Independent Bank Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2025

Key Takeaways

  • Negative Sentiment: Net income fell to $16.9 million (EPS $0.81) from $18.5 million ($0.88) a year ago.
  • Positive Sentiment: Total loans grew 9% annualized while net interest margin expanded nine basis points to 3.58%.
  • Negative Sentiment: Non-interest income declined to $11.3 million from $15.2 million, as there was no equity securities gain this quarter.
  • Positive Sentiment: Credit quality remains strong with non-performing assets at 0.16% of assets and annualized net charge-offs at 0.02%.
  • Positive Sentiment: The bank repurchased 251,183 shares for $7.3 million, signaling confidence in its valuation.
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Earnings Conference Call
Independent Bank Q2 2025
00:00 / 00:00

There are 4 speakers on the call.

Speaker 2

Hello everyone and welcome to the Independent Bank Corporation report 2025 second quarter results. My name is Ezra and I will be your coordinator for today. If you would like to ask a question, please press STAR followed by 1 on your telephone keypad. If you change your mind, please press STAR followed by 2. We will be taking questions after the prepared remarks. I will now hand over to our host, Brad Kessel, President and CEO, to begin. Please go ahead.

Operator

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 second quarter 2025 results. I am Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Moore, EVP and Chief Financial Officer, and Joel Rahn, EVP, 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. If anyone does not already have a copy of the press release issued by us today, 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.

Operator

I am pleased to report our solid second 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. We strive to be Michigan's most people-focused bank. Today, Independent Bank Corporation reported second quarter 2025 net income of $16.9 million or $0.81 per diluted share versus net income of $18.5 million or $0.88 per diluted share in the prior year period.

Operator

Significant items impacting comparable second quarter 2025 and 2024 results include the following: changes in the fair value due to price of capitalized mortgage loan servicing rights was a loss of $0.2 million or $0.01 per diluted share after tax for the three months ending 6.30.2025 as compared to a $0.9 million or $0.03 per diluted share after tax gain for the three month period June 30, 2024. Also, a gain on equity securities at fair value of $2.7 million or $0.10 per diluted share after tax in the second quarter of June 30, 2024 attributable to the exchange of our Visa Class B1 common stock. No gain or loss in equity securities at fair value was recorded in 2Q25. I'm very proud of our team and pleased to see us continue our positive trends with our second quarter 2025 results.

Operator

Overall, loans increased by 9% annualized while core deposits were down 1.4% annualized due to seasonality. We generated net interest income growth on both a linked quarter basis and a year over year quarterly basis, producing 9 basis points of margin expansion from the prior quarter. Our expenses are well managed, and we continue to see improved operational scale from strategic investments made in recent years. These fundamentals drove positive growth in tangible common equity per share of common stock, 10.8% compared to the prior year quarter, along with very healthy performance returns, a return on average assets of 1.27% and a return on average equity of 14.66%. Despite heightened uncertainty in the markets during the quarter, our credit metrics remain strong with low levels of watch credit, 16 basis points of non-performing assets to total assets, and 2 basis points in net charge-offs to average loans of the quarter.

Operator

Annualized, the allowance for credit losses was 1.47% of total loans. Our team has been effective in many areas during 1H25, including business development from the existing customer base and onboarding new relationships, which have enhanced the geographic and product line diversification of our business. We continue to succeed in recruiting talented bankers to join the Independent Bank Corporation team. During the second quarter, we rolled out several new technologies to make banking easier for both our customers and associates serving our customers. For all these reasons, I am optimistic about our prospects for growth for the balance of 2025 and into 2026. Moving to page 5 of our presentation, total deposits as of 6/30/2025 were $4.7 billion. Overall, core deposits decreased $15.7 million during 2Q25.

Operator

On a linked quarter basis, retail deposits were down $13.8 million, business deposits were up by $60.5 million, and municipal deposits decreased by $64 million. Our sales team continues to bring in new relationships 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 Fund spot rate and Fed effective rate. For the quarter, our total cost of funds declined by 4 basis points to 1.76%. At this time, I'd like to turn the presentation over to Joel Rahn to share a few comments on the success we're having in growing our loan portfolios and provide an update on our credit metrics.

Speaker 3

Yeah, thanks Brad and good morning everyone. On page seven we share an update on loan activity for the quarter. We continued to experience solid loan growth in the second quarter with total loans growing by $91.7 million or 9%. Annualized commercial loan generation was strong, resulting in $75.8 million of quarterly growth, 15.3% on an annualized basis. Our residential mortgage portfolio grew by $15.6 million and our installment loan portfolio was up slightly for the quarter. Our continued strategic investment in commercial banking talent continues to supplement our loan growth. We added three experienced commercial bankers in the second quarter, bringing our team to 50 bankers across our statewide footprint. Our staff additions include launching a new loan production office in Kalamazoo. We're very excited to have a commercial presence in that market.

Speaker 3

Looking ahead, we believe we will continue low double digit growth of our commercial loan portfolio in the second half of the year based upon a strong pipeline. We continue to see market share opportunities from regional banks and are seeing some uptick in organic growth from our existing customers. As noted in previous quarters, our new loan production in all categories continues to come on at yields well above the respective portfolio yield. Looking at the commercial loan production activity on a year to date basis, the mix of C&I lending versus investment real estate is 59% and 41% respectively. For our commercial portfolio, our mix is 70% C&I and 30% IRE. Page eight provides detail on our commercial loan portfolio concentrations. There has not been any significant shift in our portfolio and portfolio continues to be very well diversified.

Speaker 3

Our largest segment of the C&I category is manufacturing at $184 million or 8.9% of the total portfolio. It's worth noting that within the manufacturing segment is $157 million of automotive industry exposure that we're monitoring closely for any tariff related impact. To date, the impact has been nominal. Key credit quality metrics and trends are outlined on page nine. Overall credit quality continues to be excellent. As Brad said, total non-performing loans were $8.2 million or 20 basis points of total loans at quarter end, up slightly from 17 basis points at 3/31. Past due loans totaled $6.6 million or 16 basis points, also up slightly from 10 basis points at 3/31. It's not reflected on the slide and Brad mentioned it just a moment ago, but it's worth noting that our year to date charge-offs are $442,000 or 2 basis points of average loans on an annualized basis.

Speaker 3

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 1

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 $3.3 million from the year ago period on a tax equivalent basis. Net interest margin is 3.58% during the second quarter of 2025 compared to 3.40% in the second quarter of 2024 and up 9 basis points from the first quarter of 2025. Average interest earning assets were $5.04 billion in the second quarter of 2025 compared to $4.89 billion in the year ago quarter and $5.08 billion in the first quarter of 2025. 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 second quarter 2025 net interest margin was positively impacted by three factors.

Speaker 1

A decrease in funding costs contributed 3 basis points. Change in earning asset yield and mix contributed 6 basis points and a loan prepayment fee contributed 1 basis point. These were partially offset by a change in funding mix that negatively impacted the margin by 1 basis point. On page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for second quarter 2025 and first quarter 2025 calculates the change in net interest income over the next 12 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. The shock scenarios consider immediate, permanent, and parallel rate changes. The base case modeled NII is slightly higher during the quarter given earning asset growth and slight margin expansion.

Speaker 1

Asset yields were augmented by a shift in asset mix with good commercial loan growth partially funded by runoff of lower yielding investments. Also, assets continue to reprice higher. This benefit was partially offset by an adverse shift in funding mix with an increase in wholesale funding to finance earning asset growth and a modest core deposit runoff. The NII sensitivity position shows slightly more exposure to a declining rate environment. Asset repricing increased due to strong growth in variable rate commercial loans and HELOCs. Some of the increase in asset repricing was offset by purchase floors and faster liability repricing given an increase in short duration wholesale funding. Currently, 37.1% of assets repriced in one month and 49.2% repriced in the next 12 months.

Speaker 1

Moving on to page 14, non-interest income totaled $11.3 million in the second quarter 2025 compared to $15.2 million in the year-ago quarter and $10.4 million in the first quarter of 2025. Second quarter 2025 net gains on mortgage loans totaled $1.6 million compared to $1.3 million in the second quarter of 2024. The increase is due to higher profit margins and higher volume of loan sales. No gain or loss on equity securities at fair value is recorded for the second quarter of 2025 compared to a $2.7 million gain in the prior year's quarter due to the exchange of Visa Class B1 common stock. Positively impacting non-interest income was a $0.5 million gain on mortgage loan servicing net.

Speaker 1

This is comprised of a $0.2 million, or $0.01 per diluted share after-tax loss due to change in price, a $0.9 million decrease due to paydowns, and a $1.1 million loss on sale of originated servicing rights as offset by $1.6 million of servicing revenue in the second quarter of 2025. The decline in servicing revenue compared to the prior year quarter is attributed to the sale of approximately $931 million of mortgage servicing rights on January 31, 2025. As detailed on page 15, our non-interest expense totaled $33.8 million in the second quarter 2025 as compared to $33.3 million in the year-ago quarter and $34.3 million in the first quarter 2025. Compensation expense decreased $0.1 million primarily due to lower incentive-based compensation expense, lower health benefits-related costs, and higher deferred loan origination costs due to higher commercial and mortgage loan production.

Speaker 1

Data processing costs increased by $0.6 million from the prior year period primarily due to core data processor annual asset growth and CPI-related cost increases and increases in other software solutions. Page 16 is our update for our 2025 outlook to see how our actual performance during the second quarter compared to the original outlook that we provided in January 2025. Our outlook estimated loan growth in the mid-single digits. Loans increased $91.7 million in the second quarter of 2025, or 9% annualized, which is above our forecasted range. Commercial, mortgage, and installment loans increased in 2Q2025. Net interest income increased by 7.9% over 2024, which is slightly below our forecast of a high single-digit growth. The net interest margin was 3.58% for the current quarter, 3.4% for the prior year quarter, and up 9 basis points.

Speaker 1

From a linked quarter perspective, the second quarter 2025 provision for credit losses was an expense of $1.5 million, which was within our forecasted range. Moving on to page 17, non-interest income totaled $11.3 million in the second quarter 2025, which was within our forecasted range of $11 million to $12 million in the second quarter 2025. Mortgage loan origination, sales, and gains totaled $147.8 million, $95.4 million, and $1.6 million, respectively. Mortgage loan servicing net generated a gain of $0.5 million in the second quarter 2025, which is below our forecast target. Non-interest expense was $33.8 million in the second quarter, below our forecasted range of $34.5 million to $35.5 million. Our effective income tax rate was 18.4% in the second quarter of 2025. Lastly, there were 251,183 shares of common stock repurchased for an aggregate purchase price of $7.3 million in the second quarter 2025.

Speaker 1

That concludes my prepared remarks and I would like to now turn the call back over to Brad.

Operator

Thanks, Devin. 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 the second half of 2025, our focus will be continuing to invest in our team, leveraging our technology, and supporting our communities. At this point, we'd like to open up the call for questions. Ezra.

Speaker 2

Thank you very much. If you would like to ask a question, please press star followed by one on your telephone keypad. Please ensure your device is unmuted locally. If you change your mind or your question has already been answered, please press star followed by two. Our first question comes from Peter Winter with C.A. Davidson. Peter, your line is now open. Please go ahead.

Operator

Thanks.

Speaker 1

Good morning.

Operator

You guys had really nice strong margin expansion this quarter, and I was just wondering, could you talk about maybe the outlook for the margin the second half of the year? You know, especially if we get maybe 2 rate cuts based on the forward curve.

Speaker 1

Yeah Peters, I would. This is Gavin. Thanks for joining today. The margin forecast that we provided is, we're still very confident in that we provided in January. The two basis point cuts is factored in to that forecast. I would share that given the current positioning in our balance sheet, the cut of a quarter to 50 basis points does not have a significant impact in the margin, one or two basis specifically.

Operator

Okay, that's helpful. You guys also have done a nice job managing your deposit costs. Do you still see room to lower deposit costs absent if there are no rate cuts, and if so, kind.

Speaker 1

What are some of the drivers? I think that right now where we're at in the deposit costs, we're probably seeing a plateau, Peter. The longer we stay or the longer they hold flat as asset growth continues, you can kind of feel the pressure build. If I look at where we're currently seeing our CDs reprice and where we're issuing new, those are at the same level. I don't see if we stay here, a lot of opportunity to reprice down here.

Operator

Brad, if I can ask just a question, Treasury Secretary Scott Bessant, he seems very focused on bank regulation, trying to kind of level the playing field for the commercial banks. The question is, have you seen anything that benefits you from a competitive standpoint against credit unions? Oh, that's a great question, Peter.

Speaker 1

No.

Operator

Not with specifically credit unions. I do think that since the change in the administration there were quite a.

Speaker 1

Few.

Operator

Rules that were under review, including CRA, Dodd-Frank, Section 1071, small business data collection, and so on, have sort of been paused or set aside. That's significant for banks, for community banks, because it would have been, I think, costly to move forward as those regulations were being proposed. I think we are still looking for further relief and excited to see Federal Reserve Governor Michelle Bowman, who's, I think, a friend of community banks in her role in charge of the compliance side. I think there's still more to come. Again, back to your original question, that fair and equitable playing field with the non-banks, there's been no change. Okay, thanks Brad, that's helpful.

Speaker 2

Our next question comes from Brendan Nozzle with Hovde Group. Brendan, your line is now open. Please go ahead.

Speaker 3

Good morning folks. Hope you're doing well. Maybe just starting off here, kind of curious at a top level, walking through your local economies, can you just kind of take us through your markets region by region, and you know where you're seeing pockets of strength and you know where when you look at the footprint now you see the biggest long term opportunity.

Operator

Thanks.

Speaker 3

Yeah Brendan, this is Joel. I would just focus on the two largest MSAs in our footprint and that's West Michigan and then the metro Detroit market. They're both very similar in many respects. The manufacturing base is pretty much the same. There is certainly diversity to it, but it's still heavily automotive dependent. That's why earlier in my comments I specifically commented on automotive. We have relatively small exposure to the automotive industry from a supply base and they're holding up very well. We were really concerned when things first were announced back in early April. What does this mean? Maybe you could argue that all the full impact hasn't been felt yet. That's a point that has credibility. We just continue to stay really close. So far I think our economy has held up very well.

Speaker 3

I like to tell people if I don't read the news headlines, I tell you just based on customer feedback, economy's fine. Home building is still pretty strong, especially in West Michigan. Like I said, manufacturing is holding up okay. In our northern Michigan offices there's a lot of, it's a very strong tourist economy and the consumers are still spending money. That's just some kind of high level thoughts to your question. Thank you, Joel.

Speaker 1

That's super helpful.

Speaker 3

Maybe moving on just to the competitive landscape. I'm just kind of curious how it's evolved over the past couple of months and certainly hearing that some larger regionals are stepping back into certain asset classes like commercial real estate. Just kind of, you know, wondering how that's, you know, been impacting you and how you're seeing that on the ground. Yeah, I guess I'll take that one as well. Brad can chime in. It really hasn't changed. A lot of our market share lift still comes from the larger banks. We, as a community bank, sell very well against a larger bank. That hasn't changed. Interestingly, we're seeing some opportunity. I agree with your comment that the large banks are very big, very careful and maybe just not interested at all in commercial real estate right now.

Speaker 3

That's not just, you know, the obvious office segment, that's just kind of any commercial real estate. We have continued to put good investment real estate in our portfolio, but we keep it in balance. As I mentioned earlier, we like our mix of 70% C&I and 30% investment real estate overall in our portfolio. We continue to write deals. I was going to say the one interesting thing, Brendan, is we've actually seen deal opportunity coming off of CMBS maturities and especially in the medical office space. We pick our spots, but medical office, we've had good success with rewriting deals that are coming off of CMBS because that market is not as robust and not as aggressive as it once was. A variety of places, but overall the mix or where our opportunities are coming from really hasn't shifted much.

Operator

Yeah, Joel, I think that was excellent. I would just add, I mean, we were out on a call with a prospect last week whereby, you know, sort of that dollar size between $10 million and $20 million, which I'd say is sort of a sweet spot for us, was considered too small by the entity's incumbent bank. That is a terrific opportunity for us.

Speaker 1

So.

Operator

We're in a good spot. Great, great question, Brennan.

Speaker 3

Now, that's really great color.

Speaker 1

Thank you.

Speaker 3

I'm going to sneak one more in here. Maybe just turning to capital M&A activity. It certainly feels like deals have picked up not only across the country but in the Midwest specifically. Just kind of curious how you're viewing the M&A landscape at the moment, whether you're seeing signs of pickup in activity on your end, and updated thoughts on your own appetite for any inorganic opportunities right now.

Operator

I think that we've seen several very nice deals here in Michigan this year. There's definitely activity going on and there's discussions being held. Here in Michigan we have plus or minus about 80 chartered banks still left. For Independent, I would say that this is not new, organic growth will continue to be the primary driver.

Speaker 1

Of our overall growth, we would.

Operator

Be interested in acquired growth where it makes sense. Where it makes sense gets down to, you know, obviously it starts with culture and there's size and there's geography, and there's also, you know, price. I'm hopeful that as we move forward, we'll be able to complement the organic growth with some intelligent acquired growth too.

Speaker 3

Fantastic, Brad. All right, thank you for taking my questions this morning.

Speaker 2

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

Speaker 1

Hi, good morning. This is Adam Kroll on for Nathan Race. Thanks for taking my questions. Maybe just a question for Gavin. Going back to the margin, if the Federal Reserve were to remain on hold through the remainder of the year, do you think the margin can just grind higher with new loans still coming on at a higher rate than the portfolio yield? Could you remind us how much cash flow is coming off the bond book and in terms of what your fixed rate loan repricing looks like over the next couple quarters?

Operator

Yeah.

Speaker 1

To answer your first question, yes, I do believe that I'm confident that it would, if rates stay where they're at, we would continue to grind higher in the margin barring any type of disruption in the funding market. In the next 12 months, we have about $110 million of securities forecasted to reprice. I'm just looking here on your question on the commerce, the fixed rate loans repricing. Give me one second. I don't have it broken down by quarter, Adam, but I can tell you in the next 12 months.

Operator

We have.

Speaker 1

Fixed rate loans repricing at $121 million with an exit rate of 6.15% in total.

Operator

So.

Speaker 1

Okay, that's super helpful. Maybe switching to fees, you had really solid mortgage loan volume during the quarter and obviously the loan sale margin saw a drop with all the rate volatility during the quarter. I was just wondering if you have any visibility on how you see mortgage loan trending so far this quarter. Yeah, you know the gain on sale margin did come in lower than what we would have anticipated. A couple things going on there. One, just the competitiveness of the market continues to be very, very competitive. Rates were not, or the gains were not as high as what we thought they would be. There's also some nuance going on in.

Operator

Certain.

Speaker 1

Sectors of the saleable market. Where we were, the industry was paying a much higher premium into the secondary. The GSE, specifically, that premium has pulled back pretty significantly. We didn't see that coming out of our control. That has had an impact as well. We also annually go through a review of the cost of origination, and that was higher this year, which pulled down the margin as well. There are a number of moving pieces there. I would share the main driver is just the competitiveness of the mortgage space today.

Operator

Got it.

Speaker 1

I really appreciate that, and thanks for taking my questions. Thank you.

Speaker 2

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

Operator

Hey everybody, it's Matt Rank filling in for Damon. Hope everybody's doing okay.

Speaker 1

My first question is just a follow-up.

Operator

Up to the capital management.

Speaker 1

As you guys look for that inorganic opportunity.

Operator

Do you think you'll still be active?

Speaker 1

With buybacks, or should we expect you?

Operator

Guys, to kind of put those on.

Speaker 1

Pause in the meantime? Yeah, this is Gavin, Matt. We evaluate it daily. As we've explained in the past, we do model the buybacks like we would an M&A opportunity. We believe it needs to be at a price range that has a reasonable earn back for our shareholders. The current range is outside, or the current price is outside of that range of earn back that we're comfortable with. That being said, as we continue to go forward and build capital, we reserve the right to change those parameters. I would say here, in more of the short term, if the stock continues to trade in the current ranges, the buybacks will be limited.

Operator

Okay, great. Last one for me.

Speaker 1

You guys mentioned you implemented some new.

Operator

Technologies to help customers and associates.

Speaker 1

Just kind of curious what those technologies are, and if you have any other planned investments coming up.

Operator

Yeah, that's a great question. In the second quarter, we put in sort of an AI chat function on our website and within the banking platform that's getting a lot of use from our customer base. That's essentially customers being able to maybe more quickly get answers to their questions. We're using probably several dozen AI use cases around the company that is helping our staff maybe more quickly respond to customers when we've got them set on the line. Within our call center, we are leveraging some AI use cases to identify next best product opportunities with our customers. We've also leveraged technology just in terms of maybe in the loan processing, underwriting area to significantly reduce time. Those are a handful. Really excited about, you know, sort.

Speaker 1

Of where we've been, where we're at.

Operator

We can go continuing to leverage our technology. Okay, great.

Speaker 1

That's all for me.

Speaker 3

Thank you.

Speaker 2

Thank you very much. We currently have no more questions, so I will hand back over to Brad for any closing remarks.

Speaker 1

Thanks, Ezra.

Operator

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. Finally, I would 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.

Speaker 2

Thank you very much, Brad. Thank you to all our speakers on today's call. We appreciate everyone for joining. You may now disconnect your lines.

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