INDEPENDENT BANK CORP /MI/ - Quarter Report: 2021 June (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2021

Commission file number   0-7818

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  ☒  NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  ☒  NO ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, smaller reporting company or an emerging growth company.

Large accelerated filer  ☐  Accelerated filer  ☒  Non-accelerated filer  ☐  Smaller reporting company  ☐  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.  Yes  ☐  No  ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐  NO  ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: common stock, no par value, 21,518,960 as of August 5, 2021.

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

FORWARD-LOOKING STATEMENTS

Statements in this report that are not statements of historical fact, including statements that include terms such as ‘‘will,’’ ‘‘may,’’ ‘‘should,’’ ‘‘believe,’’ ‘‘expect,’’ ‘‘forecast,’’ ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘project,’’ ‘‘intend,’’ ‘‘likely,’’ ‘‘optimistic’’ and ‘‘plan’’ and statements about future or projected financial and operating results, plans, projections, objectives, expectations, and intentions, are forward-looking statements. Forward-looking statements include, but are not limited to, descriptions of plans and objectives for future operations, products or services; projections of our future revenue, earnings or other measures of economic performance; forecasts of credit losses and other asset quality trends; statements about our business and growth strategies; and expectations about economic and market conditions and trends. These forward-looking statements express our current expectations, forecasts of future events, or long-term goals. They are based on assumptions, estimates, and forecasts that, although believed to be reasonable, may turn out to be incorrect. Actual results could differ materially from those discussed in the forward-looking statements for a variety of reasons, including:

This list provides examples of factors that could affect the results described by forward-looking statements contained in this report, but the list is not intended to be all-inclusive.  The risk factors disclosed in Part I – Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, as updated by any new or modified risk factors disclosed in Part II – Item 1A of any subsequently filed Quarterly Report on Form 10-Q, include the known risks our management believes could materially affect the results described by forward-looking statements in this report. However, those risks may not be the only risks we face. Our results of operations, cash flows, financial position, and prospects could also be materially and adversely affected by additional factors that are not presently known to us that we currently consider to be immaterial, or that develop after the date of this report. We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this report are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.

See notes to interim condensed consolidated financial statements (Unaudited)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

See notes to interim condensed consolidated financial statements (Unaudited)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

See notes to interim condensed consolidated financial statements (Unaudited)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

See notes to interim condensed consolidated financial statements (Unaudited)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

See notes to interim condensed consolidated financial statements (Unaudited)

1.	Preparation of Financial Statements

2.	New Accounting Standards

•

Replaces the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost, which will reflect our estimate of credit losses over the full remaining expected life of the financial assets and will consider expected future changes in macroeconomic conditions.

•

Eliminates existing guidance for purchase credit impaired (‘‘PCI’’) loans, and requires recognition of the nonaccretable difference as an increase to the allowance for expected credit losses on financial assets purchased with more than insignificant credit deterioration since origination, which will be offset by an increase in the recorded investment of the related loans.

•

Requires inclusion of expected recoveries, limited to the cumulative amount of prior write-offs, when estimating the ACL for in scope financial assets (including collateral dependent assets).

•

Amends existing impairment guidance for securities available for sale to incorporate an allowance, which will allow for reversals of credit impairments in the event that the credit of an issuer improves. Credit losses on securities available for sale are limited to the amount of the decline in fair value regardless of what the credit loss model would show for impairment.

•

Generally requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.

		As Reported Under ASU 2016-13				Pre-ASU 2016-13 Adoption				Impact of ASU 2016-13
Assets
Loans
Commercial		$	1,242,510			$	1,242,415			$	95
Mortgage			1,015,944				1,015,926				18
Installment			475,358				475,337				21
Total loans			2,733,812				2,733,678				134
Allowance for credit losses			(47,137	)			(35,429	)			(11,708	)
Net loans		$	2,686,675			$	2,698,249			$	(11,574	)
Deferred tax assets (1)		$	65,196			$	62,456			$	2,740
Total Assets		$	4,195,179			$	4,204,013			$	(8,834	)
Liabilities and shareholders's equity
Allowance for credit losses on unfunded lending commitments (2)		$	3,274			$	1,805			$	1,469
Total liabilities		$	3,815,960			$	3,814,491			$	1,469
Retained earnings		$	29,842			$	40,145			$	(10,303	)
Total shareholders' equity		$	379,219			$	389,522			$	(10,303	)
Total liabilities and shareholders' equity		$	4,195,179			$	4,204,013			$	(8,834	)

(1)	Included in Accrued income and other assets in our Condensed Consolidated Statements of Financial Condition.

(2)	Included in Accrued expenses and other liabilities in our Condensed Consolidated Statements of Financial Condition.

3.	Securities

		Amortized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
June 30, 2021
U.S. agency		$	8,355			$	245			$	4			$	8,596
U.S. agency residential mortgage-backed			364,072				3,185				1,890				365,367
U.S. agency commercial mortgage-backed			18,829				197				16				19,010
Private label mortgage-backed			67,976				1,329				41				69,264
Other asset backed			193,509				1,743				26				195,226
Obligations of states and political subdivisions			509,250				10,499				533				519,216
Corporate			148,205				3,570				172				151,603
Trust preferred			1,973				-				106				1,867
Foreign government			499				12				-				511
Total		$	1,312,668			$	20,780			$	2,788			$	1,330,660
December 31, 2020
U.S. agency		$	10,456			$	305			$	13			$	10,748
U.S. agency residential mortgage-backed			340,224				4,951				593				344,582
U.S. agency commercial mortgage-backed			6,869				326				-				7,195
Private label mortgage-backed			41,429				1,539				139				42,829
Other asset backed			252,596				1,796				211				254,181
Obligations of states and political subdivisions			315,780				8,691				178				324,293
Corporate			82,307				3,807				97				86,017
Trust preferred			1,971				-				173				1,798
Foreign government			500				16				-				516
Total		$	1,052,132			$	21,431			$	1,404			$	1,072,159

		Less Than Twelve Months								Twelve Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(In thousands)
June 30, 2021
U.S. agency		$	-			$	-			$	1,491			$	4			$	1,491			$	4
U.S. agency residential mortgage-backed			144,894				1,830				6,617				60				151,511				1,890
U.S. agency commercial mortgage-backed			2,892				16				-				-				2,892				16
Private label mortgage-backed			5,574				27				1,426				14				7,000				41
Other asset backed			10,466				15				1,697				11				12,163				26
Obligations of states and political subdivisions			60,954				533				-				-				60,954				533
Corporate			20,313				164				547				8				20,860				172
Trust preferred			-				-				1,867				106				1,867				106
Total		$	245,093			$	2,585			$	13,645			$	203			$	258,738			$	2,788
December 31, 2020
U.S. agency		$	1,469			$	3			$	2,329			$	10			$	3,798			$	13
U.S. agency residential mortgage-backed			96,839				592				83				1				96,922				593
Private label mortgage-backed			11,838				95				2,050				44				13,888				139
Other asset backed			7,142				25				21,197				186				28,339				211
Obligations of states and political subdivisions			28,957				177				800				1				29,757				178
Corporate			1,924				97				-				-				1,924				97
Trust preferred			-				-				1,798				173				1,798				173
Total		$	148,169			$	989			$	28,257			$	415			$	176,426			$	1,404

		Amortized Cost				Fair Value
		(In thousands)
Maturing within one year		$	15,770			$	16,080
Maturing after one year but within five years			112,878				116,373
Maturing after five years but within ten years			165,791				171,342
Maturing after ten years			373,843				377,998
			668,282				681,793
U.S. agency residential mortgage-backed			364,072				365,367
U.S. agency commercial mortgage-backed			18,829				19,010
Private label mortgage-backed			67,976				69,264
Other asset backed			193,509				195,226
Total		$	1,312,668			$	1,330,660

						Realized
		Proceeds				Gains				Losses
		(In thousands)
2021		$	81,178			$	1,466			$	50
2020			36,593				253				-

4.

Loans

		Commercial				Mortgage				Installment				Subjective Allocation				Total
		(In thousands)
2021
Balance at beginning of period		$	9,530			$	18,448			$	3,979			$	14,798			$	46,755
Additions (deductions)
Provision for credit losses			(946	)			340				(219	)			(600	)			(1,425	)
Recoveries credited to the allowance			510				169				207				-				886
Loans charged against the allowance			-				(24	)			(266	)			-				(290	)
Balance at end of period		$	9,094			$	18,933			$	3,701			$	14,198			$	45,926
2020
Balance at beginning of period		$	10,212			$	7,416			$	1,258			$	13,609			$	32,495
Additions (deductions)
Provision for credit losses (1)			1,461				(130	)			175				3,682				5,188
Recoveries credited to the allowance			1,058				90				207				-				1,355
Loans charged against the allowance			(4,000	)			(115	)			(423	)			-				(4,538	)
Balance at end of period		$	8,731			$	7,261			$	1,217			$	17,291			$	34,500

(1)	Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

		Commercial				Mortgage				Installment				Subjective Allocation				Total
		(In thousands)
2021
Balance at beginning of period		$	7,401			$	6,998			$	1,112			$	19,918			$	35,429
Additions (deductions)
Impact of adoption of ASC 326			2,551				12,000				3,052				(6,029	)			11,574
Provision for credit losses			(1,622	)			(280	)			(306	)			309				(1,899	)
Initial allowance on loans purchased with credit deterioration			95				18				21				-				134
Recoveries credited to the allowance			669				381				384				-				1,434
Loans charged against the allowance			-				(184	)			(562	)			-				(746	)
Balance at end of period		$	9,094			$	18,933			$	3,701			$	14,198			$	45,926
2020
Balance at beginning of period		$	7,922			$	8,216			$	1,283			$	8,727			$	26,148
Additions (deductions)
Provision for credit losses (1)			3,679				(638	)			304				8,564				11,909
Recoveries credited to the allowance			1,166				207				381				-				1,754
Loans charged against the allowance			(4,036	)			(524	)			(751	)			-				(5,311	)
Balance at end of period		$	8,731			$	7,261			$	1,217			$	17,291			$	34,500

(1)	Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

		Commercial				Mortgage				Installment				Subjective Allocation				Total
		(In thousands)
December 31, 2020
ACL:
Individually evaluated for impairment		$	1,266			$	4,124			$	191			$	-			$	5,581
Collectively evaluated for impairment			6,135				2,874				921				19,918				29,848
Loans acquired with deteriorated credit quality			-				-				-				-				-
Total ending ACL		$	7,401			$	6,998			$	1,112			$	19,918			$	35,429
Loans
Individually evaluated for impairment		$	9,431			$	39,245			$	1,996							$	50,672
Collectively evaluated for impairment			1,236,052				980,449				474,379								2,690,880
Loans acquired with deteriorated credit quality			468				410				147								1,025
Total loans recorded investment			1,245,951				1,020,104				476,522								2,742,577
Accrued interest included in recorded investment			3,536				4,178				1,185								8,899
Total loans		$	1,242,415			$	1,015,926			$	475,337							$	2,733,678

(1)	Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.