Independent Bank Corporation (NASDAQ: IBCP) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance sheet comparisons are with December 31, 2022. Figures are unaudited. The company provides banking services primarily in Michigan’s Lower Peninsula.
Financial performance
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Net interest income | $38.4 million | $33.0 million |
| Net interest margin | 3.29% GAAP; 3.33% FTE | 2.96% GAAP; 3.00% FTE |
| Net interest income plus non-interest income | $49.0 million | $51.9 million |
| Net income | $13.0 million | $18.0 million |
| Diluted earnings per share | $0.61 | $0.84 |
| Operating cash flow | $23.6 million | $38.6 million |
| Cash and cash equivalents | $227.0 million | $74.4 million at Dec. 31, 2022 |
| Total assets | $5.14 billion | $5.00 billion at Dec. 31, 2022 |
| Total loans | $3.51 billion | $3.47 billion at Dec. 31, 2022 |
| Total deposits | $4.54 billion | $4.38 billion at Dec. 31, 2022 |
| Shareholders’ equity | $367.7 million | $347.6 million at Dec. 31, 2022 |
- Net interest income rose 16.5% year over year, reflecting higher average interest-earning assets and a 33-basis-point increase in FTE margin. Higher asset yields were partly offset by rising deposit and other funding costs.
- Net income fell about 27.7%. Non-interest income declined to $10.6 million from $18.9 million, chiefly because mortgage loan servicing income fell to $0.7 million from $9.6 million, reflecting fair-value movements in mortgage servicing rights. Non-interest expense edged down to $31.0 million from $31.5 million.
- Q1 cash flows were $23.6 million from operations, $4.8 million from investing activities, and $124.3 million from financing activities. Financing included a $165.7 million net deposit increase and net repayment of other borrowings; cash increased $152.6 million overall.
- Other borrowings were $50.0 million, down from $86.0 million at year-end. Subordinated debt was $39.5 million and subordinated debentures were $39.7 million.
Material changes and balance-sheet condition
- Loans grew $44.5 million from year-end; commercial, mortgage, and installment balances each increased. Deposits rose $165.7 million, including growth in reciprocal, time, and brokered time deposits, while non-interest-bearing deposits declined $77.4 million.
- Non-performing loans were $3.9 million, or 0.11% of portfolio loans, compared with $3.7 million and 0.11% at year-end. The allowance for loan credit losses declined to $50.6 million from $52.4 million, equal to 1.44% of portfolio loans versus 1.51%.
- Available-for-sale securities had $72.7 million of gross unrealized losses at quarter-end, down from $87.3 million at year-end. The company reported no AFS securities credit-loss allowance and attributed unrealized losses primarily to interest rates and credit spreads. Accumulated other comprehensive loss improved to $80.8 million from $92.8 million.
- Consolidated common equity Tier 1 capital was 10.55%; the Bank was categorized as well capitalized. Tangible common equity was $337.0 million and tangible common equity to tangible assets was 6.60%, both non-GAAP measures.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said deposit mix changes, greater use of time deposits, and higher deposit pricing betas are expected to continue pressuring net interest margin during 2023. The company is monitoring funding mix, earning assets, and interest-rate exposure.
- Interest-rate simulations showed that an immediate 200-basis-point increase would reduce modeled 12-month net interest income by 1.10% and portfolio economic value by 16.89% versus the base case. Management cautioned that simulations are not forecasts.
- A Signature Bank corporate security defaulted during the quarter, causing a $3.0 million provision and full charge-off. The total consolidated provision for credit losses was $2.2 million, as the loan provision was a credit of $0.8 million.
- Management described liquidity and funding resources as strong and said the recent bank failures had little to no impact on the company’s deposit base apart from deposit mix and pricing. Available unused FHLB and FRB credit lines were approximately $930.1 million and $502.7 million, respectively; unpledged securities supported estimated additional borrowing capacity of $854.9 million.
- Risks include deposit outflows and competition for deposits, reliance on wholesale and brokered funding, rising funding costs, credit deterioration, interest-rate volatility, economic uncertainty, and potential higher FDIC assessments or regulatory changes. Uninsured deposits were $964.9 million, 22.6% of deposits; the top 100 depositors represented 19.6% of deposits.
- Litigation accruals were immaterial; the company estimated reasonably possible additional losses as insignificant, while noting outcomes remain uncertain. The company carries 12,566 Visa Class B shares at zero; it cited an indicative value of approximately $4.6 million based on the conversion ratio and April 27, 2023 Class A share price, but conversion timing and transfer restrictions remain uncertain.
- The board’s repurchase authorization permits up to 1.1 million shares through December 31, 2023. No shares were repurchased under that plan in Q1. Reported Q1 share purchases outside the plan included tax-withholding shares and employee stock ownership plan purchases.
Important facts for investors to verify
- Whether deposit growth can be sustained, and how deposit pricing, reciprocal and brokered deposits, and uninsured balances affect funding costs and liquidity.
- Subsequent-quarter net interest margin and deposit betas, given the reported sensitivity to funding mix and interest rates.
- Credit trends, including commercial real estate and consumer delinquencies, the loan-loss allowance, and any further securities credit losses.
- Fair-value assumptions and potential changes in mortgage servicing rights and securities valuations.
- Actual liquidity and capital levels relative to reported borrowing capacity, deposit maturities, and regulatory requirements.