Independent Bank Corporation (IBCP) — 2021 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited consolidated results. The company provides banking services primarily in Michigan’s Lower Peninsula, with two loan production offices in Ohio.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $33.8 million | $32.0 million | $95.5 million | $92.6 million |
| Net interest margin, fully taxable equivalent | 3.18% | 3.31% | 3.09% | 3.42% |
| Provision for credit losses | $0.7 million credit | $1.0 million expense | $2.6 million credit | $12.9 million expense |
| Non-interest income | $19.7 million | $27.0 million | $60.9 million | $58.4 million |
| Non-interest expense | $34.5 million | $33.6 million | $97.1 million | $89.7 million |
| Net income | $16.0 million | $19.6 million | $50.4 million | $39.2 million |
| Diluted EPS | $0.73 | $0.89 | $2.30 | $1.76 |
For Q3, net income fell about 18% year over year as lower non-interest income and higher expenses outweighed increased net interest income and lower credit-loss provision. For the first nine months, net income rose about 29%, reflecting higher net interest and non-interest income and a substantially lower provision.
Financial position, liquidity and capital
- At September 30, 2021, total assets were $4.62 billion, up $418.3 million from year-end 2020. Total loans were $2.88 billion, up $150.3 million; mortgage and installment balances grew while commercial loans declined, principally due to PPP forgiveness.
- Deposits were $4.01 billion, up $374.7 million from year-end. Cash and cash equivalents were $125.6 million; available-for-sale securities totaled $1.35 billion.
- Other borrowings were $30.0 million; subordinated debt was $39.3 million and subordinated debentures were $39.6 million. The filing reports the Bank as well capitalized; its September 30 total risk-based capital ratio was 13.39%, Tier 1 risk-based ratio 12.14%, and common equity Tier 1 ratio 12.14%.
- Operating cash flow for the nine months was $55.9 million; investing cash flow was negative $395.6 million and financing cash flow was positive $346.6 million. Cash and cash equivalents increased $6.9 million from year-end.
- Non-performing loans were $5.6 million, or 0.19% of portfolio loans, compared with $7.9 million, or 0.29%, at December 31, 2020. The allowance for credit losses was $46.8 million, or 1.62% of portfolio loans. The company adopted CECL on January 1, 2021, reducing opening retained earnings by $10.3 million.
Material changes and management commentary
- Q3 net interest income increased 5.7%, supported by higher average interest-earning assets, while the fully taxable equivalent margin declined 13 basis points. Management attributed margin pressure to low interest rates and a larger allocation to lower-yielding securities.
- Q3 mortgage-loan gains declined to $8.4 million from $20.2 million. Mortgage sales margin fell to 2.99% from 4.84%; management cited lower sales volume, reduced refinance activity and weaker pricing spreads. Nine-month mortgage gains also declined, to $30.3 million from $46.7 million.
- Nine-month non-interest income increased modestly, including higher interchange and deposit-service income and improved mortgage servicing results. Mortgage servicing results were affected by fair-value changes in servicing rights.
- Nine-month non-interest expense increased $7.4 million, notably from compensation, data processing, interchange and conversion-related costs. The core data-processing conversion was completed in May 2021.
- The company repurchased 659,350 shares for $13.8 million in the first nine months and declared dividends of $0.63 per share. The board’s repurchase authorization covered up to 1.1 million shares through December 31, 2021.
Outlook, risks and contingencies
- No specific earnings or financial guidance is provided. Management said it expected a majority of the $90.2 million of outstanding PPP loans to be forgiven by year-end 2021. The filing notes uncertainty about future loan and deposit levels as pandemic-related stimulus programs end or taper.
- COVID-19 remains a material uncertainty, with potential effects on borrower performance, credit losses, collateral values, operations, cybersecurity and asset valuations. The company cited $411 million of commercial exposures to selected higher-risk industries, equal to 14.3% of total loans; it reported no commercial loans in forbearance and did not foresee significant losses from those exposures under then-current conditions.
- Interest-rate simulations showed projected next-12-month net interest income rising 4.36% under an immediate 200-basis-point rate increase and falling 4.90% under a 100-basis-point decrease. Management described modest longer-term exposure to rising rates as asset duration increased, and said it was monitoring the risk and may use borrowings, derivatives or loan sales to manage it.
- Available-for-sale securities had $3.5 million of gross unrealized losses; management attributed these mainly to interest rates and credit spreads, stated it did not intend to sell and considered sale before recovery unlikely. No credit-loss allowance was recorded on these securities.
- PPP loans carry risks of SBA review, possible guaranty denial or recovery, and potential litigation. Litigation accruals were immaterial; management estimated reasonably possible additional losses as insignificant. The mortgage-loan repurchase/loss-reimbursement reserve was $1.12 million.
Most important facts for investors to verify
- Whether margin pressure persists and how deposit growth, funding costs and interest-rate movements affect net interest income.
- Mortgage-banking revenue and servicing-right valuations, given the sharp decline in mortgage gains and sensitivity of servicing rights to rates and prepayments.
- Credit quality and allowance assumptions under CECL, including performance of PPP borrowers and higher-risk commercial industry concentrations.
- Deposit stability, uninsured deposits of approximately $972 million, and continued access to wholesale funding.
- Execution of remaining share repurchases and the sustainability of dividends relative to earnings and capital needs.