Independent Bank Corporation (Nasdaq: IBCP) — Q3 2019 Form 10-Q
Business and period: Michigan-based banking company serving primarily Michigan’s Lower Peninsula, with two loan production offices in Ohio. This unaudited report covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are against December 31, 2018. The 2018 comparison includes TCSB only from its April 1, 2018 acquisition date.
Financial performance and position
Amounts below are in millions except per-share data and ratios.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $30.9 | $29.7 | $91.9 | $82.6 |
| Net interest margin, GAAP | 3.74% | 3.88% | 3.82% | 3.84% |
| Net income | $12.4 | $11.9 | $32.6 | $29.9 |
| Diluted earnings per share | $0.55 | $0.49 | $1.40 | $1.27 |
| Non-interest income | $12.3 | $11.8 | $32.1 | $35.9 |
| Non-interest expense | $27.8 | $26.7 | $82.4 | $80.6 |
- Balance sheet: Total assets were $3.55 billion, up $197.6 million from year-end 2018. Portfolio loans were $2.72 billion, up 5.4%; deposits were $3.05 billion, up $138.9 million. Cash and cash equivalents were $82.4 million.
- Credit and asset quality: Allowance for loan losses was $26.1 million, or 0.96% of portfolio loans, versus $24.9 million and 0.96% at year-end. Non-performing loans were $6.6 million, or 0.24% of portfolio loans, down from $8.6 million and 0.33%. Performing troubled debt restructurings totaled $47.8 million.
- Funding and capital: Other borrowings were $64.0 million and subordinated debentures $39.4 million. Wholesale funding, including reciprocal deposits, was approximately $679.9 million, or 21.8% of funding excluding subordinated debentures. The Bank was categorized as well capitalized; its total risk-based capital ratio was 12.76%, common equity Tier 1 ratio 11.75%, and Tier 1 leverage ratio 9.43%. Tangible common equity to tangible assets was 8.71%, down from 9.17% at year-end.
- Cash flow, nine months: Operating activities generated $6.1 million, compared with $20.6 million in 2018; investing activities used $131.6 million; financing activities provided $137.7 million. Cash and cash equivalents increased $12.2 million to $82.4 million.
Material changes and management commentary
- Q3 net income rose about 4% year over year; nine-month net income rose about 9%. Management attributed the quarterly improvement to higher net interest income and non-interest income and a lower loan-loss provision, partly offset by higher expenses and taxes.
- Net interest income increased as average interest-earning assets grew, but margin narrowed. Management cited lower market rates and a flatter yield curve. Average funding costs rose as deposit costs increased.
- Nine-month non-interest income declined, chiefly because mortgage loan servicing shifted from $4.7 million of income in 2018 to a $4.7 million loss in 2019. This reflected a $9.3 million fair-value decline in mortgage servicing rights, associated with interest-rate and prepayment changes. Mortgage loan gains increased to $13.6 million from $8.6 million, supported by higher refinance activity and loan sales.
- Loan growth included a rise in consumer installment loans. The company reported increased early-watch commercial credits, though management said these were largely performing and did not expect significant losses from the increase. Non-performing loans declined overall, but defaults continued, particularly in commercial income-producing property and resort/vacation mortgage lending.
- Deposits grew mainly through reciprocal deposits, which increased to $416.2 million from $182.1 million at year-end. Uninsured deposits were approximately $554.3 million. Management warned that deposit outflows could increase reliance on wholesale funding and its cost.
- The company repurchased 1.20 million shares for $26.3 million during the first nine months and paid dividends of $0.54 per share year to date. At quarter-end, 274,298 shares remained authorized for repurchase under the plan.
Outlook, risks, contingencies, and unusual items
- CECL adoption: The company expected to adopt the current expected credit loss standard on January 1, 2020. Based on the September 30 portfolio and then-current forecasts, it estimated an increase in the loan allowance of $9–$11 million and in the allowance for unfunded commitments of $0.5–$1.5 million. These estimates remained subject to model refinement, portfolio changes, economic conditions, and management judgment.
- No numerical earnings or revenue guidance is provided in the supplied filing text. Management cautioned that interim results are not necessarily indicative of full-year results.
- Interest-rate exposure includes longer-term fixed-rate mortgage loans retained in the portfolio. The company uses derivatives and other asset-liability measures; its simulations indicated that a 100-basis-point rate decline would reduce modeled next-12-month net interest income by 3.16% and portfolio equity value by 12.40% from the base case. These are scenario estimates, not forecasts.
- Liquidity risks include dependence on customer deposits, reciprocal and other wholesale funding, and renewal or replacement of time deposits. About $508.1 million of time deposits matured within the next 12 months. Management stated it believed bank and parent-company liquidity was adequate at quarter-end.
- Mortgage servicing rights are valued using models with significant unobservable assumptions, including prepayment rates; changes can materially affect reported income. Mortgage gains also depend on market and competitive conditions and can be volatile.
- Litigation accruals were described as immaterial, and management estimated additional reasonably possible losses as insignificant, while noting outcomes remain uncertain. The company also disclosed $0.85 million reserved for mortgage-loan sale representation-and-warranty reimbursements.
- The filing reported no material changes to the risk factors in the 2018 Form 10-K and no material changes in internal control over financial reporting during the quarter. Disclosure controls were considered effective.
Important facts for investors to verify
- Whether the projected CECL allowance increases and adoption effects align with subsequent disclosures.
- How margin and funding costs respond to interest-rate movements, and whether deposit growth remains stable as reciprocal and uninsured deposits evolve.
- Whether mortgage refinancing, loan-sale margins, and servicing-right valuations sustain or reverse the material swings in non-interest income.
- Whether growth in adversely rated commercial credits, non-performing loans, and the allowance remains consistent with management’s credit-risk assessment.
- The remaining share-repurchase authorization, capital ratios, and liquidity position in later filings.