Independent Bank Q1 2025 Earnings Call Transcript

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April 24, 2025

There are 8 speakers on the call.

Operator

Hello, everyone, and welcome to the Independent Bank Corporation Reports twenty twenty five First Quarter Results. My name is Ezra, and I will be your coordinator today. I will now hand you over to Brad Kessel, President and CEO, to begin. Please go ahead.

Speaker 1

Good morning, and welcome to today's call. Thank you for joining us for Independent Bank Corporation's conference call and webcast to discuss the company's first quarter twenty twenty five results. I'm Brad Kessel, President and Chief Executive Officer. And joining me is Gavin Moore, EVP and Chief Financial Officer and Joel Ronn, Executive Vice President, Commercial Banking. Before we begin today's call, I would like to direct you to the important information on Page two of our presentation, specifically the cautionary note regarding forward looking statements.

Speaker 1

If anyone does not already have a copy of the press release issued by us this morning, you can access it at the company's website, independentbank.com. The agenda for today's call will include prepared remarks followed by a question and answer session and then closing remarks. I am pleased to report on our strong first quarter results as we advance our mission of inspiring financial independence today with tomorrow in mind. Our vision is a future where people approach their finances with confidence, clarity and the determination to succeed. Our core values of courage, drive, integrity, people focused and teamwork are the blueprint our employees live by.

Speaker 1

We strive to be Michigan's most people focused bank. Today, Independent Bank Corporation reported first quarter twenty twenty five net income of $15,600,000 or $0.74 per diluted share versus net income of $16,000,000 or $0.76 per diluted share in the prior year period. I am proud of our team and very pleased to see us continue our positive trends. Overall loans increased 3.4% annualized, while core deposits are up 0.8% annualized. We were able to generate net interest income growth on both a linked quarter basis and on a year over year quarterly basis and produced four basis points in margin expansion.

Speaker 1

We believe that our expenses continue to be well managed and we continue to see improved operational scale from strategic investments we have made in recent quarters, recent years. These fundamentals continue to drive positive growth in tangible book value per share, 13.2% compared to the prior year quarter. Our credit metrics continue to be very good with a low level of watch credits, 14 basis points of nonperforming assets to total assets and one basis point in net charge offs for the quarter to average loans annualized. The allowance for credit losses factoring in recent market uncertainty was 1.47% of total loans. We are staying in close contact with our client base during this volatile period and keeping abreast of what they are experiencing and how they are adjusting if needed.

Speaker 1

We continue to be focused on what we can control and optimistic on the long term future of the IBC franchise. Moving to Page five of our presentation, total deposits at 03/31/2025 were $4,630,000,000 Overall core deposits increased $9,100,000 during the first quarter. On a linked quarter basis, retail deposits increased by 34,200,000.0 business deposits declined by $44,000,000 and municipal deposits increased by $18,900,000 Our customer base continues to exhibit a remix out of non interest bearing and or lower yielding deposit products into our higher yielding product offerings, but the remix pace has slowed. Additionally, our sales team continues to bring in new relationships well below wholesale well below our wholesale cost of funds. On Page six, we have included in our presentation a historical view of our cost of funds as compared to the Fed funds spot rate and the Fed effective rate.

Speaker 1

For the quarter, our total cost of funds decreased by 12 basis points to 1.8%. At this time, I'd like to turn the presentation over to Joel Ron to share a few comments on the success we are having in growing our loan portfolios and provide an update on our credit metrics.

Speaker 2

Yes. Thank you, Brad, and good morning, everyone. On Page seven, we share an update on the loan activity for the quarter. We had solid loan growth to start the year. As Brad said, total loans grew $34,000,000 representing a 3.4% annualized rate.

Speaker 2

Commercial loan generation was strong with $54,800,000 of Q1 growth or an 11% annualized rate. Our residential mortgage portfolio realized a slight decline of $3,900,000 while our installment loan portfolio declined $17,000,000 in the first quarter. Our continued strategic investment in commercial banking talent continues to supplement our growth. We added three experienced commercial bankers in the first quarter, bringing our team to 47 bankers across our statewide footprint. As noted in previous quarters, our new loan production in each segment continues to come on at yields well above the respective portfolio yield.

Speaker 2

Within the commercial loan activity, the mix of C and I lending versus investment real estate for the quarter was fifty nine percent and forty one percent, respectively. While our commercial pipeline is solid, it is softer than a year ago as we're seeing some cautiousness by business owners regarding business expansion. Page eight provides detail on our commercial loan portfolio. There's not been any significant shift in our portfolio concentrations with the portfolio remaining very well diversified. Our largest segment of the C and I category is manufacturing at 9.2% of the total portfolio.

Speaker 2

It's worth noting that within the manufacturing segment is 134,000,000 or 6.7% of our portfolio of automotive industry exposure that we're monitoring closely for a tariff related impact. As Brad noted, credit quality metrics and trends are outlined on Page nine, and they continue to be excellent. Total nonperforming loans were $7,100,000 or 17 basis points of total loans at quarter end, up slightly from 15 basis points at year end 2024. Past due loans totaled $3,900,000 or 10 basis points, down slightly from 17 basis points at year end 2024. It's not reflected on the slide, but it's worth noting that our net charge offs were $68,000 or one basis point of average loans on an annualized basis for the quarter.

Speaker 2

At this time, I'd like to turn the presentation over to Gavin for his comments, including the outlook for the remainder of the year.

Speaker 3

Thanks, Joel, and good morning, everyone. I'm starting on Page 10 of our presentation. Page 10 highlights our strong regulatory capital position. Turning to Page 11. Net interest income increased $3,500,000 from the year ago period.

Speaker 3

Our tax equivalent net interest margin was 3.49% during the first quarter of twenty twenty five compared to 3.3% in the first quarter of twenty twenty four and up four basis points from the fourth quarter of twenty twenty four. Average interest earning assets were $5,080,000,000 in the first quarter of twenty twenty four compared to $4,910,000,000 in the year ago quarter and $5,010,000,000 in the fourth quarter of twenty twenty four. Page 12 contains a more detailed analysis of the linked quarter increase in net interest income and the net interest margin. On a linked quarter basis, our first quarter twenty five net interest margin was positively impacted by two factors. A decrease in funding costs benefited 18 basis points and the change in earning assets mix benefited three basis points.

Speaker 3

These were partially offset by a decrease in the yield on earning assets of 12 basis points and a change in funding mix of five basis points. On Page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for the first quarter of 'twenty five and fourth quarter 'twenty four calculates the change in net interest income over the next twelve months under five rate scenarios. All scenarios assume a static balance sheet. The base rate scenario applies the spot yield curve from the valuation date.

Speaker 3

The shock scenario is considered immediate, permanent and parallel rate changes. The base case modeled NII is modestly higher during the quarter as asset yields were augmented by a shift in asset mix and with strong loan growth largely funded by runoff of lower yielding retail loans in the investment portfolio. The NII sensitivity position shows slightly more exposure to declining rates due to faster asset repricing. During the quarter, we had growth in variable rate commercial loans and HELOCs. Currently, 35.5% of assets reprice in one month and 47.4% reprice in the next twelve months.

Speaker 3

Moving on to page 14, non interest income totaled $10,400,000 in the first quarter of twenty twenty five as compared to $12,600,000 in the year ago quarter and $19,100,000 in the fourth quarter of twenty twenty four. First quarter '20 '20 '5 net gains on mortgage loans totaled 2,300,000 compared to $1,400,000 in the first quarter of twenty twenty four. The increase is due to higher profit margins and higher volume of loan sales. Negatively impacting non interest income was $600,000 loss on mortgage loan servicing net. This comprised of $1,500,000 or $06 per diluted share after tax loss due to change in price, dollars 900,000.0 decrease due to pay downs and a $1,000,000 or $100,000 loss on sale of originated mortgage servicing rights that was partially offset by a $1,900,000 of servicing revenue in the first quarter of twenty twenty five.

Speaker 3

The decline in servicing revenue compared to the prior year quarter is attributed to the sale of approximately $931,000,000 of mortgage servicing rights on 01/31/2025. As detailed on page 15, our non interest expense totaled $34,300,000 in the first quarter of twenty twenty five as compared to $32,200,000 in the year ago quarter and $37,000,000 in the fourth quarter of twenty twenty four. Compensation expense decreased $400,000 primarily due to lower health benefits related costs and higher deferred loan origination costs due to higher commercial and mortgage loan production. Data processing costs increased $400,000 from the prior year period, primarily due to quarter data processor and annual asset growth and CPI related cost increases as well as annual increases in other software solutions. Other non interest expense increased $500,000 primarily due to costs associated with the MSR sale referenced earlier.

Speaker 3

Page 16 is our update for our 2025 outlook to see how our actual performance during the fourth quarter compared to the original outlook that we provided in January 2024. Our outlook estimated loan growth in the mid single digits. Loans increased $33,900,000 in the first quarter of twenty twenty five or 3.4% annualized, which is below our forecasted range. Commercial had loan growth while mortgage loans and installment loans decreased in the first quarter. First quarter '20 '20 '5 net interest income increased by 8.7% over 2024, which is within our forecast of high single digit growth.

Speaker 3

The net interest margin was 3.49% for the current quarter and 3.3% for the prior year quarter, and it was up four basis points on a linked quarter basis. First quarter twenty five provision for credit losses was an expense of $700,000 which was below our forecasted range. Moving on to page 17, non interest income totaled $10,400,000 in the first quarter of twenty twenty five, which was lower than our forecasted range of $11,000,000 to $12,000,000 in the first quarter. First quarter '20 '20 '5 mortgage loan origination sales and gains totaled $107,800,000 80 2 point 6 million dollars and $2,300,000 respectively. Mortgage loan servicing net generated a loss of $600,000 in the first quarter of twenty twenty five, which is below our forecasted target.

Speaker 3

Non interest expense was $34,300,000 in the first quarter, slightly lower than our forecasted range of $34,500,000 to $35,500,000 Our effective income tax rate was 18.5% for the first quarter of twenty twenty five. Lastly, there were $10.93 shares of common stock repurchased for an aggregate purchase price of $30,000 in the first quarter. After quarter end from 04/03/2025 through 04/22/2025, there were 249,482 additional shares of common stock repurchased for an aggregate purchase price of $7,200,000 That concludes my prepared remarks, and I would now like to turn the call back over to Brad.

Speaker 1

Thanks, Kevin. We've built a strong community bank franchise, which positions us well to effectively manage through a variety of economic environments and continue delivering strong and consistent results for our shareholders. As we move through 2025, our focus will be continuing to invest in our team, leveraging our technology and supporting our communities. Earlier today, we launched our new website. This redesigned site is faster, easier to navigate and more helpful for every visitor.

Speaker 1

It's built to reflect who we are, a people first bank that makes things simple and accessible. At this point, we would now like to open up the call for questions.

Operator

Thank you very much. Our first question comes from Brendan Nosal with Hovde Group. Brendan, your line is now open. Please go ahead.

Speaker 4

Hey, good morning folks. Hope you're doing well.

Speaker 3

Good morning.

Speaker 4

Maybe just to start off here at a super high level. Obviously, a really nice strong start to the year. And I know that you don't typically update the guidance that you provided at the start of the year, but I'm just kind of curious as you sit here today, you you look at that guidance from three months ago, where do you think you could potentially outperform given that strong start?

Speaker 3

Yeah. I'd I'd probably start, Brendan, with the the provision. Given that where we we came out of the gate, I think there's probably opportunity depending on where the what happens within in the next few months with the on the deposit side, if we would see some rate cuts, we may be able to pick up a little bit there. But I overall, I I think we're really, on plan and and out of the gate as we expected.

Speaker 1

Yeah. I I agree, Gavin. I think, you know, we've rerun a couple different scenarios, and Gavin probably can speak to those a little, more. But, you know, if we get no change in the Fed rate for the balance of the year and then alternatively, as the market, I believe, is now pricing in about four cuts between now and year end, we feel the balance sheet's pretty and kicking off earnings that are consistent in both those scenarios.

Speaker 3

Yes. I mean, I'd give a little more detail to Brad's statement. So and by design, we've continually tried to work volatility out of the income statement. And so we're really indifferent to the Fed flat or today or node rate changes or the Fed cuts 100. It's our modeling.

Speaker 3

If you isolate the balance sheet, it's a couple hundred thousand dollars of NII.

Speaker 4

Yeah. Yeah. Okay. I appreciate the color there. Maybe turning to something a little more specific.

Speaker 4

Just looking at mortgage banking gain on sale, within fee income, really, really strong quarter there. It seemed to certainly buck the seasonal trend seemingly thanks to a really strong gain on sale margin for the quarter. I'm just kind of curious where you see that sea line running over the next few quarters.

Speaker 3

Yeah. You know, the margin, we continue to target that two fifty, and we've we've been intentionally working to to get a few few extra basis points wherever we can. So I think we're on trend. I think the overall question is going to be production. It's still very supply side constrained.

Speaker 3

So I think out of the gate, we feel good about the first quarter. We'll just have to see how summer develops.

Operator

Our next question comes from Peter Winter with D. A. Davidson. Peter, your line is now open. Please go ahead.

Speaker 5

Good morning. I was wondering, could you guys talk what the conversations are like with the clients, just given all the uncertainty? And I realize it's early, but are you starting to see any stress from your borrowers? Mentioned you're watching the automotive portfolio more closely.

Speaker 1

Yes, Peter, I'd like to have Joel comment on that earlier in the week we had our our board meeting, and Joel gave a nice presentation to our full board on some reporting that the team's been compiling in their conversations with our customer base. So Joel, maybe give some of the highlights there.

Speaker 2

Yeah. Sure. No. It's a good question. And and and a difficult one to answer, but, you know, in terms of where it's going, there's so there is a lot of uncertainty as as we all know.

Speaker 2

And we focus primarily on the automotive industry within our portfolio, which, as I said in my comments, is pretty small piece of the overall pie, 6.5% of our portfolio in automotive exposure. So, you know, it's it's really a blessing to have a a well diversified portfolio. But what we're hearing, you know, the business owners certainly are watching it, to figure this out, trying to figure out what the potential impacts are. We're not seeing any, you know, tangible impact yet today, because, you know, many of the tariffs aren't even implemented yet. You know, anecdotally, were hearing from a couple of stamping customers that steel supply is getting harder to come by because the OEMs and the large tier ones have been purchasing up the kind of any excess domestic steel inventory and, you know, trying to get ahead of the tariff game.

Speaker 2

So, I mean, that that's probably the most tangible piece of feedback that we heard, from one of, our stamping customers. But, again, everyone's looking forward trying to read the tea leaves, but there really no no immediate impact yet.

Speaker 5

Got it. Helpful. Yep. Credit quality is excellent. You have more reserves, I guess, than what you know what to do with.

Speaker 5

I mean, 60,000,000 reserves against $7,500,000 nonperforming assets and net charge offs, they've averaged one or two basis points over the last eight quarters. Do you think there's a need to continue to build reserves even if the economy gets worse, just given the really strong credit trends?

Speaker 1

Yes. I guess I'll take first stab at that and then Gavin maybe follow-up. So today, we're at 1.47% to total loans, dollars 60,000,000. Of that, it is like, we have 20%, is subjective. Mhmm.

Speaker 1

And we added, a little bit to the subjective, here in in q one just with with the uncertainty. I I was probably, I don't know, one point million plus two. Million two. And, you know, hey. We have a very detailed model that we utilize for CECL.

Speaker 1

And probably could attribute maybe the higher reserve level as a function of the mortgage portfolio that we carry that has a longer duration to it. But we feel good about the reserve levels that we have today and the overall performance of the portfolio. As we move through the year, right now, I'm thinking that the provisioning will be directly attributed to the loan growth that we experience. So that that's sort of what the the the outlook looks like there. Do you have anything to add?

Speaker 1

No. Well said.

Speaker 6

Got it.

Speaker 5

And if I could just ask one more question just on buybacks. You didn't buy back any stock last year. You do have the buyback announcement at the start of the year and the guidance really wasn't you weren't modeling any stock buybacks. So my mind, I feel like it's good to see you're in the market. Is the plan to continue to be in the market?

Speaker 5

And do you have like a certain price level? Or is it dependent on loan demand that determines if you're going to buy back stock?

Speaker 1

Yes, Peter. First off, great question. The share repurchases is one component to the overall capital management of the company. We're looking at, obviously, a consistent upward trending payout on the dividend. We're looking at what's happening with needs to support organic growth of the company.

Speaker 1

And then, of course, share repurchases where it where it makes sense and in consideration of everything else. You know, we had the a pretty good pullback in the stock that was essentially consistent with with what happened with other publicly traded banks and community banks. And we had in place a 10 b five one filing going into the blackout period, and we were able to then do some repurchases as the tariffs were announced. As we go forward, we're going to continue to look at all the various needs, and we may or may not be back in the market. I think we've shared publicly before that one of the parameters that we try to meet is being within a three year earn back of any dilution that's incurred as a result of it's a tangible book as a result of buying back shares.

Speaker 1

So I think you'll just see us be consistent with our historical trending there. Anything to add, Gavin?

Speaker 7

No. No.

Operator

Our next question comes from Damon DelMonte with KBW. Damon, your line is now open. Please go ahead.

Speaker 7

Hey, good morning guys. Hope everybody is doing well and thanks for taking my questions here. So first question on the outlook for loan growth. Do you feel that kind of just general uncertainties have kind of given some borrowers pause and that if we do strike some agreements on the tariff front that you could see kind of like a some pent up demand and and growth really accelerate in the coming quarters?

Speaker 2

Hey, Brendan. This is Joel. You know, it's it's hard to say, but I think that that's kind of the way I'm looking at it. I I think it it's common sense that, you know, if you're a business owner right now we were seeing some activity, don't get me wrong, and, you know, some some replacement of equipment, that sort of thing. But in terms of of, you know, significant expansion, you know, plant, additions, those are few and far between right now, and people are I I do think they're just kinda waiting for some clarity on, you know, from an economic front where which way we're headed.

Speaker 2

And but I I, you know, I think there's absent the the news headlines, you know, coming into the year, we all felt really good about the economy and felt we're kinda status quo, and automotive industry was was pretty stable. A little shift with EV transition going on, but, you know, the but our customers were dealing with that. And so I do think that that there could be some, some pent up demand on the backside of this if the news calms down.

Speaker 7

Okay. Great. And then just kind of curious, along the topic of capital management, just kind of wondering what your thoughts are on M and A, if that would be something you guys would consider to, you know, kind of take advantage of opportunities across your footprint.

Speaker 1

Yes. Yeah. Damn it. I I you know? Alright.

Speaker 1

When you look yeah. I mean, when you when you look back at our our history, the last acquisition we made was in 2018, and that was Traverse City State Bank. And that has worked out terrific for our company. And and, you know, I think we we continue to try to build a franchise that would be viewed as a good partner for for other community banks. And, we've shared in the past about some of the technology investments that we're making.

Speaker 1

I mentioned earlier on today's call the investment that we made in in in our in our website, and it's redesigned and and really making it much more interactive with with chat and and Zoom video and and and a bunch of additional features. So I I think we'd be a good partner, and, you know, we welcome conversations there. Thanks, Damon.

Speaker 7

Great, Brad. Appreciate the color there. That's all that I had. Thank you very much.

Operator

Our next question comes from Nathan Race with Piper Sandler. Nathan, your line is now open. Please go ahead.

Speaker 6

Yes. Hi, guys. Good morning. Thanks for taking the questions.

Speaker 3

Gavin, for

Speaker 6

you, costs, they came down nicely in the quarter. Just curious, as long as the Fed remains on hold presumably through the second quarter, how much additional deposit cost leverage you think you have just based on kind of competition in the footprint and just kind of what you're seeing in terms of deposit pricing today that's coming in?

Speaker 3

Yes. That's a good question. I'm not going to have an exact dollar figure or percentage figure for it. But I would say that clearly the deposit downward leverage is not what it was, right, the longer we're here. And it's really going to be dependent on the market.

Speaker 3

Continue to try to find a basis point here or there wherever we can. But there's plenty of competition where we operate. And so I think I give you this for a reference point. The maturing CD book versus kind of where they're coming on in terms of the specials we have, it's about five basis points better right now, maturing versus new. So kind of give you an indication of of where where the the pricing's at.

Speaker 3

It it really has, I think, leveled off. But the the other big key to this is gonna you know, for us, it's gonna be the mix. So how we're funding the bank.

Speaker 6

Right. And along those lines, Gavin, can you remind us how much cash flow have come off the bond book in terms of kind of what your fixed rate loan repricing looks like over the next few quarters as well?

Speaker 3

Yes. The bond book's got about $100,000,000 projected yet to come off this year. And then on the loan repricing, so we had commercial new origination going on at $697,000,000 for the quarter versus portfolio of six fifty five Mortgage new production was $7.00 2 versus $4.85, and installment was $7.52 versus $5.00 3.

Speaker 6

Right. And in terms of the 42% of commercial loans that are fixed, how much of that is kind of repricing over the next few quarters?

Speaker 3

The fixed pipeline, you know, I don't have that offhand. They let me, let me take a look, and and I can come back to the to this group with, our cash flow.

Speaker 6

Okay. Gotcha. And then within fee income, outside mortgage, are you seeing any other kind of opportunities to drive growth, whether it's within treasury management or other areas of the bank with some of the technology upgrades that you've done recently that could maybe drive some upside to kind of the guidance that that was laid out in January?

Speaker 1

Yeah. I think that I'm looking at our deck, slide 14, and our fee income has been pretty consistent. And probably the wildcard there to some degree is just what happens with mortgage gains as we go forward. And I think there may be upside potential there more than what we've guided. But otherwise, think the components are fairly constant.

Speaker 6

Okay. I appreciate the color. Thanks, guys.

Speaker 1

Thank you.

Operator

Thank you very much. We currently have no further questions. So I will now hand back to Brad for any closing remarks.

Speaker 1

Thanks, Ezra. In closing, I'd like to thank our Board of Directors and our senior management for their support and leadership. I also want to thank all our associates. I continue to be so proud of the job being done by each member of our team. Each team member in his or her own way continues to do their part toward our common goal of guiding our customers to be independent.

Speaker 1

Finally, I'd like to thank each of you for your interest in Independent Bank Corporation and for joining us on today's call. Have a great day.

Operator

Thank you very much, Brad, and thank you, Gavin and Joel, for being today's speakers. We appreciate all the insights. Thank you everyone for joining. You may now disconnect your line.

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Independent Bank Q1 2025
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