Independent Bank Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The Michigan-based company operates Independent Bank and Mepco, a vehicle service contract payment-plan business. Unless otherwise noted, dollar amounts below are in millions.
Financial results and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $18.8 | $18.2 | $55.6 | $55.2 |
| Provision for loan losses | $(0.2) credit | $(0.6) credit | $(1.0) credit | $(2.0) credit |
| Non-interest income | $10.1 | $10.5 | $30.1 | $29.6 |
| Non-interest expense | $21.9 | $22.1 | $65.6 | $67.0 |
| Net income | $5.0 | $4.9 | $14.4 | $14.1 |
| Diluted earnings per share | $0.22 | $0.21 | $0.62 | $0.60 |
- Q3 tax-equivalent net interest margin was 3.58%, down 3 basis points year over year; the nine-month margin was 3.59%, down 12 basis points. Management attributed margin pressure mainly to lower loan yields in the prolonged low-rate environment.
- At September 30, 2015, total assets were $2,394.9, up 6.5% from year-end 2014. Loans were $1,468.0, up 4.1%; deposits were $2,061.0, up $136.7. Cash and cash equivalents were $105.2, versus $74.0 at year-end.
- Operating cash flow for the first nine months was $19.6, versus $6.3 in 2014; investing cash use was $119.1 and financing cash flow was $130.8. Cash increased $31.2 to $105.2.
- Other borrowings were $12.1 and subordinated debentures were $35.6. Shareholders’ equity was $253.0. Bank regulatory capital was categorized as well capitalized: total risk-based capital ratio 15.61%, Tier 1 risk-based 14.35%, common equity Tier 1 14.35%, and Tier 1 leverage 10.19%.
- Allowance for loan losses was $24.6, or 1.68% of portfolio loans, down from $26.0 and 1.84% at year-end 2014. Nonperforming loans were $15.8 (1.08% of portfolio loans); nonperforming assets were $19.7, or 0.82% of assets, versus $21.7 and 0.96% at year-end. Annualized net charge-offs were 0.03% of average portfolio loans for the nine months.
- Management said bank liquidity was adequate, supported by cash, available-for-sale securities, FHLB access and potential brokered CDs. However, $522.8 of deposits were uninsured and $296.9 of time deposits mature in the next 12 months. Parent-company cash, including time deposits, was about $22.0.
Material changes and notable items
- Net income increased modestly year over year in both the quarter and nine-month period. Higher net interest income and lower non-interest expense supported results; lower credit-loss provision credits partially offset those improvements. Nine-month income tax expense rose to $6.7 from $5.7.
- Mortgage loan originations rose to $260.7 from $187.2 for the first nine months, and mortgage loan sales rose to $222.0 from $156.1. Nine-month mortgage gains increased to $5.7 from $4.1.
- The August sale of the Midland branch generated a $1.2 gain; the buyer assumed branch deposits. Separately, six branches closed in April. Management estimated annual expense savings of about $1.6, partly offset by possible annual revenue attrition of $0.3–$0.4; $0.2 of severance expense was recorded in Q1.
- For the first nine months, Mepco recorded a $0.4 net loss, compared with $0.6 net income in 2014. Independent Bank segment net income rose to $15.6 from $14.3.
- The company repurchased 659,162 shares for $9.0 in the first nine months, at an average $13.69 per share. Quarterly dividends were $0.06 per share; in October, the board raised the quarterly dividend to $0.08.
Outlook, risks and contingencies
- The filing provides no formal earnings or revenue guidance. Management noted that low short-term rates were expected to persist into at least late 2015 or early 2016, and said rising rates could benefit net interest margin over the longer term. These are expectations, not guaranteed outcomes.
- Key exposures include Michigan and regional real estate conditions, interest-rate and liquidity changes, loan-loss estimation, deposit retention, and competition. The company also cautioned that mortgage gains and servicing-right valuations can be volatile.
- Mepco had $7.3 of net vehicle-service-contract counterparty receivables, collected primarily through recovery efforts and litigation. Management warned that counterparties may fail to pay contractual refunds and that actual losses could exceed recorded estimates; this business also depends on assumptions about cancellations, collateral and recoveries.
- Ordinary-course litigation accruals were immaterial; the company estimated up to $0.5 of additional reasonably possible losses, subject to change. The reserve for mortgage-loan sale reimbursement claims was about $0.5.
- The Bank had negative undivided profits of $15.9 and therefore could not pay dividends under Michigan rules without regulatory approval. The filing reports a prior approved $18.5 return of capital to the parent in February 2015. The company also maintains a tax-benefits preservation plan to reduce the risk of an ownership change limiting use of tax attributes.
Important facts for investors to verify
- Whether loan growth and improving charge-off trends persist, particularly given the movement of a $4.2 commercial relationship to non-accrual in Q3 and continued exposure to income-property and resort lending.
- The sufficiency of the loan-loss allowance and the assumptions supporting Mepco counterparty receivables, reserves and recoveries.
- Deposit stability, uninsured-deposit exposure, upcoming time-deposit maturities and access to wholesale funding at acceptable costs.
- Whether branch-consolidation savings are realized without greater customer attrition, and how sustainable mortgage-sale gains and servicing-right values prove to be.
- The Bank’s capital position, restrictions on upstream dividends, parent liquidity and the sustainability of share repurchases and the increased dividend.