Earnings Call Transcript
INDEPENDENT BANK CORP /MI/ (IBCP)
Earnings Call Transcript - IBCP Q4 2024
Operator, Operator
Hello everyone, and welcome to the Independent Bank Corporation's 2024 Fourth 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.
Brad Kessel, President and CEO
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 Fourth Quarter 2024 Results. I am Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Mohr, Executive Vice President and Chief Financial Officer; and Joel Rahn, Executive President and Head of our Commercial Banking. Before we begin today's call, I'd 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. Independent Bank Corporation reported fourth quarter 2024 net income of $18.5 million or $0.87 per diluted share versus net income of $13.7 million or $0.65 per diluted share in the prior year period. For the year ended December 31, 2024, the company reported net income of $66.8 million or $3.16 per diluted share, compared to net income of $59.1 million or $2.79 per diluted share in 2023. Our fourth quarter performance marked the culmination of another remarkable year with our organization excelling on the fundamentals. I am especially pleased to report a notable 10% annualized growth rate in our loan portfolio for the fourth quarter of 2024, driven by an impressive 24% annualized growth rate in our commercial loan portfolio. This strong performance enabled us to achieve a $1 million increase in net interest income for the linked quarter, contributing to a healthy net interest margin of 3.45%. Our credit metrics remain outstanding with watch credits and non-performing assets near historic lows. I am incredibly proud of our team's dedication and efforts throughout 2024 which translated into exceptional full year results. We achieved balanced growth on both sides of the balance sheet with total loan growth of 7% and core deposit growth of 5%. For the year, we delivered a return on average assets of 1.27%, a return on average equity of 15.66%, earnings per share growth of 13%, and 13% growth in tangible book value per share. Looking ahead to 2025, we remain optimistic about sustaining these growth trends. Our confidence is bolstered by a robust commercial loan pipeline, the proven track record of our core team of professionals, and our ongoing strategic initiatives to invest in talent and technology. It is this optimism about our future that moved our Board of Directors earlier this month to approve an 8% increase in our quarterly dividend, marking the 12th consecutive annual increase for our shareholders. Moving to page five of our presentation. Total deposits as of December 31, 2024, were $4.7 billion. Overall core deposits decreased $43 million during the fourth quarter of '24, but we're up $206 million for the full year. On a linked-quarter basis, retail deposits increased by $52 million. Business deposits declined by $67 million and municipal deposits declined by $24 million. Our existing customer base continues to exhibit a remix of non-interest-bearing and/or lower-yielding deposit products into our higher-yielding product offerings, but the remix pace continues to slow. Additionally, 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 decreased by 18 basis points to 1.92%. At this time, I'd like to turn the presentation over to Joel Rahn to share a few comments on the success we were having in growing our loan portfolios and provide an update on our credit metrics.
Joel Rahn, Executive President and Head of Commercial Banking
Thanks, Brad, and good morning, everyone. On page seven, we provide an update on loan activity for the quarter. We experienced strong loan generation to end the year as our strategy of incorporating experienced bankers into our team continues to support our growth. For the quarter, total loans increased by $96.5 million, which equates to a 9.7% annualized rate. Commercial loan production was robust with a growth of $112.1 million in Q4, followed by $5.3 million in mortgage growth. Our installment loan portfolio saw a decline of $20.9 million during the quarter, mainly due to seasonality. As mentioned in the materials, our new loan production continues to yield returns significantly higher than the respective portfolio yield. For the year, we achieved $248 million in loan growth, reflecting a 6.5% increase. The commercial portfolio grew by $257 million, or 15% for the year. Our mortgage portfolio increased by $31 million while our installment portfolio decreased by $40 million due to lower consumer demand and our strategic pricing discipline. Within commercial loan activities, the mix of C&I lending versus investment real estate was 64% and 36%, respectively, with 37% coming from new customers of the bank. Given a strong commercial pipeline, we anticipate ongoing growth opportunities in 2025 while upholding our strict credit standards. Page eight offers more details on our commercial loan portfolio, which is intentionally well diversified, and its composition is not expected to change significantly throughout 2024. It's important to highlight that our exposure to the office segment is $82 million, or 4.3% of our commercial portfolio at quarter end, primarily consisting of suburban low-rise office spaces, with medical making up 20% of our overall office exposure. The average loan size stands at $1.3 million, which highlights the granularity of that segment within our portfolio. For further insights into office exposure, I recommend referring to page 25 of the appendix in this presentation. Key credit quality metrics and trends are presented on page nine. Overall credit quality remains excellent, as Brad mentioned earlier. Total non-performing loans amounted to $6 million, or approximately 15 basis points of total loans at quarter end, which is a slight increase from 13 basis points as of September 30. Past due loans totaled $7 million or 17 basis points, also a slight increase from 12 basis points at September 30. While not shown on this slide, it's worth noting that our net charge-offs were 2 basis points of average loans for the year. Now, I'll turn the presentation over to Gavin for his comments, including the outlook for 2025.
Gavin Mohr, Executive Vice President and Chief Financial Officer
Thanks, Joel. Good morning, everyone. I'm starting at page 10 of our presentation. Page 10 highlights our strong regulatory capital position. Turning to page 11, net interest income increased by $2.7 million from the year-ago period, with the tax equivalent net interest margin at 3.45% during the fourth quarter of 2024, compared to 3.26% in the fourth quarter of 2023, and up 8 basis points from the third quarter of 2024. Average interest-earning assets were $5.01 billion in the first quarter of 2024, compared to $4.93 billion in the year-ago quarter and $4.99 billion in the third quarter of 2024. 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 fourth quarter '24 net interest margin was positively impacted by three factors: a decrease in funding costs of 17 basis points, a positive change in the earning asset mix of 4 basis points, and a change in the mix of interest-bearing liabilities that added 3 basis points. These were partially offset by a decrease in the yield on earning assets of 16 basis points. On page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for fourth quarter '24 and third quarter '24 calculates the change in net interest income over the next 12 months under five rate scenarios, all of which assume a static balance sheet. The base rate scenario applies the spot yield curve from the valuation date, while the shock scenarios consider immediate, permanent, and parallel rate changes. The base case model NII is modestly higher during the quarter as asset yields are improved by a shift in asset mix, and deposit betas were slightly higher than expected. The NII sensitivity position shows less exposure to declining rates due to a slower asset repricing. During the quarter, the bank added $50 million in floors. The sensitivity of the existing floor portfolio increased as the Fed lowered rates by 50 basis points. Additionally, NII for larger rate declines benefited from loans with embedded floors and reduced call risk on mortgages due to higher term rates. Currently, 35.7% of assets repriced in one month, and 46.9% will reprice in the next 12 months. Moving on to page 14, non-interest income totaled $19.1 million in the fourth quarter of 2024, compared to $9.1 million in the year-ago quarter and $9.5 million in the third quarter of 2024. Fourth quarter '24 net gains on mortgage loans totaled $1.7 million compared to $2 million in the fourth quarter of '23, with the decrease attributed to lower profit margins that were partially offset by a higher volume of loan sales. Positively impacting non-interest income was a $7.8 million gain on mortgage loan servicing net. This comprised a $6.5 million or $0.24 per diluted share after-tax gain due to a change in price and $2.2 million of revenue, partially offset by a $1 million decrease due to pay downs in the fourth quarter '24. In early December, the company executed a letter of intent to sell approximately $971 million or 27% of the mortgage servicing rights to a third party. This sale represents about $13.5 million or 27% of the total capitalized mortgage servicing right asset, with no financial impact in the fourth quarter '24 related to this transaction. The intention of this sale is to lower potential earnings volatility related to this asset in future periods. As detailed on page 15, our non-interest expense totaled $37 million in the fourth quarter of 2024, compared to $31.9 million in the year-ago quarter and $32.6 million in the third quarter of 2024. Compensation expense rose by $0.8 million primarily due to salary increases related to adjustments made at the beginning of the year and additions to the commercial banking team. Performance-based compensation increased by $2.7 million mainly due to higher expected incentive compensation payouts for salaried and hourly employees. Data processing costs increased by $0.8 million from the prior year period, primarily due to core data processor annual asset growth and CPI-related cost increases, as well as new solutions implemented during this time frame. Page 16 provides our 2024 outlook update, showing how our actual performance during the fourth quarter compared to the original outlook provided in January 2024. Our outlook estimated loan growth in the mid-single digits. Loans increased by $96.5 million in the fourth quarter '24, representing a 9.7% annualized growth, which exceeds the forecasted range. Commercial and mortgage loans grew while installment loans decreased in the fourth quarter '24. Full year loan growth totaled $247.9 million or 6.5%, which is within our forecasted range. Fourth quarter 2024 net interest income increased by 6.8% over 2023, aligning with our mid-single digit growth forecast. The net interest margin was 3.45% for the current quarter versus 3.26% for the prior year quarter, up 8 basis points from the linked quarter 2024. Full year 2024 net interest margin was 3.38% compared to 3.26% in 2023. The 12 basis point annual increase was within our forecasted range. The fourth quarter 2024 provision for credit losses was an expense of $2.2 million, while the full year 2024 provision was $4.5 million, or 14 basis points annualized, which fell below our forecasted range. Moving to page 17, non-interest income totaled $19.1 million in the fourth quarter '24, exceeding our forecasted range of $11.5 million to $13 million. Fourth quarter 2024 mortgage loan originations, sales, and gains totaled $134.1 million, $106.2 million, and $1.7 million, respectively. Mortgage loan servicing net generated a gain of $7.8 million in the fourth quarter of 2024. Full year 2024 non-interest income totaled $56.4 million, marking an increase of 11.2%, higher than our forecasted range. Non-interest expense was $37 million in the fourth quarter, above our forecasted range of $32 million to $33.5 million. For full year 2024, non-interest expense increased by 6.3%, which also exceeded the forecasted range provided in January. Our effective income tax rate was 18.9% for the fourth quarter of '24 and 19.6% for the full year 2024. Lastly, there were no shares repurchased in the fourth quarter or for the full year 2024. Turning to page 18, this summarizes our initial outlook for 2025. We anticipate loan growth in the mid-single digit range, targeting a full year growth rate of 5% to 6%. We expect growth in commercial and mortgage loans with installment loans declining, assuming a stable Michigan economy. Next is interest income, where we forecast a growth rate of 8% to 9% for full year 2024. We expect the net interest margin to increase by 20 to 25 basis points in 2025 compared to full year 2024, primarily driven by decreasing yields on interest-bearing liabilities, which is partially offset by a decrease in earning asset yields. This forecast assumes a 25 basis point cut in March and August, while long-term interest rates are expected to rise slightly from year-end 2024 levels. A full year 2025 provision expense for the allowance for credit losses of approximately 0.15% to 0.25% of average portfolio loans would be reasonable. Regarding non-interest income, we estimate a range of $11 million to $12 million in the first and second quarters, followed by a range of $12 million to $13 million in the third and fourth quarters of 2025. We estimate total for the year to decrease by 14% compared to 2024. We expect mortgage loan origination volumes and net gains on sales to remain similar to 2024. Our outlook for non-interest expense is a quarterly range of $34.5 million to $35.5 million, with a total for the year increasing by 3% to 4% over the 2024 actuals. The primary driver is the increase in compensation, employee benefits, data processing, and occupancy. We expect an effective income tax rate of approximately 19%, assuming the statutory federal corporate income tax rate does not change during 2025. Finally, the Board of Directors has authorized a share repurchase of about 5% for 2025, although we currently do not plan any share repurchase in that year. That concludes my prepared remarks, and I will now turn the call back over to Brad.
Brad Kessel, President and CEO
Thanks, Gavin. I'm very pleased with another solid quarter for 2024 and it is very much in line with the strong results which our company has been delivering quarter-over-quarter, year-after-year for some time. This success is directly attributable to our talented team, their focus on connecting with customers, investing in our communities and making banking easy. We've built a strong community bank franchise which positions us well to effectively manage for a variety of economic environments and continue delivering strong and consistent results for our shareholders. As we move into 2025, our focus will be continuing to invest in our team, leveraging our technology, and supporting our communities. In doing so, we will continue the rotation of our earning assets out of lower-yielding investments and into higher-yielding loans. With the strong value proposition offered as a large community commercial bank, we believe we can continue to grow our customer base while managing our cost of funds and controlling our non-interest expenses. Accordingly, we are very excited about our future. At this point, we would now like to open up the call for questions.
Operator, Operator
Thank you very much. Our first question comes from Adam Kroll with Piper Sandler. Adam, your line is now open. Please go ahead.
Adam Kroll, Analyst
Good morning, and thanks for taking the questions.
Brad Kessel, President and CEO
Good morning, Adam, we're having trouble hearing you, you're breaking up.
Adam Kroll, Analyst
Yes, we're having trouble hearing you, you're breaking up.
Operator, Operator
Sorry, Adam, could you double-check your line as you are breaking up. Adam, can you hear us?
Adam Kroll, Analyst
Good morning, Adam, we're having trouble hearing you, you're breaking up.
Operator, Operator
Sorry, Adam, your line is breaking up. We will have to move on to the next question. Next question comes from Brendan Nosal with Hovde Group. Brendan, your line is now open. Please go ahead.
Brendan Nosal, Analyst
Hey, good morning, folks. Can you hear me?
Gavin Mohr, Executive Vice President and Chief Financial Officer
Yes.
Joel Rahn, Executive President and Head of Commercial Banking
Yes.
Brad Kessel, President and CEO
Good morning, Brendan.
Brendan Nosal, Analyst
Good morning. I encountered some issues with my phone earlier, but I wanted to ensure you could hear me. To start, regarding the lending outlook for 2025, you've experienced significant success in recruiting commercial bankers to your platform. I am curious about your perspective on the potential for further additions of bankers in 2025, particularly in light of the M&A disruptions in your markets and how these factors might influence your strong guidance for commercial loan growth this year. Thank you.
Brad Kessel, President and CEO
Certainly. I'll start, and then I’d like Joel to add some thoughts. We've been given the go-ahead to recruit consistently over the quarters and years, focusing on individuals rather than expanding teams. We aim to maintain our recent pace, and I believe there are still disruptions in the marketplace, with various players involved, but plenty of opportunities as well. Joel, feel free to chime in.
Joel Rahn, Executive President and Head of Commercial Banking
Yes. You summed it up really well, Brad. I don't have a lot to add. I would agree that we want to just continue the momentum. We think the pace at which we've been adding talent is realistic to us. That means probably another handful of good banker additions this year and we're already one in that column for the start of the year. So, we added an experienced banker here earlier this month and we'll continue to, as Brad said, it's not just simply the M&A disruption, but that certainly helps to create opportunities to talk to people who want to join a solid community bank organization. So we'll just continue that focus as we move through the year, Brendan.
Brendan Nosal, Analyst
Okay, well, thank you very much for the color there. Maybe one more from me. Just looking at the margin outlook for the year, I mean the full year guidance implies quite a bit of expansion not only for the full year, but kind of across 2025 as we move through the year. Can you just offer some color on how you expect the cadence for expansion to play out across the year? Is it ratable throughout the year and then kind of where you see the margin exiting 2025 based on that full year outlook? Thank you.
Gavin Mohr, Executive Vice President and Chief Financial Officer
Yes, this is Gavin. I think ratable is a fair label, Brendan. As we mentioned in the presentation, we are expecting full year expansion in the range of 20 basis points to 25 basis points compared to where we finished for 2024.
Brendan Nosal, Analyst
Okay, great. Well, thank you for taking the questions. Appreciate it.
Brad Kessel, President and CEO
Thanks.
Operator, Operator
Our next question comes from Damon DelMonte with KBW. Damon, your line is now open. Please go ahead.
Matt Renck, Analyst
Hey, everybody, this is Matt Renck, filling in for Damon DelMonte. Hope everybody is doing well.
Brad Kessel, President and CEO
Hi, Matt.
Matt Renck, Analyst
My first question is a follow-up to the loan growth question. Considering the momentum you have in commercial from last year, should we anticipate a more even growth profile throughout the year, or is it likely to be similar to this one, where it dips and then strengthens towards the end of the year?
Joel Rahn, Executive President and Head of Commercial Banking
This is Joel. It's always challenging to predict the exact timing of bookings, but the first quarter is typically a bit softer. Therefore, it's not surprising to see the early part of the year reflect that. This aligns with historical trends. However, I believe the activity tends to balance out over the course of the year. Last year, we experienced a unique second quarter with several large payoffs, including some company sales and real estate transactions. As a result, the second quarter this year was exceptional. Nevertheless, if you look deeper into the numbers and examine our production, it remained fairly steady throughout the year. So, I don't expect a significant variation from one quarter to the next.
Matt Renck, Analyst
Okay, got it, thank you. And then just follow up on margin. The forecast assumes two cuts. Just assuming we get no cuts this next year, do you think asset yields can still outpace liability costs to give you expansion, just maybe not to the same degree? Is that how we should think about it?
Gavin Mohr, Executive Vice President and Chief Financial Officer
So, I'll just give you the number. If the Fed didn't cut, everything else held the same in the yield curve, asset mix, liability mix as we budgeted, it's a 3 basis point to 5 basis point decline in margin.
Matt Renck, Analyst
Okay, got it, thank you.
Gavin Mohr, Executive Vice President and Chief Financial Officer
Yes.
Matt Renck, Analyst
I'll step back now.
Operator, Operator
Thank you. Our next question comes from Nathan Race with Piper Sandler. Nathan, your line is now open. Please go ahead.
Adam Kroll, Analyst
Hi, this is Adam Kroll on for Nathan Race. Can you guys hear me, okay?
Brad Kessel, President and CEO
Yes, Adam, we can hear you clearly.
Gavin Mohr, Executive Vice President and Chief Financial Officer
Good morning.
Adam Kroll, Analyst
Sorry about that earlier. So I guess just a question, piggybacking on the margin is, could you guys remind me how much you have in fixed rate loans repricing over the next year?
Gavin Mohr, Executive Vice President and Chief Financial Officer
The portfolio has approximately 35.7% of total assets repricing within one month and 47% repricing over the next 12 months. This also accounts for $120 million in securities runoff.
Adam Kroll, Analyst
Okay, I appreciate that. And then kind of going off of that, how are you guys planning to fund that mid-single digit loan growth guide and just kind of what expectations do you have for deposit growth baked into there?
Gavin Mohr, Executive Vice President and Chief Financial Officer
Yes. So deposit growth for the year on a core basis, we're targeting that around 3%. That's going to be a little less than what we saw for 2024. But total deposits only being up about 1.5%, 2%.
Adam Kroll, Analyst
Okay, I appreciate the color there. And then last one for me is just what are you focusing on in terms of deposit pricing competition within your area and I guess how has that evolved over maybe the past 90 days or so?
Gavin Mohr, Executive Vice President and Chief Financial Officer
Yes, there's still plenty of competition out there. We have made some adjustments as the Fed has lowered short-term rates. However, due to the market and competition, there is some lag. Overall, rates have decreased, but there is no shortage of one-off specials being offered in our markets.
Adam Kroll, Analyst
Got it. Thanks for taking my questions. I'll step back now.
Gavin Mohr, Executive Vice President and Chief Financial Officer
Thank you.
Operator, Operator
Our next question comes from Brendan Nosal with Hovde Group. Brendan, your line is now open. Please go ahead.
Brendan Nosal, Analyst
Hey, just to follow up on the margin commentary with no cuts. You said a 3 basis point to 5 basis point decline in the margin. That's versus the current outlook, not versus 2024 margin. Correct?
Gavin Mohr, Executive Vice President and Chief Financial Officer
Yes, thanks for clarifying that. That's right, Brendan. Yes.
Brendan Nosal, Analyst
Got it. Okay. So instead of 20 basis point to 25 basis point, it would be 18 basis point to 22 basis point something like that. Right?
Gavin Mohr, Executive Vice President and Chief Financial Officer
Yes. Yes, Perfect.
Brendan Nosal, Analyst
Fantastic. Okay, thanks for taking the follow up. Much appreciated.
Operator, Operator
Thank you very much, everyone. That concludes the questions and answers session. I will now hand back over to Brad for any closing remarks.
Brad Kessel, President and CEO
Thanks, Ezra. In closing, I would like to thank our Board of Directors and our senior management for their support and leadership. I also want to thank all of our associates. I continue to be so proud of the job being done each day by each member of our team. Each team member, in his or her own way, continues to do their part toward a 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.
Operator, Operator
Thank you very much, Brad. And thank you to all the speakers who have joined us today. That concludes today's call. You may now disconnect your lines.