Earnings Call Transcript - IBCP Q1 2025

Operator, Operator

Hello everyone and welcome to the Independent Bank Corporation Reports 2025 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.

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 first quarter 2025 results. I am Brad Kessel, President and Chief Executive Officer, and I am joined by Gavin Mohr, EVP and Chief Financial Officer, and Joel Rahn, Executive Vice President of Commercial Banking. Before we begin, I would like to direct you to the important information on Page 2 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 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. We strive to be Michigan's most people-focused bank. Today Independent Bank Corporation reported first quarter 2025 net income of $15.6 million or $0.74 per diluted share compared to net income of $16 million 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. 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 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 1 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. We continue to be focused on what we can control and optimistic about the long-term future of the IDC franchise. Moving to Page 5 of our presentation, total deposits at March 31, 2025, were $4.63 billion. Overall, core deposits increased $9.1 million during the first quarter. On a linked quarter basis, retail deposits increased by $34.2 million. Business deposits declined by $44 million and municipal deposits increased by $18.9 million. 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 our wholesale cost of funds. On Page 6, we have included in our presentation a historical view of our cost of funds as compared to the Fed fund spot rate and the Fed effective rate. For the quarter, our total cost of funds decreased by 12 basis points to 1.80%. At this time, I'd like to turn the presentation over to Joel Rahn, to share a few comments on the success we are having in growing our loan portfolios and provide an update on our credit metrics.

Joel Rahn, Executive Vice President of Commercial Banking

Thank you, Brad and good morning everyone. On Page 7, we shared 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 million, representing a 3.4% annualized rate. Commercial loan generation was strong with $54.8 million of Q1 growth or an 11% annualized rate. Our residential mortgage portfolio realized a slight decline of $3.9 million, while our installment loan portfolio declined $17 million 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. Within the commercial loan activity the mix of C&I lending versus investment real estate for the quarter was 59% and 41%, respectively. While our commercial pipeline is solid, it is softer than a year ago and 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&I category is manufacturing at 9.2% of the total portfolio. It's worth noting that within the Manufacturing segment is $134 million 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 9 and they continue to be excellent. Total non-performing loans were $7.1 million or 17 basis points of total loans at quarter end, up slightly from 15 basis points at year-end 2024. Past due loans totaled $3.9 million 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. 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.

Gavin Mohr, EVP and Chief Financial Officer

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 $3.5 million from the year-ago period. Our tax-equivalent net interest margin was 3.49% during the first quarter of 2025 compared to 3.30% in the first quarter of 2024 and up four basis points from the fourth quarter of 2024. Average interest-earning assets were $5.08 billion in the first quarter of 2024 compared to $4.91 billion in the year-ago quarter and $5.01 billion in the fourth 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 first quarter 2025 net interest margin was positively impacted by two factors. A decrease in funding costs benefited 18 basis points and a change in earning assets mix that benefited three basis points. 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 2025 and the fourth quarter 2024 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 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 and 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 in HELOCs. Currently, 35.5% of assets repriced in one month and 47.4% reprice in the next 12 months. Moving on to Page 14. Non-interest income totaled $10.4 million in the first quarter of 2025 as compared to $12.6 million in the year-ago quarter and $19.1 million in the fourth quarter of 2024. First quarter 2025 net gains on mortgage loans totaled $2.3 million compared to $1.4 million in the first quarter of 2024. The increase is due to higher profit margins and a higher volume of loan sales. Negatively impacting non-interest income was a $0.6 million loss on mortgage loan servicing net. This comprised of a $1.5 million loss due to change in price, a $0.9 million decrease due to paydowns, and a $0.1 million loss on the sale of originated mortgage servicing rights. That was partially offset by $1.9 million of servicing revenue in the first quarter of 2025. The decline in servicing revenue compared to the prior year quarters is attributed to the sale of approximately $931 million of mortgage servicing rights on January 31, 2025. The detail on Page 15 our non-interest expense totaled $34.3 million in the first quarter of 2025 as compared to $32.2 million in the year-ago quarter and $37 million in the fourth quarter of 2024. Compensation expense decreased $0.4 million, 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 $0.4 million from the prior year period, primarily due to core 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 $0.5 million primarily due to costs associated with the MSR sale referenced earlier. 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 $33.9 million in the first quarter of 2025 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 2025 net interest income increased by 8.7% over 2024, which is within our forecast of high single-digit growth. The net interest margin was 3.49% for the current quarter and 3.30% for the prior year quarter and it was up four basis points on a linked quarter basis. First quarter 2025 provision for credit losses was an expense of $0.7 million, which was below our forecasted range. Moving on to Page 17. Non-interest income totaled $10.4 million in the first quarter of 2025, which was lower than our forecasted range of $11 million to $12 million in the first quarter. First quarter 2025 mortgage loan origination sales and gains totaled $107.8 million, $82.6 million and $2.3 million respectively. Mortgage loan servicing net generated a loss of $0.6 million in the first quarter of 2025, which is below our forecasted target. Non-interest expense was $34.3 million in the first quarter, slightly lower than our forecasted range of $34.5 million to $35.5 million. Our effective income tax rate was 18.5% for the first quarter of 2025. Lastly, there were 1,093 shares of common stock repurchased for an aggregate purchase price of $0.03 million in the first quarter. After quarter end from April 3, 2025, through April 22, 2025, there were 249,482 additional shares of common stock repurchased for an aggregate purchase price of $7.2 million. That concludes my prepared remarks. And I would now like to turn the call back over to Brad.

Brad Kessel, President and CEO

Thanks, Gavin. 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 on 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. 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, Operator

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

Brendan Nosal, Analyst

Hi, good morning, folks. Hope you're doing well? 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 look at that guidance three months ago, where do you think you could potentially outperform given that strong start?

Gavin Mohr, EVP and Chief Financial Officer

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

Brad Kessel, President and CEO

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

Gavin Mohr, EVP and Chief Financial Officer

Yeah. I mean, I'll give more detail to Brad's statement. By design, we've continually tried to work volatility out of the income statement. So we're really indifferent to the Fed flat or today, or if the Fed cuts 100. In our modeling, if you isolate the balance sheet, it's a couple of hundred thousand dollars of NII.

Brendan Nosal, Analyst

Yeah, yeah. Okay. I appreciate the color there. Maybe turning to something a little more specific. 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. Just curious where you see that fee line running over the next few quarters?

Gavin Mohr, EVP and Chief Financial Officer

Yeah. I think the margin we continue to target at 2.50, and we've been intentionally working to get a 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. So I think out of the gate we feel good about the first quarter. We just have to see how the summer develops.

Brendan Nosal, Analyst

Okay, fantastic. Thank you for taking the questions.

Gavin Mohr, EVP and Chief Financial Officer

Thanks, Brendan.

Operator, Operator

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

Peter Winter, Analyst

Good morning. I was wondering, could you guys talk about 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? You mentioned you're watching the automotive portfolio more closely.

Brad Kessel, President and CEO

Yeah, Peter, I'd like to have Joel comment on that. Earlier in the week we had 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.

Joel Rahn, Executive Vice President of Commercial Banking

Yes, sure. No, it's a good question and a difficult one to answer. But in terms of where it's going, there’s a lot of uncertainty, as we all know. We focus primarily on the automotive industry within our portfolio, which as I said in my comments is a pretty small piece of the overall pie, about 6.5% of our portfolio in automotive exposure. So, it's really a blessing to have a well-diversified portfolio. But what we're hearing is that business owners certainly are watching it, trying to figure this out, trying to ascertain what the potential impacts are. We're not seeing any tangible impact yet because many of the tariffs aren't even implemented yet. Anecdotally, we're hearing from a couple of stamping customers that steel supply is getting harder to come by, since the OEMs and the large Tier 1s have been purchasing up any excess domestic steel inventory and trying to get ahead of the tariff game. So that’s probably the most tangible piece of feedback that we've heard from one of our stamping customers. But again, everyone is looking forward and trying to read the tea leaves, but there's really no immediate impact yet.

Peter Winter, Analyst

Got it. Helpful. Yes, credit quality is excellent. You have more reserves, I guess, than you know what to do with. I mean $60 million reserves against $7.5 million nonperforming assets, and net charge-offs have averaged 1 basis point or 2 basis points over the last eight quarters. Do you think there is a need to continue to build reserves, even if the economy gets worse, just given the really strong credit trends?

Brad Kessel, President and CEO

Yes, I'll start with that, and then Gavin may add on. Currently, we're at 1.47% of total loans. Of that, around $60 million has about 20% considered subjective, and we increased this subjective component slightly in Q1 due to uncertainty, estimating it was around $1.5 million to $1.2 million. We utilize a detailed model for CECL, and the higher reserve level may be related to our mortgage portfolio, which has a longer duration. Overall, we are confident in our current reserve levels and the performance of our portfolio. As the year progresses, I anticipate that our provisioning will be directly linked to the loan growth we see. Gavin, do you have anything to add?

Gavin Mohr, EVP and Chief Financial Officer

No. Well said.

Peter Winter, Analyst

Understood. I'd like to ask one more question regarding buybacks. You did not repurchase any stock last year, but there was a buyback announcement at the beginning of the year. The guidance did not include any stock buybacks, so it's encouraging to see you active in the market. Is the intention to keep this up? Do you have a specific price point in mind, or is your decision to buy back stock influenced by loan demand?

Brad Kessel, President and CEO

Yes. Peter, first off great question. The share repurchases is one component of 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 the organic growth of the company. And then of course share repurchases where it makes sense and in consideration of everything else. We had a pretty good pullback in the stock that was essentially consistent with what happened with other publicly traded banks and community banks and we had in place a 10b5-1 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 buying back shares. So I think you'll just see us be consistent with our historical trending there. Anything to add, Gavin?

Gavin Mohr, EVP and Chief Financial Officer

No. No.

Peter Winter, Analyst

That's great. Thanks for taking my questions.

Brad Kessel, President and CEO

Thank you.

Operator, Operator

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

Damon DelMonte, Analyst

Hi, good morning, guys. Hope everybody is doing well. Thanks for taking my questions here. So first question on the outlook for loan growth. Do you feel that 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 some pent-up demand and growth really accelerate in the coming quarters?

Joel Rahn, Executive Vice President of Commercial Banking

Hey, Brendan, this is Joel. It's tough to say, but that's how I see it. It's common sense that if you're a business owner right now, we're noticing some activity, including some equipment replacements. However, when it comes to significant expansions and plant additions, those are rare at the moment. I believe many are waiting for more clarity on the economic situation and where we are headed. I think there could be some pent-up demand if the news stabilizes.

Damon DelMonte, Analyst

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

Brad Kessel, President and CEO

Yes. Yes, Damon. All right. When you look back at our history, the last acquisition we made was in 2018 and that was Traverse City State Bank. That has worked out terrific for our company. I think we continue to try to build a franchise that would be viewed as a good partner for other community banks. We've shared in the past about some of the technology investments that we're making. I mentioned earlier on today's call the investment that we made in our website and it's redesigned, making it much more interactive with chat and Zoom video and additional features. I think we'd be a good partner and we would welcome conversations there. Thanks, Damon.

Damon DelMonte, Analyst

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

Operator, Operator

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

Nathan Race, Analyst

Yes. Hi, guys. Good morning. Thanks for taking the questions. Maybe Gavin, where do you see deposit 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 do you think you have based on the competition in the footprint and what you're seeing in terms of deposit pricing today?

Gavin Mohr, EVP and Chief Financial Officer

That's a good question. I'm not going to have an exact dollar figure or a percentage figure going forward. 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. We continue to try to find a basis point here or there. But there's plenty of competition where we operate. I think I'd 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 5 basis points better right now maturing versus new. So kind of give you an indication of where the pricing is at. It really has, I think, leveled off. The other big key to this is going to be the mix; how we're funding the bank.

Nathan Race, Analyst

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

Gavin Mohr, EVP and Chief Financial Officer

Yes. The bond book has got about $100 million projected yet to come off this year. And then on the loan repricing, we had commercial new origination going on at 6.97% for the quarter versus a portfolio of 6.55%. Mortgage new production was 7.02% versus 4.85%. And installment was 7.52% versus 5.03%.

Nathan Race, Analyst

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

Gavin Mohr, EVP and Chief Financial Officer

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

Nathan Race, Analyst

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

Brad Kessel, President and CEO

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

Nathan Race, Analyst

Okay. I appreciate all the color. Thanks, guys.

Operator, Operator

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

Brad Kessel, President and CEO

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 towards our common goal of guiding our customers to be independent. 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, 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 lines.