8-K
INDEPENDENT BANK CORP /MI/ (IBCP)
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: January 23, 2020
INDEPENDENT BANK CORPORATION
(Exact name of registrant as specified in its charter)
| Michigan | 0-7818 | 38-2032782 |
|---|---|---|
| (State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
| 4200 East Beltline<br><br> <br>Grand Rapids, Michigan | 49525 | |
| --- | --- | |
| (Address of principal executive office) | (Zip Code) |
Registrant’s telephone number,
including area code:
(616) 527-5820
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| --- | --- |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| --- | --- |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
| --- | --- |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
|---|---|---|
| Common stock, no par value | IBCP | NASDAQ Global Select Market |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
| Item 2.02. | Results of Operations and Financial Condition |
|---|
On January 23, 2020, Independent Bank Corporation issued a press release announcing its financial results for the quarter ended December 31, 2019. A copy of the press release is attached as Exhibit 99.1. Attached Exhibit 99.2 contains supplemental data to that press release and attached Exhibit 99.3 contains a slide presentation for our earnings conference call.
The information in this Form 8-K and the attached Exhibits shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.
| Item 9.01. | Financial Statements and Exhibits |
|---|---|
| Exhibits. | |
| --- | --- |
| 99.1 | Press release dated January 23, 2020. |
| 99.2 | Supplemental data to the Registrant’s press release dated January 23, 2020. |
| 99.3 | Earnings conference call presentation. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| INDEPENDENT BANK CORPORATION | |||
|---|---|---|---|
| (Registrant) | |||
| Date | January 23, 2020 | By | s/Robert N. Shuster |
| Robert N. Shuster, Principal Financial Officer |
2
Exhibit 99.1
News Release
Independent Bank Corporation
4200 East Beltline
Grand Rapids, MI 49525
616.527.5820
| For Release: | Immediately |
|---|---|
| Contact: | William B. Kessel, President and CEO, 616.447.3933 |
| Robert N. Shuster, retiring Chief Financial Officer, 616.522.1765 | |
| Stephen A. Erickson, incoming Chief Financial Officer, 616.447.3914 |
INDEPENDENT BANK CORPORATION REPORTS
2019 FOURTH QUARTER AND FULL YEAR RESULTS
GRAND RAPIDS, Mich., Jan. 23, 2020 - Independent Bank Corporation (NASDAQ: IBCP) reported fourth quarter 2019 net income of $13.9 million, or $0.61 per diluted share, versus net income of $9.9 million, or $0.41 per diluted share, in the prior-year period. For the year ended Dec. 31, 2019, the Company reported net income of $46.4 million, or $2.00 per diluted share. This compares to net income of $39.8 million, or $1.68 per diluted share, in 2018. The increase in 2019 fourth quarter earnings as compared to 2018, primarily reflects an increase in non-interest income and a decrease in the provision for loan losses that was partially offset by increases in non-interest expense and income tax expense. The increase in full year 2019 earnings as compared to 2018, primarily reflects increases in net interest income and non-interest income as well as a decrease in the provision for loan losses that were partially offset by increases in non-interest expense and income tax expense.
Significant items impacting comparable fourth quarter and full year 2019 and 2018 results include the following:
| • | A change in the fair value due to price of capitalized mortgage loan servicing rights (the “MSR Change”) of a positive $0.6 million ($0.02 per diluted share, after taxes) and a negative $6.4 million ($0.22 per diluted share, after<br> taxes) for the fourth quarter and year ended Dec. 31, 2019, respectively, as compared to a negative MSR Change of $2.4 million ($0.08 per diluted share, after taxes) and a positive MSR change of $0.2 million ($0.01 per diluted share,<br> after taxes) for the fourth quarter and year ended Dec. 31, 2018, respectively. |
|---|---|
| • | A reduction in non-interest expense of $0.4 million ($0.01 per diluted share, after taxes) and $0.8 million ($0.03 per diluted share, after taxes) for the fourth quarter and year ended Dec. 31, 2019, respectively, related to the<br> Company’s use of its Federal Deposit Insurance Corporation (“FDIC”) Small Bank Assessment Credit (the “Assessment Credit”). The Company will not have any remaining Assessment Credit to apply against 2020 FDIC deposit insurance 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. <br> 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 ($0.004 per diluted share, after taxes) and $3.5 million ($0.115 per diluted share, after taxes) for the fourth quarter and year ended Dec. 31, 2018, respectively. |
| --- | --- |
1
The fourth quarter of 2019 was highlighted by:
| • | Annualized return on average assets and return on average equity of 1.56% and 15.92%, respectively (these ratios decrease to 1.47% and 14.97%, respectively, when excluding the after tax impact of the MSR Change and the Assessment<br> Credit); |
|---|---|
| • | 39.7% and 48.8% increases in net income and diluted earnings per share respectively, over the prior year. |
| --- | --- |
| • | Growth in net gains on mortgage loans of $4.4 million, or 215.3%, compared to the year ago quarter. |
| --- | --- |
| • | Payment of an 18 cent per share dividend on Nov. 15, 2019. |
| --- | --- |
The Company’s full year 2019 results were highlighted by:
| • | Return on average assets and return on average equity of 1.35% and 13.63%, respectively (these ratios increase to 1.48% and 14.94%, respectively, when excluding the after tax impact of the MSR Change and the Assessment Credit); |
|---|---|
| • | 16.6% and 19.0% increases in net income and diluted earnings per share, respectively, over the prior year. |
| --- | --- |
| • | Growth in net interest income of $9.3 million, or 8.2%. |
| --- | --- |
| • | Total portfolio loan growth of $142.5 million, or 5.5%. |
| --- | --- |
| • | Mortgage loan origination volume topping $1 billion for only the second time in the Company’s history. |
| --- | --- |
| • | A $204.3 million, or 7.7%, increase in total deposits, excluding brokered deposits. |
| --- | --- |
| • | A 9.1% increase in tangible book value per share to $14.08 at Dec. 31, 2019. |
| --- | --- |
William B. (“Brad”) Kessel, the President and Chief Executive Officer of Independent Bank Corporation, commented: “We are very pleased with our fourth quarter and full year 2019 results. This performance reflects strong mortgage banking revenues, generally 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 9.5% and 16.3%, respectively, in the fourth quarter of 2019 as compared to the prior year. As we look ahead to 2020 and beyond, we will continue to focus on our key strategic initiatives, including: growth, process improvement, and effective risk management. Reflecting our success and our optimism about the future, we recently announced an 11% increase in our quarterly common stock cash dividend to 20 cents per share, to be paid on Feb. 14, 2020.”
Operating Results
The Company’s net interest income totaled $30.7 million during the fourth quarter of 2019, an increase of $0.04 million, or 0.1% from the year-ago period, and a decrease of $0.2 million, or 0.5%, from the third quarter of 2019. The Company’s tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”) was 3.70% during the fourth quarter of 2019, compared to 3.93% in the year-ago quarter and 3.76% in the third 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 $3.32 billion in the fourth quarter of 2019 compared to $3.12 billion in the year-ago quarter and $3.29 billion in the third quarter of 2019.
For the full-year of 2019, net interest income totaled $122.6 million, an increase of $9.3 million, or 8.2% from 2018. This increase is due to an increase in average interest-earning assets that was partially offset by a decline in the net interest margin. The Company’s net interest margin for all of 2019 declined to 3.80% compared to 3.88% in 2018. Full year 2019 and 2018 interest income on loans includes $1.5 million and $1.7 million, respectively, of accretion of the discount recorded on the TCSB loans acquired in the Merger. Average interest-earning assets totaled $3.24 billion in 2019 compared to $2.94 billion in 2018.
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 $15.6 million and $47.7 million, respectively, for the fourth quarter and full year of 2019, compared to $9.0 million and $44.8 million in the respective comparable year ago periods. These variances were primarily due to changes in mortgage banking related revenues (net gains on mortgage loans and mortgage loan servicing, net), as described below.
Net gains on mortgage loans were $6.4 million in the fourth quarter of 2019, compared to $2.0 million in the year-ago quarter. For the full year of 2019, net gains on mortgage loans totaled $20.0 million compared to $10.6 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.
2
Mortgage loan servicing, net, generated income of $1.3 million and a loss of $1.5 million in the fourth quarters of 2019 and 2018, respectively. For all of 2019, mortgage loan servicing, net, generated a loss of $3.3 million as compared to income of $3.2 million in 2018. This activity is summarized in the following table:
| Three Months Ended | Year Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 12/31/2019 | 12/31/2018 | 12/31/2019 | 12/31/2018 | |||||||||
| Mortgage loan servicing: | (Dollars in thousands) | |||||||||||
| Revenue, net | $ | 1,622 | $ | 1,506 | $ | 6,196 | $ | 5,480 | ||||
| Fair value change due to price | 628 | (2,395 | ) | (6,408 | ) | 191 | ||||||
| Fair value change due to pay-downs | (902 | ) | (622 | ) | (3,124 | ) | (2,514 | ) | ||||
| Total | $ | 1,348 | $ | (1,511 | ) | $ | (3,336 | ) | $ | 3,157 |
Capitalized mortgage loan servicing rights totaled $19.2 million at Dec. 31, 2019 compared to $21.4 million at Dec. 31, 2018. As of Dec. 31, 2019, the Company serviced approximately $2.58 billion in mortgage loans for others on which servicing rights have been capitalized.
Non-interest expenses totaled $29.3 million in the fourth quarter of 2019, compared to $26.8 million in the year-ago period. For the full year of 2019, non-interest expenses totaled $111.7 million versus $107.5 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 net gains on other real estate and repossessed assets. In particular, the fourth quarter 2019 increase in compensation and employee benefits as compared to 2018, in part reflects the Company’s strong financial performance that resulted in an increase in the year-end accrual for incentive compensation.
The Company recorded an income tax expense of $3.3 million and $11.3 million in the fourth quarter and full-year of 2019, respectively. This compares to an income tax expense of $2.3 million and $9.3 million in the fourth quarter and full-year 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 Dec. 31, 2019 were 0.02% for commercial loans and 0.45% 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 | 12/31/2019 | 12/31/2018 | 12/31/2017 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||
| Commercial | $ | 1,377 | $ | 2,220 | $ | 646 | |||
| Consumer/installment | 805 | 781 | 543 | ||||||
| Mortgage | 7,996 | 6,033 | 6,995 | ||||||
| Total non-accrual loans | 10,178 | 9,034 | 8,184 | ||||||
| Less – government guaranteed loans | 646 | 460 | 255 | ||||||
| Total non-performing loans | $ | 9,532 | $ | 8,574 | $ | 7,929 | |||
| Ratio of non-performing loans to total portfolio loans | 0.35 | % | 0.33 | % | 0.39 | % | |||
| Ratio of non-performing assets to total assets | 0.32 | % | 0.29 | % | 0.34 | % | |||
| Ratio of the allowance for loan losses to non-performing loans | 274.32 | % | 290.27 | % | 284.87 | % | |||
| (1) | Excludes loans that are classified as “troubled debt restructured” that are still performing. | ||||||||
| --- | --- |
Non-performing loans increased $1.0 million from Dec. 31, 2018. This increase principally reflects an increase in non-performing mortgage loans partially offset by a decrease in non-performing commercial loans due primarily to pay-downs and transfers to other real estate. Other real estate and repossessed assets totaled $1.9 million at Dec. 31, 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 $0.2 million and an expense of $0.6 million in the fourth quarters of 2019 and 2018, respectively. The provision for loan losses was an expense of $0.8 million and $1.5 million for all 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 mix, levels of non-performing and classified loans, and loan net charge-offs. The Company recorded loan net recoveries of $0.2 million and net charge offs of $0.1 million in the fourth quarters of 2019 and 2018, respectively. For all of 2019 and 2018, the Company recorded loan net recoveries of $0.4 million and $0.8 million, respectively. At Dec. 31, 2019, the allowance for loan losses totaled $26.1 million, or 0.96% of portfolio loans (1.01% when excluding the remaining TCSB acquired loan balances), compared to $24.9 million, or 0.96% of portfolio loans, at Dec. 31, 2018.
3
Balance Sheet, Liquidity and Capital
Total assets were $3.56 billion at Dec. 31, 2019, an increase of $211.4 million from Dec. 31, 2018, primarily reflecting growth in securities available for sale and loans. Loans, excluding loans held for sale, were $2.73 billion at Dec. 31, 2019, compared to $2.58 billion at Dec. 31, 2018.
Deposits totaled $3.04 billion at Dec. 31, 2019, an increase of $123.3 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 $65.3 million at Dec. 31, 2019, versus $70.2 million at Dec. 31, 2018. Securities available for sale totaled $518.4 million at Dec. 31, 2019, compared to $427.9 million at Dec. 31, 2018.
Total shareholders’ equity was $350.2 million at Dec. 31, 2019, or 9.82% of total assets. Tangible common equity totaled $316.5 million at Dec. 31, 2019, or $14.08 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 | 12/31/2019 | 12/31/2018 | Well<br><br> <br>Capitalized<br><br> <br>Minimum | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Tier 1 capital to average total assets | 9.49 | % | 9.44 | % | 5.00 | % | |||
| Tier 1 common equity to risk-weighted assets | 11.96 | % | 11.94 | % | 6.50 | % | |||
| Tier 1 capital to risk-weighted assets | 11.96 | % | 11.94 | % | 8.00 | % | |||
| Total capital to risk-weighted assets | 12.96 | % | 12.94 | % | 10.00 | % |
Share Repurchase Plan
On Dec. 17, 2019, the Board of Directors of the Company authorized the 2020 share repurchase plan. Under the terms of the 2020 share repurchase plan, the Company is authorized to buy back up to 1,120,000 shares, or approximately 5%, of its outstanding common stock. The repurchase plan commenced on Jan. 1, 2020 and, subject to the Board’s authority to amend or suspend the plan, and will last through Dec. 31, 2020.
During the 2019, the Company repurchased 1,204,688 shares at a weighted average purchase price of $21.82 per share (no shares were repurchased in the fourth quarter of 2019).
The Company intends to accomplish the 2020 repurchases through open market transactions, though the Company could execute repurchases through other means, such as privately negotiated transactions. The timing and amount of any share repurchases will depend on a variety of factors, including, among others, securities law restrictions, the trading price of the Company’s common stock, other regulatory requirements, potential alternative uses for capital, and the Company’s financial performance. The repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion. The Company expects to fund any repurchases from cash on hand.
Earnings Conference Call
Brad Kessel, President and CEO, Rob Shuster, retiring CFO and Steve Erickson, incoming CFO, will review the quarterly and full-year results in a conference call for investors and analysts beginning at 11:00 am ET on Thursday, Jan. 23, 2020.
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 at the following event site/URL: https://services.choruscall.com/links/ibcp200123.html.
A playback of the call can be accessed by dialing 1-877-344-7529 (Conference ID # 10137087). The replay will be available through Jan. 30, 2020.
About Independent Bank Corporation
Independent Bank Corporation (NASDAQ: IBCP) is a Michigan-based bank holding company with total assets of approximately $3.6 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.
4
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.
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, 2018 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.
5
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||
| (unaudited) | ||||||
| (In thousands, except share<br><br> <br>amounts) | ||||||
| Assets | ||||||
| Cash and due from banks | $ | 53,295 | $ | 23,350 | ||
| Interest bearing deposits | 12,009 | 46,894 | ||||
| Cash and Cash Equivalents | 65,304 | 70,244 | ||||
| Interest bearing deposits - time | 350 | 595 | ||||
| Equity securities at fair value | - | 393 | ||||
| Securities available for sale | 518,400 | 427,926 | ||||
| Federal Home Loan Bank and Federal Reserve Bank stock, at cost | 18,359 | 18,359 | ||||
| Loans held for sale, carried at fair value | 69,800 | 44,753 | ||||
| Loans held for sale, carried at lower of cost or fair value | - | 41,471 | ||||
| Loans | ||||||
| Commercial | 1,166,695 | 1,144,481 | ||||
| Mortgage | 1,098,911 | 1,042,890 | ||||
| Installment | 459,417 | 395,149 | ||||
| Total Loans | 2,725,023 | 2,582,520 | ||||
| Allowance for loan losses | (26,148 | ) | (24,888 | ) | ||
| Net Loans | 2,698,875 | 2,557,632 | ||||
| Other real estate and repossessed assets | 1,865 | 1,299 | ||||
| Property and equipment, net | 38,411 | 38,777 | ||||
| Bank-owned life insurance | 55,710 | 55,068 | ||||
| Deferred tax assets, net | 2,072 | 5,779 | ||||
| Capitalized mortgage loan servicing rights | 19,171 | 21,400 | ||||
| Other intangibles | 5,326 | 6,415 | ||||
| Goodwill | 28,300 | 28,300 | ||||
| Accrued income and other assets | 42,751 | 34,870 | ||||
| Total Assets | $ | 3,564,694 | $ | 3,353,281 | ||
| Liabilities and Shareholders’ Equity | ||||||
| Deposits | ||||||
| Non-interest bearing | $ | 852,076 | $ | 879,549 | ||
| Savings and interest-bearing checking | 1,186,745 | 1,194,865 | ||||
| Reciprocal | 431,027 | 182,072 | ||||
| Time | 376,877 | 385,981 | ||||
| Brokered time | 190,002 | 270,961 | ||||
| Total Deposits | 3,036,727 | 2,913,428 | ||||
| Other borrowings | 88,646 | 25,700 | ||||
| Subordinated debentures | 39,456 | 39,388 | ||||
| Accrued expenses and other liabilities | 49,696 | 35,771 | ||||
| Total Liabilities | 3,214,525 | 3,014,287 | ||||
| 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: 22,481,643 shares at December 31, 2019 and 23,579,725 shares at December 31, 2018 | 352,344 | 377,372 | ||||
| Retained earnings (accumulated deficit) | 1,611 | (28,270 | ) | |||
| Accumulated other comprehensive loss | (3,786 | ) | (10,108 | ) | ||
| Total Shareholders’ Equity | 350,169 | 338,994 | ||||
| Total Liabilities and Shareholders’ Equity | $ | 3,564,694 | $ | 3,353,281 |
6
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
| Three Months Ended | Twelve Months Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | September 30, | December 31, | December 31, | ||||||||||||
| 2019 | 2019 | 2018 | 2019 | 2018 | |||||||||||
| (unaudited) | |||||||||||||||
| Interest Income | (In thousands, except per share amounts) | ||||||||||||||
| Interest and fees on loans | $ | 33,140 | $ | 34,226 | $ | 32,838 | $ | 133,883 | $ | 116,865 | |||||
| Interest on securities | |||||||||||||||
| Taxable | 3,031 | 2,771 | 2,782 | 11,842 | 10,874 | ||||||||||
| Tax-exempt | 325 | 319 | 408 | 1,342 | 1,743 | ||||||||||
| Other investments | 412 | 495 | 393 | 1,861 | 1,291 | ||||||||||
| Total Interest Income | 36,908 | 37,811 | 36,421 | 148,928 | 130,773 | ||||||||||
| Interest Expense | |||||||||||||||
| Deposits | 5,487 | 6,236 | 5,006 | 23,425 | 14,478 | ||||||||||
| Other borrowings and subordinated debentures | 711 | 703 | 746 | 2,922 | 3,013 | ||||||||||
| Total Interest Expense | 6,198 | 6,939 | 5,752 | 26,347 | 17,491 | ||||||||||
| Net Interest Income | 30,710 | 30,872 | 30,669 | 122,581 | 113,282 | ||||||||||
| Provision for loan losses | (221 | ) | (271 | ) | 591 | 824 | 1,503 | ||||||||
| Net Interest Income After Provision for Loan Losses | 30,931 | 31,143 | 30,078 | 121,757 | 111,779 | ||||||||||
| Non-interest Income | |||||||||||||||
| Service charges on deposit accounts | 2,885 | 2,883 | 3,092 | 11,208 | 12,258 | ||||||||||
| Interchange income | 2,553 | 2,785 | 2,669 | 10,297 | 9,905 | ||||||||||
| Net gains on assets | |||||||||||||||
| Mortgage loans | 6,388 | 5,677 | 2,026 | 19,978 | 10,597 | ||||||||||
| Securities | 3 | - | 209 | 307 | 138 | ||||||||||
| Mortgage loan servicing, net | 1,348 | (1,562 | ) | (1,511 | ) | (3,336 | ) | 3,157 | |||||||
| Other | 2,420 | 2,492 | 2,466 | 9,282 | 8,760 | ||||||||||
| Total Non-interest Income | 15,597 | 12,275 | 8,951 | 47,736 | 44,815 | ||||||||||
| Non-interest Expense | |||||||||||||||
| Compensation and employee benefits | 18,546 | 16,673 | 15,572 | 67,501 | 62,078 | ||||||||||
| Occupancy, net | 2,216 | 2,161 | 2,245 | 9,013 | 8,912 | ||||||||||
| Data processing | 2,308 | 2,282 | 2,082 | 8,905 | 8,262 | ||||||||||
| Furniture, fixtures and equipment | 1,055 | 1,023 | 1,051 | 4,113 | 4,080 | ||||||||||
| Interchange expense | 883 | 891 | 728 | 3,215 | 2,702 | ||||||||||
| Communications | 728 | 733 | 737 | 2,947 | 2,848 | ||||||||||
| Loan and collection | 709 | 714 | 782 | 2,685 | 2,682 | ||||||||||
| Advertising | 515 | 636 | 577 | 2,450 | 2,155 | ||||||||||
| Legal and professional | 533 | 541 | 528 | 1,814 | 1,839 | ||||||||||
| FDIC deposit insurance | (38 | ) | 13 | 331 | 685 | 1,081 | |||||||||
| Credit card and bank service fees | 111 | 100 | 104 | 411 | 414 | ||||||||||
| Net (gains) losses on other real estate and repossessed assets | (63 | ) | 52 | (53 | ) | (90 | ) | (672 | ) | ||||||
| Merger related expenses | - | - | 111 | - | 3,465 | ||||||||||
| Other | 1,800 | 2,029 | 2,030 | 8,084 | 7,615 | ||||||||||
| Total Non-interest Expense | 29,303 | 27,848 | 26,825 | 111,733 | 107,461 | ||||||||||
| Income Before Income Tax | 17,225 | 15,570 | 12,204 | 57,760 | 49,133 | ||||||||||
| Income tax expense | 3,346 | 3,125 | 2,268 | 11,325 | 9,294 | ||||||||||
| Net Income | $ | 13,879 | $ | 12,445 | $ | 9,936 | $ | 46,435 | $ | 39,839 | |||||
| Net Income Per Common Share | |||||||||||||||
| Basic | $ | 0.62 | $ | 0.55 | $ | 0.41 | $ | 2.03 | $ | 1.70 | |||||
| Diluted | $ | 0.61 | $ | 0.55 | $ | 0.41 | $ | 2.00 | $ | 1.68 |
7
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Selected Financial Data
| December 31,<br><br> <br>2019 | September 30,<br><br> <br>2019 | June 30,<br><br> <br>2019 | March 31,<br><br> <br>2019 | December 31,<br><br> <br>2018 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (unaudited) | |||||||||||||||
| (Dollars in thousands except per share data) | |||||||||||||||
| Three Months Ended | |||||||||||||||
| Net interest income | $ | 30,710 | $ | 30,872 | $ | 30,756 | $ | 30,243 | $ | 30,669 | |||||
| Provision for loan losses | (221 | ) | (271 | ) | 652 | 664 | 591 | ||||||||
| Non-interest income | 15,597 | 12,275 | 9,905 | 9,959 | 8,951 | ||||||||||
| Non-interest expense | 29,303 | 27,848 | 26,592 | 27,990 | 26,825 | ||||||||||
| Income before income tax | 17,225 | 15,570 | 13,417 | 11,548 | 12,204 | ||||||||||
| Income tax expense | 3,346 | 3,125 | 2,687 | 2,167 | 2,268 | ||||||||||
| Net income | $ | 13,879 | $ | 12,445 | $ | 10,730 | $ | 9,381 | $ | 9,936 | |||||
| Basic earnings per share | $ | 0.62 | $ | 0.55 | $ | 0.47 | $ | 0.40 | $ | 0.41 | |||||
| Diluted earnings per share | 0.61 | 0.55 | 0.46 | 0.39 | 0.41 | ||||||||||
| Cash dividend per share | 0.18 | 0.18 | 0.18 | 0.18 | 0.15 | ||||||||||
| Average shares outstanding | 22,481,551 | 22,486,041 | 23,035,526 | 23,588,313 | 23,988,810 | ||||||||||
| Average diluted shares outstanding | 22,776,908 | 22,769,572 | 23,313,346 | 23,884,744 | 24,339,782 | ||||||||||
| Performance Ratios | |||||||||||||||
| Return on average assets | 1.56 | % | 1.42 | % | 1.27 | % | 1.13 | % | 1.18 | % | |||||
| Return on average common equity | 15.92 | 14.64 | 12.72 | 11.14 | 11.43 | ||||||||||
| Efficiency ratio ^(1)^ | 62.56 | 63.76 | 64.57 | 69.27 | 67.11 | ||||||||||
| As a Percent of Average Interest-Earning Assets^(1)^ | |||||||||||||||
| Interest income | 4.44 | % | 4.60 | % | 4.73 | % | 4.70 | % | 4.66 | % | |||||
| Interest expense | 0.74 | 0.84 | 0.86 | 0.82 | 0.73 | ||||||||||
| Net interest income | 3.70 | 3.76 | 3.87 | 3.88 | 3.93 | ||||||||||
| Average Balances | |||||||||||||||
| Loans | $ | 2,776,037 | $ | 2,786,544 | $ | 2,699,648 | $ | 2,621,871 | $ | 2,627,614 | |||||
| Securities available for sale | 488,016 | 423,255 | 441,523 | 446,734 | 433,903 | ||||||||||
| Total earning assets | 3,320,828 | 3,285,081 | 3,191,264 | 3,152,177 | 3,121,640 | ||||||||||
| Total assets | 3,529,744 | 3,483,296 | 3,388,398 | 3,357,003 | 3,327,002 | ||||||||||
| Deposits | 3,040,099 | 3,023,334 | 2,929,885 | 2,909,096 | 2,873,889 | ||||||||||
| Interest bearing liabilities | 2,251,928 | 2,219,133 | 2,155,660 | 2,115,549 | 2,058,720 | ||||||||||
| Shareholders’ equity | 345,910 | 337,162 | 338,254 | 341,592 | 344,779 | ||||||||||
| End of Period | |||||||||||||||
| Capital | |||||||||||||||
| Tangible common equity ratio | 8.96 | % | 8.71 | % | 8.72 | % | 9.26 | % | 9.17 | % | |||||
| Average equity to average assets | 9.80 | 9.68 | 9.98 | 10.18 | 10.36 | ||||||||||
| Tangible common equity per share of common stock | $ | 14.08 | $ | 13.63 | $ | 13.19 | $ | 13.17 | $ | 12.90 | |||||
| Total shares outstanding | 22,481,643 | 22,480,748 | 22,498,776 | 23,560,179 | 23,579,725 | ||||||||||
| Selected Balances | |||||||||||||||
| Loans | $ | 2,725,023 | $ | 2,722,446 | $ | 2,706,526 | $ | 2,618,795 | $ | 2,582,520 | |||||
| Securities available for sale | 518,400 | 439,592 | 430,305 | 461,531 | 427,926 | ||||||||||
| Total earning assets | 3,343,941 | 3,348,631 | 3,239,247 | 3,180,655 | 3,162,911 | ||||||||||
| Total assets | 3,564,694 | 3,550,837 | 3,438,302 | 3,383,606 | 3,353,281 | ||||||||||
| Deposits | 3,036,727 | 3,052,312 | 2,978,885 | 2,934,225 | 2,913,428 | ||||||||||
| Interest bearing liabilities | 2,312,753 | 2,272,587 | 2,194,970 | 2,141,083 | 2,098,967 | ||||||||||
| Shareholders’ equity | 350,169 | 340,245 | 330,846 | 344,726 | 338,994 | ||||||||||
| (1) | Presented on a fully tax equivalent basis assuming a marginal tax rate of 21%. | ||||||||||||||
| --- | --- |
8
Reconciliation of Non-GAAP Financial Measures
Independent Bank Corporation
Independent Bank Corporation believes non-GAAP measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate the adequacy of common equity and performance trends. Tangible common equity is used by the Company to measure the quality of capital.
| Reconciliation of Non-GAAP Financial Measures | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended<br><br> <br>December 31, | Twelve Months Ended<br><br> <br>December 31, | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Net Interest Margin, Fully Taxable Equivalent (“FTE”) | |||||||||||||||
| Net interest income | $ | 30,710 | $ | 30,669 | $ | 122,581 | $ | 113,282 | |||||||
| Add: taxable equivalent adjustment | 104 | 126 | 423 | 510 | |||||||||||
| Net interest income - taxable equivalent | $ | 30,814 | $ | 30,795 | $ | 123,004 | $ | 113,792 | |||||||
| Net interest margin (GAAP) ^(1)^ | 3.68 | % | 3.91 | % | 3.79 | % | 3.85 | % | |||||||
| Net interest margin (FTE) ^(1)^ | 3.70 | % | 3.93 | % | 3.80 | % | 3.88 | % | |||||||
| (1) | Annualized for three months ended December 31, 2019 and 2018. | ||||||||||||||
| --- | --- | ||||||||||||||
| Tangible Common Equity Ratio | |||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| December 31,<br><br> <br>2019 | September 30,<br><br> <br>2019 | June 30,<br><br> <br>2019 | March 31,<br><br> <br>2019 | December 31,<br><br> <br>2018 | |||||||||||
| (Dollars in thousands) | |||||||||||||||
| Common shareholders’ equity | $ | 350,169 | $ | 340,245 | $ | 330,846 | $ | 344,726 | $ | 338,994 | |||||
| Less: | |||||||||||||||
| Goodwill | 28,300 | 28,300 | 28,300 | 28,300 | 28,300 | ||||||||||
| Other intangibles | 5,326 | 5,598 | 5,870 | 6,143 | 6,415 | ||||||||||
| Tangible common equity | $ | 316,543 | $ | 306,347 | $ | 296,676 | $ | 310,283 | $ | 304,279 | |||||
| Total assets | $ | 3,564,694 | $ | 3,550,837 | $ | 3,438,302 | $ | 3,383,606 | $ | 3,353,281 | |||||
| Less: | |||||||||||||||
| Goodwill | 28,300 | 28,300 | 28,300 | 28,300 | 28,300 | ||||||||||
| Other intangibles | 5,326 | 5,598 | 5,870 | 6,143 | 6,415 | ||||||||||
| Tangible assets | $ | 3,531,068 | $ | 3,516,939 | $ | 3,404,132 | $ | 3,349,163 | $ | 3,318,566 | |||||
| Common equity ratio | 9.82 | % | 9.58 | % | 9.62 | % | 10.19 | % | 10.11 | % | |||||
| Tangible common equity ratio | 8.96 | % | 8.71 | % | 8.72 | % | 9.26 | % | 9.17 | % | |||||
| Tangible Common Equity per Share of Common Stock: | |||||||||||||||
| Common shareholders’ equity | $ | 350,169 | $ | 340,245 | $ | 330,846 | $ | 344,726 | $ | 338,994 | |||||
| Tangible common equity | $ | 316,543 | $ | 306,347 | $ | 296,676 | $ | 310,283 | $ | 304,279 | |||||
| Shares of common stock outstanding (in thousands) | 22,482 | 22,481 | 22,499 | 23,560 | 23,580 | ||||||||||
| Common shareholders’ equity per share of common stock | $ | 15.58 | $ | 15.13 | $ | 14.70 | $ | 14.63 | $ | 14.38 | |||||
| Tangible common equity per share of common stock | $ | 14.08 | $ | 13.63 | $ | 13.19 | $ | 13.17 | $ | 12.90 |
The tangible common equity ratio removes the effect of goodwill and other intangible assets from capital and total assets. Tangible common equity per share of common stock removes the effect of goodwill and other intangible assets from common shareholders’ equity per share of common stock.
9
Exhibit 99.2
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Supplemental Data
| Non-performing assets ^(1)^ | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31,<br><br> <br>2019 | September 30,<br><br> <br>2019 | June 30,<br><br> <br>2019 | March 31,<br><br> <br>2019 | December 31,<br><br> <br>2018 | |||||||||||
| (Dollars in thousands) | |||||||||||||||
| Non-accrual loans | $ | 10,178 | $ | 7,124 | $ | 7,798 | $ | 8,849 | $ | 9,029 | |||||
| Loans 90 days or more past due and still accruing interest | - | - | - | - | 5 | ||||||||||
| Total non-accrual loans | 10,178 | 7,124 | 7,798 | 8,849 | 9,034 | ||||||||||
| Less: Government guaranteed loans | 646 | 475 | 436 | 617 | 460 | ||||||||||
| Total non-performing loans | 9,532 | 6,649 | 7,362 | 8,232 | 8,574 | ||||||||||
| Other real estate and repossessed assets | 1,865 | 1,789 | 1,990 | 1,338 | 1,299 | ||||||||||
| Total non-performing assets | $ | 11,397 | $ | 8,438 | $ | 9,352 | $ | 9,570 | $ | 9,873 | |||||
| As a percent of Portfolio Loans | |||||||||||||||
| Non-performing loans | 0.35 | % | 0.24 | % | 0.27 | % | 0.31 | % | 0.33 | % | |||||
| Allowance for loan losses | 0.96 | 0.96 | 0.96 | 0.96 | 0.96 | ||||||||||
| Non-performing assets to total assets | 0.32 | 0.24 | 0.27 | 0.28 | 0.29 | ||||||||||
| Allowance for loan losses as a percent of non-performing loans | 274.32 | 393.26 | 351.85 | 306.78 | 290.27 | ||||||||||
| ^(1)^ | Excludes loans classified as “trouble debt restructured” that are not past due. | ||||||||||||||
| --- | --- | ||||||||||||||
| Troubled debt restructurings (“TDR”) | |||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | ||||||||
| December 31, 2019 | |||||||||||||||
| Commercial | Retail ^(1)^ | Total | |||||||||||||
| (In thousands) | |||||||||||||||
| Performing TDR’s | $ | 7,974 | $ | 39,601 | $ | 47,575 | |||||||||
| Non-performing TDR’s ^(2)^ | 540 | 2,607 | ^(3)^ | 3,147 | |||||||||||
| Total | $ | 8,514 | $ | 42,208 | $ | 50,722 | |||||||||
| December 31, 2018 | |||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | ||||||||
| Commercial | Retail ^(1)^ | Total | |||||||||||||
| (In thousands) | |||||||||||||||
| Performing TDR’s | $ | 6,460 | $ | 46,627 | $ | 53,087 | |||||||||
| Non-performing TDR’s ^(2)^ | 74 | 2,884 | ^(3)^ | 2,958 | |||||||||||
| Total | $ | 6,534 | $ | 49,511 | $ | 56,045 | |||||||||
| (1) | Retail loans include mortgage and installment loan segments. | ||||||||||||||
| --- | --- | ||||||||||||||
| (2) | Included in non-performing assets table above. | ||||||||||||||
| --- | --- | ||||||||||||||
| (3) | Also includes loans on non-accrual at the time of modification until six payments are received on a timely basis. | ||||||||||||||
| --- | --- |
1
| Allowance for loan losses | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Twelve months ended<br><br> December 31, | ||||||||||
| 2019 | 2018 | |||||||||
| Loans | Unfunded<br><br> <br>Commitments | Loans | Unfunded<br><br> <br>Commitments | |||||||
| (Dollars in thousands) | ||||||||||
| Balance at beginning of period | $ | 24,888 | $ | 1,296 | $ | 22,587 | $ | 1,125 | ||
| Additions (deductions) | ||||||||||
| Provision for loan losses | 824 | - | 1,503 | - | ||||||
| Recoveries credited to allowance | 3,961 | - | 4,622 | - | ||||||
| Loans charged against the allowance | (3,525 | ) | - | (3,824 | ) | - | ||||
| Additions included in non-interest expense | - | 246 | - | 171 | ||||||
| Balance at end of period | $ | 26,148 | $ | 1,542 | $ | 24,888 | $ | 1,296 | ||
| Net loans charged against the allowance to average Portfolio Loans | (0.02 | )% | (0.03 | )% | ||||||
| Capitalization | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | ||||
| December 31, | ||||||||||
| 2019 | 2018 | |||||||||
| (In thousands) | ||||||||||
| Subordinated debentures | $ | 39,456 | $ | 39,388 | ||||||
| Amount not qualifying as regulatory capital | (1,224 | ) | (1,224 | ) | ||||||
| Amount qualifying as regulatory capital | 38,232 | 38,164 | ||||||||
| Shareholders’ equity | ||||||||||
| Common stock | 352,344 | 377,372 | ||||||||
| Accumulated deficit | 1,611 | (28,270 | ) | |||||||
| Accumulated other comprehensive loss | (3,786 | ) | (10,108 | ) | ||||||
| Total shareholders’ equity | 350,169 | 338,994 | ||||||||
| Total capitalization | $ | 388,401 | $ | 377,158 |
2
| Non-Interest Income | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three months ended | Twelve months ended | ||||||||||||
| December 31, | September 30, | December 31, | December 31, | ||||||||||
| 2019 | 2019 | 2018 | 2019 | 2018 | |||||||||
| (In thousands) | |||||||||||||
| Service charges on deposit accounts | $ | 2,885 | $ | 2,883 | $ | 3,092 | $ | 11,208 | $ | 12,258 | |||
| Interchange income | 2,553 | 2,785 | 2,669 | 10,297 | 9,905 | ||||||||
| Net gains on assets | |||||||||||||
| Mortgage loans | 6,388 | 5,677 | 2,026 | 19,978 | 10,597 | ||||||||
| Securities | 3 | - | 209 | 307 | 138 | ||||||||
| Mortgage loan servicing, net | 1,348 | (1,562 | ) | (1,511 | ) | (3,336 | ) | 3,157 | |||||
| Investment and insurance commissions | 461 | 450 | 537 | 1,658 | 1,971 | ||||||||
| Bank owned life insurance | 298 | 301 | 257 | 1,111 | 970 | ||||||||
| Other | 1,661 | 1,741 | 1,672 | 6,513 | 5,819 | ||||||||
| Total non-interest income | $ | 15,597 | $ | 12,275 | $ | 8,951 | $ | 47,736 | $ | 44,815 | |||
| Capitalized Mortgage Loan Servicing Rights | |||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |
| Three months ended<br><br> December 31, | Twelve months ended<br><br> December 31, | ||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||
| (In thousands) | |||||||||||||
| Balance at beginning of period | $ | 16,906 | $ | 23,151 | $ | 21,400 | $ | 15,699 | |||||
| Servicing rights acquired | - | - | - | 3,047 | |||||||||
| Originated servicing rights capitalized | 2,539 | 1,266 | 7,303 | 4,977 | |||||||||
| Change in fair value | (274 | ) | (3,017 | ) | (9,532 | ) | (2,323 | ) | |||||
| Balance at end of period | $ | 19,171 | $ | 21,400 | $ | 19,171 | $ | 21,400 |
3
| Mortgage Loan Activity | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three months ended | Twelve months ended | ||||||||||||||
| December 31, | September 30, | December 31, | December 31, | ||||||||||||
| 2019 | 2019 | 2018 | 2019 | 2018 | |||||||||||
| (Dollars in thousands) | |||||||||||||||
| Mortgage loans originated | $ | 302,520 | $ | 329,461 | $ | 190,328 | $ | 1,011,141 | $ | 807,408 | |||||
| Mortgage loans sold | 248,691 | 204,058 | 121,426 | 738,910 | 491,798 | ||||||||||
| Net gains on mortgage loans | 6,388 | 5,677 | 2,026 | 19,978 | 10,597 | ||||||||||
| Net gains as a percent of mortgage loans sold (“Loan Sales Margin”) | 2.57 | % | 2.78 | % | 1.67 | % | 2.70 | % | 2.15 | % | |||||
| Fair value adjustments included in the Loan Sales Margin | (0.38 | ) | 0.22 | (0.39 | ) | 0.22 | (0.02 | ) | |||||||
| Non-Interest Expense | |||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |
| Three months ended | Twelve months ended | ||||||||||||||
| December 31, | September 30, | December 31, | December 31, | ||||||||||||
| 2019 | 2019 | 2018 | 2019 | 2018 | |||||||||||
| (In thousands) | |||||||||||||||
| Compensation | $ | 10,726 | $ | 10,327 | $ | 9,792 | $ | 41,719 | $ | 37,878 | |||||
| Performance-based compensation | 4,336 | 3,214 | 2,704 | 12,066 | 11,942 | ||||||||||
| Payroll taxes and employee benefits | 3,484 | 3,132 | 3,076 | 13,716 | 12,258 | ||||||||||
| Compensation and employee benefits | 18,546 | 16,673 | 15,572 | 67,501 | 62,078 | ||||||||||
| Occupancy, net | 2,216 | 2,161 | 2,245 | 9,013 | 8,912 | ||||||||||
| Data processing | 2,308 | 2,282 | 2,082 | 8,905 | 8,262 | ||||||||||
| Furniture, fixtures and equipment | 1,055 | 1,023 | 1,051 | 4,113 | 4,080 | ||||||||||
| Interchange expense | 883 | 891 | 728 | 3,215 | 2,702 | ||||||||||
| Communications | 728 | 733 | 737 | 2,947 | 2,848 | ||||||||||
| Loan and collection | 709 | 714 | 782 | 2,685 | 2,682 | ||||||||||
| Advertising | 515 | 636 | 577 | 2,450 | 2,155 | ||||||||||
| Legal and professional fees | 533 | 541 | 528 | 1,814 | 1,839 | ||||||||||
| Amortization of intangible assets | 272 | 272 | 293 | 1,089 | 969 | ||||||||||
| FDIC deposit insurance | (38 | ) | 13 | 331 | 685 | 1,081 | |||||||||
| Supplies | 164 | 163 | 173 | 638 | 689 | ||||||||||
| Credit card and bank service fees | 111 | 100 | 104 | 411 | 414 | ||||||||||
| Costs (recoveries) related to unfunded lending commitments | (95 | ) | 154 | 177 | 246 | 171 | |||||||||
| Provision for loss reimbursement on sold loans | 50 | 33 | (68 | ) | 229 | 10 | |||||||||
| Net (gains) losses on other real estate and repossessed assets | (63 | ) | 52 | (53 | ) | (90 | ) | (672 | ) | ||||||
| Merger related expenses | - | - | 111 | - | 3,465 | ||||||||||
| Other | 1,409 | 1,407 | 1,455 | 5,882 | 5,776 | ||||||||||
| Total non-interest expense | $ | 29,303 | $ | 27,848 | $ | 26,825 | $ | 111,733 | $ | 107,461 |
4
| Average Balances and Tax Equivalent Rates | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended<br><br> December 31, | ||||||||||||||
| 2019 | 2018 | |||||||||||||
| Average<br><br> Balance | Interest | Rate ^(2)^ | Average<br><br> Balance | Interest | Rate ^(2)^ | |||||||||
| (Dollars in thousands) | ||||||||||||||
| Assets | ||||||||||||||
| Taxable loans | $ | 2,767,857 | $ | 33,061 | 4.75 | % | $ | 2,618,834 | $ | 32,753 | 4.98 | % | ||
| Tax-exempt loans ^(1)^ | 8,180 | 100 | 4.85 | 8,780 | 107 | 4.83 | ||||||||
| Taxable securities | 437,087 | 3,031 | 2.77 | 373,988 | 2,782 | 2.98 | ||||||||
| Tax-exempt securities^(1)^ | 50,929 | 408 | 3.20 | 59,915 | 512 | 3.42 | ||||||||
| Interest bearing cash | 38,416 | 163 | 1.68 | 41,766 | 157 | 1.49 | ||||||||
| Other investments | 18,359 | 249 | 5.38 | 18,357 | 236 | 5.10 | ||||||||
| Interest Earning Assets | 3,320,828 | 37,012 | 4.44 | 3,121,640 | 36,547 | 4.66 | ||||||||
| Cash and due from banks | 48,095 | 33,915 | ||||||||||||
| Other assets, net | 160,821 | 171,447 | ||||||||||||
| Total Assets | $ | 3,529,744 | $ | 3,327,002 | ||||||||||
| Liabilities | ||||||||||||||
| Savings and interest- bearing checking | $ | 1,547,860 | 2,441 | 0.63 | $ | 1,291,994 | 1,812 | 0.56 | ||||||
| Time deposits | 611,914 | 3,046 | 1.97 | 695,316 | 3,194 | 1.82 | ||||||||
| Other borrowings | 92,154 | 711 | 3.06 | 71,410 | 746 | 4.14 | ||||||||
| Interest Bearing Liabilities | 2,251,928 | 6,198 | 1.09 | 2,058,720 | 5,752 | 1.11 | ||||||||
| Non-interest bearing deposits | 880,325 | 886,579 | ||||||||||||
| Other liabilities | 51,581 | 36,924 | ||||||||||||
| Shareholders’ equity | 345,910 | 344,779 | ||||||||||||
| Total liabilities and shareholders’ equity | $ | 3,529,744 | $ | 3,327,002 | ||||||||||
| Net Interest Income | $ | 30,814 | $ | 30,795 | ||||||||||
| Net Interest Income as a Percent of Average Interest Earning Assets | 3.70 | % | 3.93 | % |
| (1) | Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21%. |
|---|---|
| (2) | Annualized |
| --- | --- |
5
| Average Balances and Tax Equivalent Rates | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Twelve Months Ended<br><br> December 31, | ||||||||||||||
| 2019 | 2018 | |||||||||||||
| Average<br><br> Balance | Interest | Rate | Average<br><br> Balance | Interest | Rate | |||||||||
| (Dollars in thousands) | ||||||||||||||
| Assets | ||||||||||||||
| Taxable loans | $ | 2,713,690 | $ | 133,574 | 4.92 | % | $ | 2,418,421 | $ | 116,634 | 4.82 | % | ||
| Tax-exempt loans ^(1)^ | 7,937 | 391 | 4.93 | 6,118 | 292 | 4.77 | ||||||||
| Taxable securities | 397,598 | 11,842 | 2.98 | 394,160 | 10,874 | 2.76 | ||||||||
| Tax-exempt securities^(1)^ | 52,324 | 1,683 | 3.22 | 67,574 | 2,192 | 3.24 | ||||||||
| Interest bearing cash | 48,023 | 818 | 1.70 | 32,593 | 371 | 1.14 | ||||||||
| Other investments | 18,359 | 1,043 | 5.68 | 16,936 | 920 | 5.43 | ||||||||
| Interest Earning Assets | 3,237,931 | 149,351 | 4.61 | 2,935,802 | 131,283 | 4.48 | ||||||||
| Cash and due from banks | 37,575 | 33,384 | ||||||||||||
| Other assets, net | 164,726 | 162,750 | ||||||||||||
| Total Assets | $ | 3,440,232 | $ | 3,131,936 | ||||||||||
| Liabilities | ||||||||||||||
| Savings and interest- bearing checking | $ | 1,453,061 | 10,228 | 0.70 | $ | 1,218,243 | 4,696 | 0.39 | ||||||
| Time deposits | 655,718 | 13,197 | 2.01 | 632,330 | 9,782 | 1.55 | ||||||||
| Other borrowings | 77,254 | 2,922 | 3.78 | 79,519 | 3,013 | 3.79 | ||||||||
| Interest Bearing Liabilities | 2,186,033 | 26,347 | 1.21 | 1,930,092 | 17,491 | 0.91 | ||||||||
| Non-interest bearing deposits | 867,314 | 846,718 | ||||||||||||
| Other liabilities | 46,153 | 33,354 | ||||||||||||
| Shareholders’ equity | 340,732 | 321,772 | ||||||||||||
| Total liabilities and shareholders’ equity | $ | 3,440,232 | $ | 3,131,936 | ||||||||||
| Net Interest Income | $ | 123,004 | $ | 113,792 | ||||||||||
| Net Interest Income as a Percent of Average Interest Earning Assets | 3.80 | % | 3.88 | % |
| (1) | Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21%. |
|---|
6
| Commercial Loan Portfolio Analysis as of December 31, 2019 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Total Commercial Loans | |||||||||||
| Watch Credits | Percent of Loan | ||||||||||
| Loan Category | All Loans | Performing | Non-accrual | Total | Category in<br><br> <br>Watch Credit | ||||||
| (Dollars in thousands) | |||||||||||
| Land | $ | 11,235 | $ | 275 | $ | 735 | $ | 1,010 | 9.0 | % | |
| Land Development | 12,899 | - | - | - | 0.0 | ||||||
| Construction | 97,463 | - | - | - | 0.0 | ||||||
| Income Producing | 409,897 | 15,347 | - | 15,347 | 3.7 | ||||||
| Owner Occupied | 323,694 | 35,485 | 295 | 35,780 | 11.1 | ||||||
| Total Commercial Real Estate Loans | $ | 855,188 | $ | 51,107 | 1,030 | $ | 52,137 | 6.1 | |||
| Other Commercial Loans | $ | 311,507 | $ | 20,580 | 347 | $ | 20,927 | 6.7 | |||
| Total non-performing commercial loans | $ | 1,377 | |||||||||
| Commercial Loan Portfolio Analysis as of December 31, 2018 | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Total Commercial Loans | |||||||||||
| Watch Credits | Percent of Loan | ||||||||||
| Loan Category | All Loans | Performing | Non-accrual | Total | Category in<br><br> <br>Watch Credit | ||||||
| (Dollars in thousands) | |||||||||||
| Land | $ | 12,308 | $ | 63 | $ | - | $ | 63 | 0.5 | % | |
| Land Development | 12,155 | 338 | - | 338 | 2.8 | ||||||
| Construction | 59,856 | 7,901 | - | 7,901 | 13.2 | ||||||
| Income Producing | 388,311 | 12,430 | - | 12,430 | 3.2 | ||||||
| Owner Occupied | 353,572 | 23,041 | 846 | 23,887 | 6.8 | ||||||
| Total Commercial Real Estate Loans | $ | 826,202 | $ | 43,773 | 846 | $ | 44,619 | 5.4 | |||
| Other Commercial Loans | $ | 318,279 | $ | 16,695 | 1,374 | $ | 18,069 | 5.7 | |||
| Total non-performing commercial loans | $ | 2,220 |
7
Exhibit 99.3
Cautionary note regarding forward-looking statements This presentation 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. 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, 2018 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. 2
Agenda Formal Remarks.William B. (Brad) Kessel, President and Chief Executive OfficerRobert N. Shuster, retiring Executive Vice President and Chief Financial OfficerStephen A. Erickson, incoming Executive Vice President and Chief Financial OfficerQuestion and Answer session.Closing Remarks.Note: This presentation is available at www.IndependentBank.com in the Investor Relations area under the “Presentations” tab. 3
Quarterly Financial Summary 4Q’19 3Q’19 2Q’19 1Q’19 4Q’18 Diluted EPS $ 0.61 $ 0.55 $ 0.46 $ 0.39 $ 0.41 Income before taxes $ 17,225 $ 15,570 $ 13,417 $ 11,548 $ 12,204 Net income $ 13,879 $ 12,445 $ 10,730 $ 9,381 $ 9,936 Return on average assets 1.56% 1.42% 1.27% 1.13% 1.18% Return on average equity 15.92% 14.64% 12.72% 11.14% 11.43% Total assets $3,564,694 $3,550,837 $3,438,302 $3,383,606 $3,353,281 Total portfolio loans $2,725,023 $2,722,446 $2,706,526 $2,618,795 $2,582,520 Total deposits $3,036,727 $3,052,312 $2,978,885 $2,934,225 $2,913,428 Loans to deposits ratio 89.74% 89.19% 90.86% 89.25% 88.64% Shareholders’ equity $ 350,169 $ 340,245 $ 330,846 $ 344,726 $ 338,994 Tangible BV per share $ 14.08 $ 13.63 $ 13.19 $ 13.17 $ 12.90 TCE to tangible assets 8.96% 8.71% 8.72% 9.26% 9.17% Note: Dollars in thousands, except per share data. 4
4Q 2019 Financial Highlights Income StatementNet income of $13.9 million, or $0.61 per diluted share. Return on average assets of 1.56% and return on average equity of 15.92%. These ratios decrease to 1.47% and 14.97%, respectively, when excluding the after tax impact of the increase in the fair value of capitalized mortgage loan servicing rights due to price and the FDIC Small Bank Assessment Credit utilization.Net interest income of $30.7 million, up $0.04 million, or 0.1%, from the year ago quarter.An increase in the fair value of capitalized mortgage loan servicing rights (due to price) increased non-interest income by $0.6 million, or $0.02 per diluted share, after tax.$0.2 million loan loss provision credit (compared to a $0.6 million expense in the year ago quarter). Net gains on mortgage loans of $6.4 million increased $4.4 million from the year ago quarter. Balance Sheet/CapitalTotal portfolio loans grew $2.6 million, or 0.1% annualized in 4Q’19 and grew $142.5 million or 5.5% for all of 2019. Deposits totaled $3.04 billion at 12/31/19 compared to $3.05 billion at 9/30/19 and $2.91 billion at 12/31/18. Deposits declined by $15.6 million in 4Q’19. The 4Q’19 decrease was due to declines in non-interest bearing checking and brokered time deposits that were partially offset by increases in savings and interest bearing checking, reciprocal and time deposits.No shares were repurchased during 4Q’19. TBV per share increased to $14.08 at 12/31/19 compared to $13.63 at 9/30/19 and $12.90 at 12/31/18.Paid an 18 cent per share cash dividend on common stock on 11/15/19. 5
Five Year Financial Summary 2019 2018 2017 2016 2015 Diluted EPS(1) $ 2.00 $ 1.68 $ 0.95 $ 1.05 $ 0.86 Dividends paid $ 0.72 $ 0.60 $ 0.42 $ 0.34 $ 0.26 Net interest income $ 122,581 $ 113,282 $ 89,186 $ 79,641 $ 74,986 Income before taxes $ 57,760 $ 49,133 $ 38,438 $ 32,901 $ 29,380 Net income(1) $ 46,435 $ 39,839 $ 20,475 $ 22,766 $ 20,017 Return on average assets(1) 1.35% 1.27% 0.77% 0.92% 0.86% Return on average equity(1) 13.63% 12.38% 7.82% 9.21% 7.89% Note: Dollars in thousands, except per share data. 6 2019 net income and diluted EPS increased 16.6% and 19.0%, respectively, compared to 2018.2019 dividends increased 20% over 2018.Continued improvements in ROAA and ROAE.Mortgage loan originations topped $1 billion for only the second time in the Company’s history! (1) Excluding the impact of the $5.96 million remeasurement of net deferred tax assets in 2017, diluted EPS was $1.22; net income is $26.440 million, ROA is 1.00%; and ROE is 10.10%.
Our Michigan Markets Independent Bank branches – 68 Most recent Forbes “Best in Banks and Credit Unions” Survey (published in June 2019) ranked Independent Bank first in the State of Michigan in customer satisfaction.Acquisition of Traverse City State Bank on April 1, 2018 added five branches in attractive Northwestern Michigan.Since 2012, substantial changes have been implemented to streamline and optimize our branch delivery network.Significant market presence and opportunity to gain market share in attractive Michigan markets.Opening a new loan production office in Toledo, Ohio in March 2020.Michigan’s unemployment rate was 4.0% in November 2019 (unchanged from one year ago and 0.5% above the November 2019 U.S. unemployment rate of 3.5%). Independent Bank loan production offices (not pictured Columbus, Fairlawn and Toledo, Ohio) 7
8 Select Economic Statistics Unemployment Trends (%) Total Employees (Thousands) Regional Average Home Sales Price (Thousands) Annualized Home Sales (Thousands) Continued low unemployment rates Job growth continues Rising prices in key markets Slowing Michigan home sales Q4’19 Q3’19 Q4’19
Our Markets – Regional Region Cities Branches 12/31/19Portfolio Loans(1) % ofLoans(1) 12/31/19Deposits(3) % of Deposits(3) 12/31/18 Portfolio Loans(2) 12/31/18 Deposits(3) East / “Thumb” Bay City / Saginaw 23 $ 447 17% $ 769 27% $ 411 $ 781 West Grand Rapids / Ionia 21 844 32% 701 25% 775 714 Central Lansing 12 201 8% 383 14% 205 398 Southeast Troy 7 681 26% 298 11% 641 308 Northwest Traverse City 5 297 11% 222 8% 307 229 Michigan Reciprocal deposits all n/a n/a 431 15% n/a 182 Ohio Columbus -- 165 6% -- n/a 136 -- Various On-line only creation -- n/a n/a 8 --% n/a 6 Total 68 $2,635 100% $2,812 100% $2,475 $2,618 Note: Dollars are in millions.Loans exclude those related to resort lending ($62 million) and purchased mortgage loans ($28 million).Loans exclude those related to resort lending ($76 million) and purchased mortgage loans ($32 million). Deposits exclude brokered deposits and certain other “non-market” deposits. 9
Low Cost Deposit Franchise Focused on Core Deposit Growth Deposit Highlights$3.04 billion in total deposits at 12/31/19.Substantially core funding.$2.43 billion of non-maturity deposit accounts (79.9% of total deposits).Total deposits increased $204.3 million, or 7.7%, since 12/31/18 (excluding brokered deposits).Average deposits per branch of $41.9 million at 12/31/19 vs. $20.2 million at 12/31/11 (an increase of 107.4%).2020 focus:Commercial – small to middle market business and public funds.Treasury management services.Retail – checking accounts and debit card services.Digital – continue to expand the use of digital and improved Omni-channel service delivery to enhance customer experience. Deposit Composition – 12/31/19 Cost of Deposits (%)/Total Deposits (billions) 10
Diversified Loan PortfolioFocused on High Quality Growth Lending Highlights23 consecutive quarters of net loan growth.$2.795 billion in total loans at 12/31/19 (including $69.8 million of loans held for sale).4Q 2019 lending results include:Commercial loans net decline of $22.3 million due primarily to $16.0 million in payoffs/pay-downs of watch credits.Consumer installment loans net decline of $4.0 million due primarily to seasonal factors.Portfolio mortgage loans net growth of $28.9 million, or 10.7% annualized. 4Q’19 mortgage loan origination volume of $302.5 million (up 58.9% from 4Q’18). 2020 focus:Commercial – businesses with $1 million to $100 million in annual sales.Consumer – through branch network, internet and indirect channels.Residential mortgage – purchase money (both salable and portfolio) and home equity lending opportunities.Transition from use of LIBOR as a benchmark rate in loan documents. Loan Composition – 12/31/19 Yield on Loans (%)/Total Portfolio Loans (billions) 11
Strong Capital PositionFocused on Shareholder Return HighlightsPrudent capital management. Target TCE ratio – 8.50% to 9.50%. Priorities are: (A) capital retention to support (1) organic growth and (2) acquisitions; and (B) return of capital through (1) strong and consistent dividend and (2) share repurchases.The 2019 share repurchase plan expired on 12/31/19. During 2019, 1,204,688 shares were repurchased at an average price of $21.82 per share. The 2020 share repurchase plan was approved on 12/17/19. The 2020 share repurchase plan authorizes up to 1,120,000 shares and it expires on 12/31/20.2020 quarterly cash dividend rate increased by 11.1% to $0.20 per share effective 2/15/20.Goals of 1.3% ROA or better and 13% ROE or better. Note: ROA and ROE represent a four quarter rolling average. ROA, ROE and TCE Ratio 12
13 HighlightsInterest rate sensitivity profile of the loan and securities portfolios, in combination with a low cost core deposit base, positions us to slightly benefit from a rising interest rate environment.Net interest income decreased $0.16 million, or 0.5%, in 4Q’19 vs. 3Q’19 due primarily to a six basis point decline in the net interest margin that was only partially offset by a $35.7 million increase in average interest earning assets. In addition, net recoveries of interest on non-accrual or previously charged-off loans was down $0.10 million.Commercial loans 53% fixed/47% variable (57% tied to Prime, 39% tied to LIBOR and 4% tied to a US Treasury rate). Mortgage loans (including HECL) 47% fixed/53% variable (21% tied to Prime, 60% tied to LIBOR and 19% tied to a US Treasury rate). Net Interest Margin (TE)(%) Net Interest Income ($ in Millions) Net Interest Margin/Income
Net Interest Income and Net Interest Margin Details Summary4Q’19 net interest income of $30.710 million, down $0.162 million from 3Q’19. The linked quarter decrease was due to a $1.086 million decrease in interest income and fees on loans that was partially offset by a $0.183 million increase in interest income on securities and investments and by a $0.741 million decrease in interest expense on deposits and borrowings. The decrease in interest income and fees on loans was due a 14 basis point (bps) decrease in the average yield and a $10.5 million decrease in average balance. A decrease in interest recoveries (net) on previously charged-off or non-accrual loans of $0.102 million decreased the overall average yield on loans by 1.5 bps.The tax equivalent net interest margin (NIM) decreased 6 bps (3.70% vs. 3.76%) due to a 16 bps decrease in the yield on interest earning assets that was partially offset by a 10 bps decrease in the cost of funds (interest expense as a percentage of average interest-earning assets). 4Q’19 discount accretion on the TCSB acquired loans of $0.376 million increased the NIM by 4.5 bps. Average yield on new/renewed commercial loans was 4.87% on fixed rate (37% of production) and 4.67% on variable rate (63% of production), 4Q’19 volume of $98.7 million with an estimated weighted average duration of 1.7 years. Average yield on new retail loans (mortgage and consumer installment) was 4.14%, 4Q’19 volume of $142.4 million with an estimated weighted average duration of 3.8 years.Loan Portfolio DetailsCommercial loans: Interest income decreased $0.779 million due to a 25 bps decrease in the average yield (5.19% vs. 5.44%) and a $2.7 million decrease in the average balance. Interest recoveries (net) decreased by $0.074 million. This decreased the average yield by 2.5 bps. Mortgage loans (includes loans held for sale): Interest income decreased $0.525 million due to a $13.5 million decrease in the average balance and a 13 bps decrease in the average yield (4.36% vs. 4.49%) . Interest recoveries (net) decreased by $0.046 million. This decreased the average yield by 1.6 bps.Consumer installment loans: Interest income increased $0.218 million due to a $5.8 million increase in the average balance and a 13 bps increase in the average yield (4.62% vs. 4.49%). Interest recoveries (net) increased by $0.019 million. This increased the average yield by 1.7 bps.Other FactorsSecurities and investments: Interest income increased $0.183 million due to a $46.3 million increase in average balance that was partially offset by a 11 bps decrease in the average TE yield (2.83% vs. 2.94%).Deposits and borrowings: Interest expense decreased $0.741 million due to a 15 basis point decrease in the average cost of interest-bearing liabilities (1.09% vs. 1.24%) that was partially offset by a $32.8 million increase in the average balance of interest-bearing liabilities. Analysis of Linked Quarter Increase 14
15 Non-interest Income HighlightsDiverse sources of non-interest income which totaled $15.6 million in 4Q’19.4Q’19 total non-interest income represents approximately 33.7% of total revenue (net interest income and non-interest income).Service charges on deposits declined by $0.2 million, or 6.7%, in 2019 vs. 2018, due primarily to a reduction in NSF fees.Interchange revenue decreased by $0.1 million, or 4.3%, in 2019 vs. 2018, due to the timing of the receipt of a $0.2 million annual volume incentive payment from MasterCard (in 2019 received and recorded in 3Q compared to being received and recorded in 4Q in 2018).4Q’19 net gains on mortgage loans totaled $6.4 million, which was up $4.4 million from 4Q’18, due primarily to higher loan sales volumes and an improved loan sales profit margin.4Q’19 mortgage loan servicing includes a $0.6 million ($0.02 per diluted share, after tax) increase in fair value adjustment due to price. 4Q’18 included a $2.4 million ($0.08 per diluted share, after tax) decrease in fair value adjustment due to price. YTD 2019 Non-interest Income Breakout Non-interest Income Trends ($ in Millions)
16 Non-interest Expense Highlights4Q’19 non-interest expenses of $29.3 million (an increase from 4Q’18 and from 3Q’19) were above the projected range for non-interest expenses of $27.0 to $27.5 million due primarily to higher than projected incentive compensation as described below. 4Q’19 compensation and benefits increased by $2.97 million over 4Q’18 due primarily to an increase in salaries ($0.93 million), performance based compensation ($1.63 million) and payroll taxes and employee benefits ($0.41 million). The increase in salaries is primarily due to annual merit raises and growth in full time equivalent employees (primarily lenders and technology related positions). The increase in performance based compensation is primarily due to a higher accrual adjustment in 4Q’19 for the incentive compensation plan based on actual full year performance as compared to the adjustment in 4Q’18. The full year 2019 incentive compensation payout (110% of Target) is actually lower than the 2018 level (134% of Target), but 4Q’19 had a sizable “catch-up” adjustment because the accrual at 9/30/19 was based on 86% of Target. Efficiency ratio: Full year 2019 – 64.9% (63.0% excluding FV change due to price on MSRs and FDIC Small Bank Assessment Credit), 2018 – 67.2% (65.0% excluding TCSB Merger related expenses); 2017 – 69.2%; 2016 – 73.7%; 2015 – 77.2%; 2014 – 80.3%; and 2013 – 82.6%. Non-interest Expense ($ in Millions)
17 Investment Securities Portfolio HighlightsHigh quality, liquid, diverse portfolio with relatively short duration.Fair value of $518.75 million(1) at 12/31/19 (an increase of $78.7 million in 4Q’19).Net unrealized gain of $4.7 million at 12/31/19 (representing 0.9% of amortized cost).78% of the portfolio is AAA rated (or backed by the U.S. Government).2.64 year estimated average duration with a weighted average yield of 2.84% (with TE gross up).Approximately 28% of the portfolio is variable rate. (1) Includes investments in bank CD’s of $0.35 million. Investment Portfolio by Type (12/31/19) Investment Portfolio by Rating (12/31/19)
18 Credit Quality Summary Note 1: Non-performing loans and non-performing assets exclude troubled debt restructurings that are performing.Note 2: 12/31/16 30 to 89 days delinquent data excludes $1.63 million of payment plan receivables that were held for sale. Non-performing Assets ($ in Millions) ORE/ORA ($ in Millions) Non-performing Loans ($ in Millions) 30 to 89 Days Delinquent ($ in Millions)
19 Note: Dollars all in millions. Provision for Loan Losses Loan Net Charge-Offs/Recoveries Allowance for Loan Losses Credit Cost Summary
20 Classified Assets and New Default Trends Note: Dollars all in millions. Total Classified Assets Commercial Loan New Defaults Total Loan New Defaults Retail Loan New Defaults
21 Troubled Debt Restructurings (TDRs) TDR HighlightsWorking with client base to maximize sustainable performance.The specific reserves allocated to TDRs totaled $5.2 million at 12/31/19.A majority of our TDRs are performing under their modified terms but remain in TDR status for the life of the loan.92.2% of TDRs are current as of 12/31/19.Commercial TDR Statistics:27 loans with $8.5 million book balance.93.7% performing.WAR of 5.74% (accruing loans).Well seasoned portfolio; over 61% of accruing loans are not only performing but have been for over a year since modification.Retail TDR Statistics:502 loans with $42.2 million book balance.93.8% performing.WAR of 5.86% (accruing loans).Well seasoned portfolio; over 97% of accruing loans are not only performing but have been for over a year since modification. TDRs ($ in Millions) 92% of TDRs are Current
CECL (ASU 2016-13) Countdown 22 Description of Task / Action Step Date Status / Notes 1. Full transition of Excel based incurred allowance for loan losses (ALLL) model into a third-party software solution. 1Q’19 Parallel runs completed in 2018 and full transition in 1Q’19. 2. Select CECL calculation methodologies for each loan segment. 1Q’19 Methodology documentation and testing completed. A discounted cash flow model is generally preferred. 3. Determine appropriate economic/subjective factors for each loan segment to adjust for current environment. 1Q’19 Qualitative factor analysis has been completed. 4. Establish methodology for adjusting loss rates for reasonable and supportable forecast periods. 1Q’19 Regression analysis of loss rates and relevant economic factors completed. Have determined appropriate factors and application methods. Sources for future external economic forecasts in process of review. 5. Historical data validation. 1Q’19 Third-party review of historical data integrity and incurred ALLL process validation. 6. Run full CECL calculations on loan portfolio using all inputs – share impact internally. 2Q’19 Full CECL calculations completed on loan portfolio. Share results internally in 2Q’19. 7. CECL model validation. 2Q/3Q’19 Third-party review of CECL model and validation. 8. Disclose estimated financial impact of CECL on IBCP in public reporting. August 2, 2019 First disclosed the CECL impact range on ALLL in 2Q’19 Form 10-Q. This impact range was updated in the 3Q’19 Form 10-Q. 9. Finalize new financial disclosures. 4Q’19/1Q’20 Update class and risk metrics (if needed) in loan disclosures, and develop new vintage and other required CECL disclosures. 10. Finalize CECL methodology and policy and procedure documentation ahead of 1/1/2020 implementation. 4Q’19/1Q’20 Complete all CECL internal documentation (key controls/policies/procedures) and finalize CECL ALLL calculations. 11. Transition to CECL. 1Q’20 Record entry for adoption of CECL effective 1/1/2020.
Final 2019 Actual Performance vs. Original Outlook Category Outlook Lending Continued growthIBCP goal of high single digit (8% to 9%) overall loan growth in 2019, primarily supported by increases in commercial loans, mortgage loans and consumer loans. Expect much of this growth to occur in the last three quarters of 2019. This growth forecast also assumes a stable Michigan economy.4Q’19 update: 4Q’19 and full year 2019 annualized portfolio loan growth of 0.4% and 5.5%, respectively. Notable slowing in 4Q’19 in commercial loan portfolio due to an acceleration in payoffs (including $16.0 million of watch credits). Net Interest Income Growth driven primarily by higher portfolio loan balances, expect total deposits to grow by 3% to 4% in 2019 IBCP goal of approximately 10% to 11% increase in net interest income (NII) over 2018. Expect the net interest margin to be relatively stable to slightly higher in 2019. The forecast assumes one 0.25% increase in the federal funds rate in June 2019 and long-term interest rates up slightly over year end 2018 levels. 4Q’19 update: 4Q’19 and full year 2019 actual net interest income increased 0.1% and 8.2% from comparable respective period in 2018. Provision for Loan Losses Steady asset quality metricsVery difficult area to forecast. Future provision levels will be particularly sensitive to loan net charge-offs, watch credit levels, loan default volumes, and TDR portfolio performance as well as loan growth. The allowance as a percentage of total loans was at 0.96% at 12/31/18. A full year provision (expense) for loan losses of approximately 0.20% of average total portfolio loans would not be unreasonable in 2019.4Q’19 update: 4Q’19 and full year 2019 actual provision for loan losses of a credit of $0.2 million and an expense of $0.8 million, respectively, were below expectations due primarily to continued low levels of loan net charge-offs, new loan defaults and non-performing loans. Non-interest Income IBCP forecasted 2019 quarterly range of $11 million to $12 million with the total for the year up 4% to 5% from 2018 actual of $44.8 millionExpect mortgage lending volumes in 2019 to be generally comparable to 2018. Expect mortgage banking revenues (primarily gain on sale) to improve in 2019 due to some margin expansion. Expect service charges on deposits and interchange income in 2019 to be generally comparable to 2018. 4Q’19 update: Excluding $0.6 million positive fair value change due to price of MSRs, non-interest income was $15.0 million, or well above the high end of the projected range. Non-interest Expenses IBCP forecasted 2019 quarterly range of $27 to $27.5 million with the total for the year up slightly (about 1%) from the 2018 actual of $107.5 millionExcluding Merger related expenses ($3.5 million) and gain on sale of other real estate ($0.7 million) and adjusting for TCSB being in only three quarters of 2018, the assumed run rate for 2019 expenses is just over 2% higher than the adjusted 2018 level.4Q’19 update: Actual non-interest expense of $29.3 million was above the high end of the projected range primarily due to an increase in the accrual for incentive compensation. Income Taxes Approximately a 20% effective income tax rate in 2019. This assumes a 21% statutory federal corporate income tax rate during 2019.4Q’19 update: 19.4% and 19.6% actual effective income tax rate for the fourth quarter and full year of 2019, respectively. 23
2020 Initial Outlook Category Outlook Lending Continued growthIBCP goal of mid- single digit (approximately 7%) overall loan growth in 2020, primarily supported by increases in commercial loans, mortgage loans and consumer loans. Expect much of this growth to occur in the last three quarters of 2020. This growth forecast also assumes a stable Michigan economy. Net Interest Income Growth driven primarily by higher portfolio loan balances, expect total deposits (including brokered time) to grow by approximately 5% in 2020 IBCP goal of approximately a 2% increase in net interest income (NII) over 2019. Expect the net interest margin (NIM) to be relatively stable in 2020 and comparable to the 4Q’19 level but lower than the full year 2019 NIM. The forecast assumes no changes in the target federal funds rate in 2020 and long-term interest rates up very slightly over year end 2019 levels. Provision for Loan Losses Steady asset quality metricsVery difficult area to forecast. Future provision levels under CECL will be particularly sensitive to loan growth and mix, projected economic conditions, watch credit levels and loan default volumes. The allowance as a percentage of total loans was at 0.96% at 12/31/19. The initial (effective 1/1/2020) CECL adjustment is now expected to be approximately $7 million to $8 million. This revised lower range (compared to the 3Q’19 CECL estimate) primarily reflects the following factors: (i) a decline in commercial loan watch credits; (ii) a 4Q’19 update of the credit scoring of the retail loan portfolio reflecting improved scores; (iii) slightly higher prepayment rates in the retail loan portfolio; (iv) methodology refinements in the retail construction loan portfolio; and (v) changes in specific reserves. This CECL adjustment is still subject to certain final review procedures that will be completed in 1Q’20. A full year 2020 provision (expense) for loan losses of approximately 0.15% to 0.20% of average total portfolio loans would not be unreasonable. Non-interest Income IBCP forecasted 2020 quarterly range of $11 million to $13.5 million with the total for the year up 3% to 4% from 2019 actual of $47.7 millionExpect mortgage loan origination volumes in 2020 to be down by approximately 15% due primarily to a decline in refinance activity. Expect overall mortgage banking revenues (gain on sale and mortgage loan servicing) to improve in 2020 due to not having any fair value write downs due to price for MSRs. Expect service charges on deposits and interchange income in 2020 to be collectively comparable to 2019 (i.e. a decline in servicing charges on deposits due to lower NSF fees to be largely offset by an increase in interchange income). Non-interest Expenses IBCP forecasted 2020 quarterly range of $27.5 to $28.5 million with the total for the year up very slightly (less than 1%) from the 2019 actual of $111.7 million.Expect total compensation and employee benefits to be slightly lower in 2020 compared to 2019 due primarily to a reduction in incentive compensation. Most other categories of non-interest expense expected to have small (1% to 2%) increases. Income Taxes Approximately a 20% effective income tax rate in 2020. This assumes a 21% statutory federal corporate income tax rate during 2020. Share Repurchases 2020 share repurchase authorization at approximately 5% of outstanding shares. Expect total share repurchases in 2020 at just above the mid-point of this authorization. 24
Strategic Initiatives Growth1. Improve net interest income via balanced loan growth, disciplined risk adjusted loan pricing and active management of deposit pricing. 2. Innovative and targeted customer acquisition, retention and cross sales strategies leveraging data analytics, inside sales staff, and intra-company referrals with strategic business unit partners.3. Add new customers and grow revenue through outbound calling efforts.4. Add new customers and grow revenue through the addition of new talented sales professionals in our existing markets. 5. Supplement our organic growth initiatives via selective and opportunistic bank acquisitions and branch acquisitions. Process Improvement and Cost Controls1. Completion of core data processing provider contract.2. On-going branch optimization: including assessing existing locations; new locations; service hours; staffing; workflow; and our leveraging of existing technology. 3. Modernize branch delivery technology/systems.4. Expand Digital Branch (Call Center) services.5. All business lines and departments: streamline/automate operating processes and workflows (use process mapping to identify moments of value and eliminate duplication and waste.6. Build/enhance dashboard reporting and business intelligence.Talent Management 1. We recognize that the path to organizational success is through the success of each and every one of our team members. Accordingly we encourage and support the professional development of our colleagues through our IB Leadership Program, mentoring and other initiatives. 2. We are passionate about our desire to ensure that our team members are empowered and supported in a way that will best position them to serve our customers. 3. We believe that if we are committed to the well-being of our team members, and recognize and reward their contributions, they will ensure our success.Risk Management1. Maintain strong, high quality, capital levels. 2. Maintain excellent asset quality and strong proactive monitoring and problem resolution.3. Sound overall risk management with effective and transparent reporting.4. Strong and consistent earnings, augmenting capital.5. Active liquidity and interest rate risk monitoring and management.6. Strong, independent and collaborative risk management, utilizing three layers of defense (business unit, risk management and internal audit). 7. Effective operational controls with special emphasis on cyber security, fraud prevention and regulatory compliance.8. Effective working relationships with banking regulators and other key outside oversight partners. 25
Q&A and Closing Remarks Question and Answer SessionClosing RemarksThank you for attending !NASDAQ: IBCP 26