Independent Bank Corporation (Nasdaq: IBCP) — Q2 2022 Form 10-Q
Business context and period. Michigan-focused bank holding company, with two loan production offices in Ohio. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are with the same 2021 periods unless otherwise noted. Dollar amounts below are in millions unless stated.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $36.1 | $31.4 | $69.1 | $61.7 |
| Non-interest income | $14.6 | $14.8 | $33.6 | $41.2 |
| Non-interest expense | $32.4 | $32.5 | $63.9 | $62.6 |
| Provision for credit losses | $2.4 | ($1.4) credit | $0.8 | ($1.9) credit |
| Net income | $13.0 | $12.4 | $31.0 | $34.4 |
| Diluted earnings per share | $0.61 | $0.56 | $1.45 | $1.56 |
| Annualized GAAP net interest margin | 3.21% | 2.98% | 3.09% | 3.00% |
Q2 net income rose about 5%, supported chiefly by higher net interest income. First-half net income fell about 10%, as weaker non-interest income and higher expenses and credit-loss provision more than offset net interest income growth. Mortgage loan sales gains were $1.3 million in Q2 and $2.1 million for the half, versus $9.1 million and $21.9 million in 2021. Mortgage servicing income, including fair-value changes, was $4.2 million in Q2 and $13.8 million year to date.
Average interest-earning assets rose year over year, supporting net interest income growth; management attributed this mainly to commercial, mortgage, and installment loan growth funded by deposits. Q2 fully taxable equivalent net interest margin was 3.26%, up from 3.02%. Q2 annualized return on average assets was 1.10% (1.12% in 2021); return on average equity was 15.68% (12.78%).
At June 30, 2022, total assets were $4.83 billion, loans $3.26 billion, deposits $4.29 billion, and shareholders’ equity $331.1 million. Compared with December 31, 2021, loans increased $353.8 million and deposits increased $173.5 million. Cash and cash equivalents were $59.5 million, down from $109.5 million. Other borrowings were $25.5 million; subordinated debt and debentures totaled approximately $79.0 million.
For the first six months, operating cash flow was $61.1 million, investing cash flow was negative $266.2 million, and financing cash flow was positive $155.1 million; cash and cash equivalents decreased $50.0 million. Management stated it believed the Bank and parent company had adequate liquidity. The Bank was categorized as well capitalized; its June 30 total risk-based capital ratio was 12.26%, Tier 1 ratio 11.02%, and common equity Tier 1 ratio 11.02%.
Material changes and notable items
- Interest-rate-driven securities losses: AFS securities had $75.5 million of gross unrealized losses at June 30, versus $8.6 million at year-end 2021. The company reported a first-half after-tax other comprehensive loss of $85.5 million, taking accumulated other comprehensive loss to $85.0 million and reducing shareholders’ equity from $398.5 million to $331.1 million. Management attributed most unrealized losses to higher rates and wider credit spreads, and said it did not intend, and was unlikely to be required, to sell the affected securities before recovery.
- Portfolio reclassification: On April 1, $418.1 million amortized cost of AFS securities, with a $26.5 million unrealized loss at transfer, was moved to held-to-maturity. The HTM portfolio’s June 30 fair value was $359.7 million versus $381.6 million carrying value; the transfer loss is to be accreted over the securities’ remaining lives. No AFS securities credit-loss allowance was recorded; the HTM allowance was $0.2 million.
- Capital: Tangible common equity was $300.0 million and tangible common equity to tangible assets was 6.26%, down from 7.85% at year-end. Management attributed the decline largely to AOCI losses, as well as repurchases and dividends, partly offset by net income.
- Shareholder returns: The company declared $0.22 per share in Q2 dividends and repurchased 181,586 shares for $4.0 million in the first half. A repurchase authorization for up to 1.1 million shares runs through December 31, 2022.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management described continued uncertainty from elevated inflation, higher energy prices, the Russia-Ukraine war, COVID-19 effects, and rising interest rates. It noted that the Federal Reserve raised short-term rates 75 basis points in June and indicated further 2022 increases. Management said the pandemic’s effects had declined by Q2, but future economic and portfolio impacts remained uncertain.
Interest-rate simulations showed exposure to rising rates: a 200-basis-point parallel increase was estimated to reduce portfolio economic value by 15.78%, while projected next-12-month net interest income declined 0.62%. These are scenario estimates, not forecasts; management said it was monitoring deposit repricing and asset duration and might use longer-term borrowing, derivatives, or mortgage loan sales to manage exposure.
Credit quality indicators were generally low: non-performing loans were $4.5 million, or 0.14% of portfolio loans, versus $5.1 million and 0.18% at year-end; the allowance for credit losses was $47.9 million, or 1.47% of portfolio loans. Management cautioned that further provisions may be needed if economic conditions or borrower circumstances worsen. Higher-risk commercial industry concentrations totaled $400 million, or 12.3% of loans; the company reported no commercial loans in forbearance. Remaining accommodation loans were $1.2 million.
Other risks include approximately $1.04 billion of uninsured deposits, reliance on wholesale funding sources totaling about $680.7 million (including reciprocal deposits), potential deposit outflows, and the possibility that wholesale funding could become less available or more expensive. The company reported ordinary-course litigation with immaterial accruals and estimated reasonably possible additional losses as insignificant, while noting uncertainty could change that estimate. It also carries 12,566 Visa Class B shares at zero; management cited an indicative value of approximately $4.2 million based on the then-current conversion ratio and July 18 Class A share price, subject to transfer, conversion, and litigation uncertainties.
Key investor verification points
- Review the extent to which net interest income growth persists as deposit costs and deposit betas respond to rate increases.
- Assess the AFS-to-HTM transfer, the size and duration of unrealized securities losses, and the effect on equity and regulatory capital.
- Track mortgage origination volumes, gain-on-sale margins, servicing-rights valuations, and the contribution of fair-value changes to reported non-interest income.
- Monitor loan growth, delinquency and non-performing trends, higher-risk industry exposures, and allowance adequacy under changing economic forecasts.
- Evaluate deposit stability, uninsured balances, wholesale funding availability and cost, and the company’s liquidity under stress.
- Confirm whether management’s rate-risk assumptions, capital ratios, and stated liquidity position remain consistent with subsequent results; the filing’s scenarios are not earnings guidance.