Independent Bank Corporation (Nasdaq: IBCP) — Q1 2022 Form 10-Q
Business context and period. The Michigan-based bank holding company provides banking services primarily in Michigan’s Lower Peninsula, with two loan production offices in Ohio. This unaudited filing covers the three months ended March 31, 2022; comparative income and cash-flow figures are for Q1 2021. Balance-sheet comparisons are to December 31, 2021. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial results and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $34.7 million | $32.5 million, Q1 2021 |
| Net interest income | $33.0 million | $30.3 million, Q1 2021 |
| Net interest margin | 3.00% fully tax-equivalent | 3.05%, Q1 2021 |
| Non-interest income | $18.9 million | $26.4 million, Q1 2021 |
| Non-interest expense | $31.5 million | $30.0 million, Q1 2021 |
| Net income | $18.0 million; diluted EPS $0.84 | $22.0 million; diluted EPS $1.00, Q1 2021 |
| Operating cash flow | $38.6 million | $35.1 million, Q1 2021 |
| Total assets | $4,762 million | $4,705 million, Dec. 31, 2021 |
| Total loans | $3,004 million | $2,905 million, Dec. 31, 2021 |
| Total deposits | $4,205 million | $4,117 million, Dec. 31, 2021 |
| Cash and cash equivalents | $109.8 million | $109.5 million, Dec. 31, 2021 |
| Total shareholders’ equity | $355.4 million | $398.5 million, Dec. 31, 2021 |
| Debt and borrowings | $30.0 million other borrowings; $39.4 million subordinated debt; $39.6 million subordinated debentures | Amounts broadly unchanged from year-end |
- Net interest income rose 9.0% year over year, supported by $444.8 million growth in average interest-earning assets; the fully tax-equivalent margin declined five basis points.
- Net income fell about 18.5%. The main drivers were lower non-interest income and higher non-interest expense, partly offset by higher net interest income, a larger credit to provision for credit losses, and lower tax expense.
- Non-interest income declined chiefly because mortgage-loan gains fell to $0.8 million from $12.8 million, reflecting lower originations and sales and a lower loan-sale margin. Mortgage refinance volumes fell 75% year over year. Mortgage servicing income increased to $9.6 million from $5.2 million, including a $7.6 million fair-value gain on servicing rights.
- Provision for credit losses was a $1.6 million credit, versus a $0.5 million credit in Q1 2021. The loan allowance fell to $45.6 million, or 1.52% of loans, from $47.3 million, or 1.63%, at year-end. Non-performing loans were $5.0 million, 0.17% of loans, compared with $5.1 million, 0.18%.
- Loans grew $99.0 million and deposits grew $88.4 million during the quarter. The company attributed deposit growth partly to seasonal business and municipal cash-management needs and elevated pandemic-era liquidity.
- Cash from operations was $38.6 million; investing activities used $120.0 million, primarily reflecting securities purchases and loan growth; financing activities provided $81.8 million, primarily from deposit growth. Cash increased $0.3 million during the quarter.
- Available-for-sale securities had a $1,400.1 million fair value and $64.2 million of gross unrealized losses at quarter-end, compared with $8.6 million at year-end. The company attributed the increased losses primarily to rising interest rates and reported no securities credit-loss allowance. The after-tax quarterly other comprehensive loss was $54.9 million, reducing equity.
- Tangible common equity was $324.0 million and tangible common equity to tangible assets was 6.85%, versus 7.85% at year-end. The Bank remained categorized as well capitalized; its total risk-based capital ratio was 12.71% and common equity Tier 1 ratio was 11.49%.
Material changes, outlook and risks
- Interest rates and securities: Management reported modest longer-term exposure to rising rates, associated partly with growth in portfolio mortgage loans. Its simulation estimated next-12-month net interest income increases of 2.53% under an immediate 100-basis-point rise and 3.51% under a 200-basis-point rise; estimated portfolio-equity value declines were 3.69% and 10.51%, respectively. These are scenario simulations, not forecasts.
- Subsequent event: On April 1, 2022, the company transferred securities with $418.1 million amortized cost and $26.4 million unrealized loss to held-to-maturity. It said it intended and was able to hold them to maturity. The transfer occurred after quarter-end.
- Liquidity and funding: Management said liquidity was adequate, citing cash, available-for-sale securities and borrowing access. However, uninsured deposits were approximately $1.04 billion; wholesale funding, including reciprocal deposits, was approximately $638.3 million, or 15.1% of total funding as defined in the filing. The company cautioned that uninsured deposits may leave and wholesale funding may become unavailable or more expensive. About $253 million of time deposits mature within 12 months.
- Credit and economic risks: COVID-19 effects had declined but remained uncertain. The company identified commercial exposures in retail, food service, hotels, office and multifamily real estate; those categories totaled $412 million, or 13.7% of loans. It reported no commercial loans in forbearance and no expected significant losses in these concentrations under then-current conditions, while emphasizing uncertainty. Inflation, supply-chain disruption, employment, interest rates and regional economic conditions could affect borrowers, collateral and credit reserves.
- Other items: The company repurchased 59,002 shares for $1.4 million and declared dividends of $0.22 per share. Its board-authorized repurchase plan permitted up to 1.1 million shares through December 31, 2022. Litigation accruals and estimated reasonably possible additional losses were described as immaterial or insignificant; the company noted outcomes remain uncertain. It gave no specific earnings or financial guidance and cautioned that quarterly results are not necessarily indicative of full-year results.
- Accounting and controls: The company was assessing the impact of ASU 2022-02, which changes certain loan-modification and vintage-disclosure requirements. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the April 1 securities transfer and subsequent rate movements materially affect reported equity, capital measures, liquidity flexibility or future interest income.
- Deposit composition and retention, including uninsured balances, reciprocal deposits, upcoming time-deposit maturities and reliance on wholesale funding.
- Loan growth and credit quality trends, especially commercial real estate and pandemic-sensitive industries, delinquency levels, and the assumptions underlying the allowance for credit losses.
- How sustainable earnings are after the sharp reduction in mortgage-sale gains and the contribution of fair-value changes in mortgage servicing rights.
- Future net interest margin and the actual effects of changing rates, compared with the filing’s scenario simulations.