Independent Bank Corporation (NASDAQ: IBCP) — Q3 2022 Form 10-Q
Business context and period. The company provides banking services primarily in Michigan’s Lower Peninsula, with a loan production office in Ohio. This unaudited report covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021.
Financial performance and condition
| Metric | Q3 2022 / September 30, 2022 | Comparable period / December 31, 2021 |
|---|---|---|
| Net income | $17.3 million; diluted EPS $0.81 | Q3 2021: $16.0 million; $0.73 |
| Nine-month net income | $48.3 million; diluted EPS $2.27 | Nine months 2021: $50.4 million; $2.30 |
| Net interest income | Q3: $39.9 million; nine months: $109.0 million | Q3 2021: $33.8 million; nine months 2021: $95.5 million |
| Net interest margin | GAAP: Q3 3.45%; nine months 3.21% | GAAP: Q3 2021 3.13%; nine months 2021 3.04% |
| Non-interest income / expense | Q3: $16.9 million / $32.4 million; nine months: $50.4 million / $96.3 million | Q3 2021: $19.7 million / $34.5 million; nine months 2021: $60.9 million / $97.1 million |
| Total assets | $4.93 billion | $4.70 billion |
| Loans / allowance for credit losses | $3.41 billion / $51.1 million; allowance equals 1.50% of loans | Loans: $2.91 billion; allowance: $47.3 million, or 1.63% |
| Deposits / cash and cash equivalents | $4.33 billion / $70.6 million | Deposits: $4.12 billion; cash: $109.5 million |
| Shareholders’ equity | $332.3 million | $398.5 million |
- Q3 net income increased 8.4% year over year, as higher net interest income and lower non-interest expense more than offset lower non-interest income and higher credit-loss provision. Nine-month net income declined 4.2%, reflecting lower non-interest income and higher provision expense.
- Q3 net interest income increased 18.0%; nine-month net interest income rose 14.1%. Management attributed growth to higher average earning assets and improved margin. Fully taxable equivalent net interest margin was 3.49% for Q3 and 3.25% year to date, versus 3.18% and 3.09%, respectively, in 2021.
- Mortgage banking was weaker: nine-month mortgage loan originations fell to $796.9 million from $1.44 billion, and gains on mortgage loans fell to $4.9 million from $30.3 million. Higher rates reduced refinance activity and pressured loan-sale margins. Mortgage servicing income rose to $18.1 million from $4.5 million, primarily due to fair-value changes in servicing rights.
- Loans grew 17.4% from year-end, with growth in commercial, mortgage, and installment lending. Deposits grew 5.1%. The company reported $1.08 billion of uninsured deposits and wholesale funding, including reciprocal deposits, equal to about 17.5% of deposits and borrowings excluding subordinated debt and debentures.
- Nonperforming loans, excluding government-guaranteed balances, were $3.8 million, down from $5.1 million at year-end; nonperforming assets were $4.2 million. The allowance increased $3.9 million from year-end. Q3 provision expense was $3.1 million versus a $0.7 million provision credit in Q3 2021; nine-month provision expense was $4.0 million versus a $2.6 million credit in 2021.
- Cash flow from operating activities was $95.4 million for the first nine months, compared with $55.9 million in 2021. Investing activities used $382.4 million and financing activities provided $248.2 million. Cash and cash equivalents declined $38.8 million during the period. These cash-flow totals should be considered alongside the bank’s funding and liquidity disclosures.
- Total borrowings were $86.7 million, up from $30.0 million at year-end; subordinated debt and debentures were $39.4 million and $39.6 million, respectively. Parent-company cash and time deposits were approximately $50 million.
- The bank was categorized as well capitalized. At September 30, its total risk-based capital ratio was 12.17%, common equity Tier 1 ratio 10.92%, and Tier 1 leverage ratio 8.47%. Tangible common equity was $301.3 million and tangible common equity to tangible assets was 6.15%, compared with 7.85% at year-end.
Material changes and unusual items
- On April 1, 2022, the company transferred securities with $418.1 million amortized cost and a $26.5 million unrealized loss from available-for-sale (AFS) to held-to-maturity (HTM), stating it had the intent and ability to hold them to maturity. At September 30, AFS securities had $91.7 million of gross unrealized losses; HTM fair value was $341.1 million compared with $379.4 million carrying value. The company reported no AFS securities credit-loss allowance.
- Accumulated other comprehensive loss moved to $97.0 million from $0.5 million positive at year-end, principally reflecting securities valuation losses. This was the main driver cited for the decline in shareholders’ equity.
- The nine-month results included a $1.1 million gain on sale of two bank-owned properties. Mortgage servicing rights were valued at $43.2 million, up from $26.2 million at year-end; the associated nine-month fair-value gain was $11.7 million.
- The company repurchased 181,586 shares for $4.0 million during the first nine months and declared dividends of $0.66 per share. A plan authorized repurchases of up to 1.1 million shares through December 31, 2022.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management described economic conditions as highly uncertain and said it was cautiously optimistic about managing the risks, while emphasizing uncertainty around future loan performance.
- Management cited elevated inflation, rising interest rates, energy costs, supply-chain disruption, and Russia-Ukraine-related uncertainty as potential sources of adverse effects on customers, asset values, earnings, and financial condition. The Federal Reserve had raised rates by 75 basis points for a third consecutive time in September, and officials expected further increases into 2023.
- Interest-rate simulations indicated exposure to rising rates. A modeled 200-basis-point increase reduced the market value of portfolio equity by 14.64% while increasing projected next-12-month net interest income by 0.24%; the filing cautions these simulations are not reliable forecasts and assume specified rate shifts and other conditions.
- Management noted risks from deposit outflows, uninsured deposits, wholesale-funding availability and cost, and the possibility that time deposits may not renew on attractive terms. It reported $342.3 million of time deposits maturing within 12 months. Liquidity resources include cash, AFS securities, borrowing access, and brokered CDs.
- The filing reported no commercial loans in forbearance. Ordinary-course litigation accruals were immaterial; management considered reasonably possible additional losses insignificant, while noting outcomes remain uncertain. The company carries its 12,566 Visa Class B shares at zero, although it estimated an indicative value of approximately $4.1 million using the stated conversion ratio and October 27 share price; transfer and conversion remain restricted and uncertain.
- Management identified the allowance for credit losses and mortgage servicing-rights valuation as critical accounting estimates. The filing also notes potential impairments to securities, loans, servicing rights, intangibles, or deferred tax assets under adverse economic developments.
Important facts for investors to verify
- Whether loan and deposit growth can be sustained, and how the rising-rate environment affects deposit costs, net interest margin, and funding needs.
- The composition and stability of uninsured deposits, reciprocal deposits, and other wholesale funding, including maturities and renewal costs.
- The size and duration of securities unrealized losses, the HTM classification and hold-to-maturity intent, and any effects on capital or liquidity.
- Trends in loan delinquencies, criticized or classified loans, charge-offs, and the adequacy of the credit-loss allowance as economic conditions change.
- The sustainability of mortgage servicing-rights fair-value gains and the continued decline in mortgage originations and loan-sale margins.