Independent Bank Corporation (NASDAQ: IBCP) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company provides banking services primarily in Michigan’s Lower Peninsula, with two Ohio loan production offices. Amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $31.4 | $30.5 | $61.7 | $60.7 |
| Net interest margin, GAAP | 2.98% | 3.34% | 3.00% | 3.47% |
| Non-interest income | $14.8 | $20.4 | $41.2 | $31.4 |
| Provision for credit losses | $(1.4) credit | $5.2 expense | $(1.9) credit | $11.9 expense |
| Non-interest expense | $32.5 | $27.3 | $62.6 | $56.1 |
| Net income | $12.4 | $14.8 | $34.4 | $19.6 |
| Diluted earnings per share | $0.56 | $0.67 | $1.56 | $0.88 |
Quarterly net income fell about 16%, while first-half net income rose about 76%. Q2 net interest income increased 3.1%, but margin pressure and lower non-interest income—especially mortgage gains—more than offset that growth. First-half results benefited from higher non-interest income and a much lower credit-loss provision versus the pandemic-affected 2020 period. The filing reports no revenue measure labeled “total revenue”; net interest income and non-interest income are presented separately.
Q2 fully taxable-equivalent net interest margin was 3.02%, down from 3.36%. Management attributed margin pressure to low short-term rates and a larger allocation to lower-yielding securities. Average interest-earning assets increased $564 million in Q2 and $631 million year to date.
Financial position, liquidity and capital
- Assets: $4.46 billion at June 30, up $257.3 million from year-end 2020.
- Loans: $2.81 billion, up $80.9 million from year-end; commercial, mortgage and installment balances all increased. PPP loans totaled $171.9 million.
- Deposits: $3.86 billion, up $225.1 million. Growth in non-interest-bearing, savings/checking and reciprocal deposits was partly offset by lower time and brokered deposits.
- Cash and cash equivalents: $69.3 million, down from $118.7 million at year-end. First-half operating cash flow was $66.6 million; investing used $324.1 million and financing provided $208.1 million.
- Borrowings and debt: $30.0 million of other borrowings, $39.3 million subordinated debt and $39.6 million subordinated debentures. The filing reports no material change in these balances from year-end.
- Credit quality: Non-performing loans were $5.1 million, or 0.18% of portfolio loans, versus $7.9 million and 0.29% at year-end. The allowance for credit losses was $45.9 million, or 1.63% of portfolio loans.
- Capital: The bank was categorized as well capitalized. At June 30, its total risk-based capital ratio was 13.71%, Tier 1 ratio 12.46%, common equity Tier 1 ratio 12.46%, and Tier 1 leverage ratio 8.69%. Tangible common equity to tangible assets was 8.21%, versus 8.56% at year-end.
- Funding exposure: Uninsured deposits were approximately $831.9 million. Wholesale funding, including reciprocal deposits, represented about 16.0% of total funding as defined by the company. Management stated that bank and parent-company liquidity were adequate.
Material changes and notable items
- Mortgage loan gains fell to $9.1 million in Q2 from $17.6 million a year earlier; the loan sales margin declined to 2.96% from 4.65%. Management cited fair-value adjustments, lower refinance activity and market pricing. Mortgage originations were $473.7 million.
- First-half mortgage servicing income was $3.2 million versus an $8.3 million loss in 2020, reflecting changes in mortgage servicing rights valuations. Servicing rights were valued at $22.4 million; the company serviced $3.14 billion of loans for others.
- Non-interest expense increased $5.2 million in Q2. Compensation and benefits, data processing and interchange costs contributed; conversion-related expense was $1.1 million in Q2. The core processing system conversion was completed in May 2021.
- The company adopted CECL on January 1, 2021. Adoption increased the loan allowance by $11.7 million and the allowance for unfunded commitments by $1.5 million, and reduced retained earnings by $10.3 million. Prior-year credit-loss figures use the incurred-loss method, so comparisons are not fully comparable.
- Shareholders’ equity was $396.0 million. The company repurchased 344,005 shares for $7.3 million in the first half and declared $0.42 per share in dividends. A plan authorized repurchases of up to 1.1 million shares through December 31, 2021.
Outlook, risks and contingencies
The filing provides no numerical earnings, revenue or margin guidance. Management noted uncertainty about loan and deposit balances as government stimulus programs end or taper, and said liquidity plans account for possible reductions during 2021. It also cautioned that results for the first half are not necessarily indicative of full-year results.
- COVID-19 remained a material uncertainty despite improving vaccination levels and Michigan’s rescission of emergency restrictions. Potential impacts include borrower stress, defaults, collateral declines, valuation impairments, operational disruption and cyber or payment fraud.
- Commercial exposure to industries management identified as more vulnerable included retail, food service and hotels in commercial and industrial lending, and retail, office and multifamily in commercial real estate. The company reported no commercial loans in forbearance; total remaining customer accommodations were $12.7 million, or 0.5% of portfolio loans.
- PPP loans are federally guaranteed, but SBA audits may extend six years after repayment or forgiveness. The company warned that procedural deficiencies could expose it to guarantee denial or repayment demands, as well as litigation and reputational risk.
- Mortgage servicing rights are valued using significant assumptions, including prepayment rates and servicing costs; changes can affect earnings materially. Management also flagged interest-rate risk as portfolio mortgage lending includes more long-term fixed-rate loans.
- Management considered litigation-related probable accruals and reasonably possible additional losses immaterial or insignificant, while noting outcomes remain uncertain. A $1.08 million reserve covered mortgage-loan sale representation and warranty obligations.
- The company carried its 12,566 Visa Class B shares at zero, although it estimated a reference value of approximately $4.8 million using the prevailing conversion ratio and Visa Class A share price; transfer and conversion remain restricted and uncertain.
Important facts for investors to verify
- How much of reported earnings growth reflects credit-loss provision releases and CECL accounting transition effects rather than recurring operating performance.
- Whether deposit growth and liquidity remain durable as stimulus-related balances change, particularly given uninsured deposits and reliance on wholesale funding.
- Credit quality trends, CECL model assumptions, remaining COVID-19 accommodations, and the performance and forgiveness of PPP loans.
- Mortgage banking and servicing-rights valuation sensitivity, including the effects of rates, prepayments and changes in loan-sale margins.
- Whether higher operating costs—especially incentive compensation, technology and conversion-related costs—persist after the May system conversion.
- Capital ratios, buybacks and dividends relative to future loan growth, credit needs and regulatory limits.