Independent Bank Corporation (NASDAQ: IBCP) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless otherwise stated, amounts are in U.S. dollars; financial statement figures below are in millions. Comparisons are with Q1 2018 or December 31, 2018, as applicable.
Business context and reporting period
Independent Bank Corporation is a Michigan-focused bank holding company operating primarily in Michigan’s Lower Peninsula, with two loan production offices in Ohio. Q1 2019 results include TCSB, acquired April 1, 2018; Q1 2018 results do not, limiting year-over-year comparability.
Financial results and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period |
|---|---|---|
| Total interest income | $36.6 million | $26.8 million in Q1 2018 |
| Net interest income | $30.2 million | $23.9 million in Q1 2018 |
| Net interest margin | 3.86% GAAP; 3.88% fully taxable equivalent (FTE) | 3.69% GAAP; 3.71% FTE in Q1 2018 |
| Provision for loan losses | $0.7 million | $0.3 million in Q1 2018 |
| Non-interest income | $10.0 million | $11.7 million in Q1 2018 |
| Non-interest expense | $28.0 million | $24.1 million in Q1 2018 |
| Net income | $9.4 million | $9.2 million in Q1 2018 |
| Basic / diluted EPS | $0.40 / $0.39 | $0.43 / $0.42 in Q1 2018 |
| Total assets | $3.38 billion | $3.35 billion at December 31, 2018 |
| Portfolio loans | $2.62 billion | $2.58 billion at December 31, 2018 |
| Total deposits | $2.93 billion | $2.91 billion at December 31, 2018 |
| Allowance for loan losses | $25.3 million; 0.96% of portfolio loans | $24.9 million; 0.96% at December 31, 2018 |
| Cash and cash equivalents | $71.6 million | $70.2 million at December 31, 2018 |
| Borrowings and subordinated debentures | $25.7 million other borrowings; $39.4 million subordinated debentures | Nearly unchanged from year-end |
| Shareholders’ equity | $344.7 million | $339.0 million at December 31, 2018 |
Cash flows: Operating activities provided $10.1 million; investing activities used $22.2 million; financing activities provided $13.4 million. Cash and cash equivalents increased $1.4 million during the quarter.
Capital and liquidity: The Bank remained categorized as well capitalized. At March 31, the Bank’s total risk-based capital ratio was 12.96%, common equity Tier 1 ratio 11.94%, and Tier 1 leverage ratio 9.46%. Management stated that Bank liquidity and approximately $32.0 million of parent-company cash and time deposits were adequate. Tangible common equity to tangible assets was 9.26%, a non-GAAP measure.
Material changes versus comparable periods
- Net income rose modestly, but diluted EPS declined as average diluted shares increased to 23.9 million from 21.7 million. Management attributed higher net interest income principally to the TCSB acquisition, loan growth, a higher share of loans in earning assets, and improved margin.
- Interest expense increased to $6.4 million from $2.9 million, including higher deposit costs. Average time-deposit cost rose to 2.47% from 1.25%; total interest-bearing liability cost increased to 1.23% from 0.67%.
- Non-interest income fell $1.8 million. Mortgage loan servicing swung from $2.2 million of income to a $1.2 million loss, primarily because lower mortgage rates increased projected prepayments and reduced servicing-rights fair value by $2.7 million. Higher mortgage-sale gains and securities gains partly offset this.
- Non-interest expense increased $3.9 million, largely reflecting the acquired business, higher employee and health costs, occupancy, data processing, advertising, and other costs. The quarter had no merger-related expense, versus $0.2 million in Q1 2018.
- Non-performing loans decreased slightly to $8.8 million from $9.0 million at year-end; non-performing assets were $10.2 million. Performing troubled debt restructurings declined to $50.6 million from $53.1 million.
- Deposits increased $20.8 million, including growth in reciprocal deposits, which rose to $267.2 million from $182.1 million. Securities available for sale increased $33.6 million to $461.5 million.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautions that quarterly results are not necessarily indicative of full-year results and describes Michigan economic conditions as generally improving, though unevenly.
- The company is preparing for the expected-credit-loss standard (CECL), effective January 1, 2020. Management anticipates the allowance may increase under the expected-loss model, has not yet determined the impact, and aimed to provide an estimated impact range in its Q2 2019 Form 10-Q.
- Key risks include regional economic and real-estate conditions, credit losses and allowance assumptions, competition, deposit and loan growth, changing interest rates, and access to wholesale funding. Management reported approximately $565.9 million of uninsured deposits and $505.0 million of wholesale funding sources, including reciprocal deposits; it warned that funding availability and cost could adversely affect results.
- Rate sensitivity simulations showed that an immediate 200-basis-point rate increase would raise modeled next-12-month net interest income 2.89% but reduce modeled market value of portfolio equity 4.59%. These are scenario estimates, not forecasts.
- Portfolio strategy includes retaining more fixed-rate mortgages, increasing exposure to interest-rate risk; management said it is monitoring the change and may use borrowings, derivatives, or loan sales to manage it.
- The company sold $40.6 million of residential adjustable-rate loans and securitized $29.8 million of fixed-rate portfolio mortgages, primarily for asset/liability management. It repurchased 115,787 shares for $2.5 million under a plan authorizing repurchases of up to 5% of outstanding shares through December 31, 2019, and declared a $0.18-per-share dividend.
- Leases adopted under the new accounting standard resulted in about $7.7 million of right-of-use assets and lease liabilities at adoption; management reported no material effect on results or financial condition. Litigation accruals and estimated reasonably possible additional losses were described as immaterial or insignificant.
Most important facts for investors to verify
- Separate organic performance from acquisition-driven growth: Q1 2019 includes TCSB, while Q1 2018 does not.
- Track deposit pricing and composition, including reciprocal, brokered, and uninsured deposits, and the renewal of $511.1 million of time deposits maturing within 12 months.
- Monitor mortgage servicing-rights valuations and prepayment assumptions, which materially affected non-interest income this quarter.
- Review credit quality trends, TDRs, classified commercial loans, charge-offs, and the adequacy of the allowance, including CECL implementation estimates.
- Confirm the impact of continued rate changes on net interest margin, market value of equity, and the company’s growing fixed-rate mortgage exposure.
- Assess whether expense growth, capital distributions, and share repurchases remain consistent with earnings, liquidity, and regulatory capital needs.