Independent Bank Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Independent Bank Corporation is a Michigan bank holding company; its principal subsidiary, Independent Bank, provides commercial banking services primarily in Lower Michigan.
Business context and financial highlights
- Completed the acquisition of TCSB Bancorp and Traverse City State Bank on April 1, 2018. Consideration had an aggregate fair value of approximately $64.5 million, including about 2.71 million shares and 0.19 million stock options. TCSB results are included from the acquisition date; 2018 acquisition-related expenses were $3.5 million.
- At year-end, loans excluding loans held for sale were $2.583 billion and deposits were $2.913 billion. The loan table reports $2.669 billion of total loans including $86.2 million held for sale, versus $2.058 billion total in 2017. These comparisons reflect the acquisition as well as business activity.
- Average deposits rose to $2.697 billion from $2.283 billion in 2017. The average rate paid on total deposits increased to 0.54% from 0.30%; average time-deposit rates rose to 1.63% from 1.04%.
- Net income as a percentage of average common equity was 12.38%, versus 7.82% in 2017; return on average assets was 1.27%, versus 0.77%. Average equity was 10.27% of average assets, compared with 9.88%.
- Available-for-sale securities totaled $427.9 million at year-end, down from $522.9 million in 2017. Gross unrealized losses on that portfolio were approximately $6.8 million, versus $3.8 million a year earlier.
Credit quality, capital, and other metrics
- Non-accrual loans were $9.0 million, up from $8.2 million in 2017; loans 90 days or more past due were $5,000. Troubled debt restructurings not otherwise listed were $53.1 million, down from $60.1 million.
- The allowance for loan losses was $24.9 million, or 0.93% of year-end loans including loans held for sale, compared with $22.6 million and 1.10% in 2017. Net charge-offs were negative $0.8 million in 2018, meaning net recoveries, versus net recoveries of $1.2 million in 2017.
- The filing says the bank’s capital ratios exceeded the minimum requirements for the “well-capitalized” category at December 31, 2018. It does not provide the actual ratios in the supplied text. The holding company reported $38.2 million of trust preferred securities included in Tier 1 capital.
- Mortgage-loan gains were $10.6 million, compared with $11.8 million in 2017. The company repurchased 587,969 shares in the market during the fourth quarter under its 2018 plan; a new 2019 plan authorized repurchases of up to 5% of outstanding shares.
Material changes and reporting limitations
Loan balances and average deposits increased substantially year over year, with the TCSB acquisition contributing to the change. The filing states that consolidated financial statements, cash-flow information, detailed income-statement results, net interest margin, debt and liquidity discussion, and management’s discussion and analysis are incorporated by reference to the 2018 annual report filed as Exhibit 13. Those details are not included in the supplied filing text, so clear values for revenue, net income, cash flow, margins, total debt, and liquidity ratios cannot be established from this text alone.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or growth guidance in the supplied text. Management cautions that forward-looking statements depend on assumptions and may differ materially from actual results.
- Key stated risks include Michigan and local real-estate economic conditions, credit losses and adequacy of the loan-loss allowance, interest-rate movements and deposit pricing, competition, liquidity and funding access, acquisition integration, regulatory change, cybersecurity and technology/vendor disruptions, and customer or industry downturns.
- The company reported that it believes it exceeds applicable capital requirements; regulatory and state-law restrictions can nevertheless limit dividends from the bank to the holding company and shareholder distributions.
- A checking-account transaction-sequencing class-action settlement received final court approval in January 2018. The company paid $2.2 million plus approximately $0.1 million of notification and other costs; a $2.3 million expense had been recorded in 2016. Other litigation accruals were described as immaterial, with estimated reasonably possible additional losses described as insignificant.
- The company had indemnification obligations related to the 2017 sale of Mepco assets, but reported no accrued liability because payment was considered remote; the purchaser had made no claims through year-end 2018.
Important facts for investors to verify
- Review Exhibit 13 for full-year revenue, net income, diluted earnings per share, net interest margin, cash flows, debt, and detailed liquidity and capital ratios.
- Assess how much loan and deposit growth came from the TCSB acquisition versus organic growth, and the resulting integration costs and expected benefits.
- Examine loan mix, allowance methodology, delinquencies, restructurings, charge-offs, and the effect of economic or real-estate deterioration on credit quality.
- Verify sensitivity to interest rates, including deposit-cost increases and the duration and unrealized losses in the securities portfolio.
- Review the scope and execution of the 2019 share-repurchase authorization alongside capital needs, dividend capacity, and acquisition-related integration priorities.