Independent Bank - Earnings Call - Q1 2025

Executive Summary

• EPS of $0.74 beat consensus by $0.04; operating revenue (S&P Global definition) also beat Street, aided by lower funding costs and stable margin expansion to 3.49%. EPS consensus: $0.70*; revenue consensus: $46.25m* vs actual: $53.39m*.
• Net interest income rose 8.7% YoY and 1.9% QoQ to $43.7m; NIM expanded 4 bps QoQ to 3.49% on funding cost leverage and asset mix, while deposit cost fell 12 bps to 1.80%.
• Non-interest income of $10.4m missed the company’s $11–12m first-half outlook, driven by a $0.6m servicing loss and fair-value marks on MSRs following a January sale of ~$931m servicing rights to reduce future volatility.
• Credit quality remained exceptional: NPLs at 0.17% of loans, NPAs at 0.14% of assets, net charge-offs of 0.01% annualized; ACL held at 1.47% of loans.
• Capital actions emerged as near-term catalysts: 249,482 shares repurchased post-quarter for $7.2m; dividend raised to $0.26 (paid May 15).

What Went Well and What Went Wrong

What Went Well

• “We were able to generate net interest income growth on both a linked quarter basis and on a year over year quarterly basis and produce four basis points in margin expansion.” – CEO Brad Kessel. NII +1.9% QoQ, NIM 3.49%.
• Funding cost leverage: total cost of funds decreased 12 bps QoQ to 1.80%, supporting margin resilience despite competitive pricing.
• Strong asset quality and reserves: NPAs/Assets 0.14%, NPLs/Loans 0.17%, net charge-offs 0.01% annualized; ACL 1.47% of loans.

What Went Wrong

• Non-interest income below internal outlook ($10.4m vs $11–12m target) due to a $0.6m mortgage servicing net loss (fair value change −$1.5m, paydowns −$0.9m, sale loss −$0.1m).
• Loan growth ran below mid-single-digit annual plan (Q1 +$33.9m, 3.4% annualized), with softness in mortgage (−$3.9m) and installment (−$17.0m) portfolios.
• Business deposit balances declined $44m QoQ, reflecting mixed client behavior amid macro uncertainty, partially offset by retail +$34.2m and municipal +$18.9m.

Transcript

Operator (participant)

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. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. 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 joining me is Gavin Mohr, EVP and Chief Financial Officer, and Joel Rahn, 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. 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 a 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, versus 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 produce 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 quarters, recent years. These fundamentals continue to drive positive growth and 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 non-performing 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. 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 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 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. 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 (EVP, Commercial Banking)

Yeah, 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 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 any tariff-related impact. As Brad noted, credit quality metrics and trends are outlined on page nine, 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 (CFO)

Thanks, Joel. 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 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 fourth quarter of 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 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 repriced in one month and 47.4% repriced 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 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, or 6 cents per diluted share after-tax loss due to change in price, a $0.9 million decrease due to paydowns, and a $1 million loss on 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 quarter is attributed to the sale of approximately $931 million of mortgage servicing rights on January 31 of 2025. As detailed 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 cost 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. 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-$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-$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 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'd now like to open up the call for questions.

Operator (participant)

Thank you very much. If you would like to ask a question, please press star followed by one on your telephone keypad now. 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 Brendan Nosal with Hovde Group. Brendan, your line is now open. Please go ahead.

Brendan Nosal (Analyst)

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

Brad Kessel (President and CEO)

Good morning.

Brendan Nosal (Analyst)

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

Gavin Mohr (CFO)

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 on the deposit side. If we would see some rate cuts, we may be able to pick up a little bit there. 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 probably can speak to those a little more. 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.

Gavin Mohr (CFO)

Yeah. I mean, I'd give a little more detail to Brad's statement. By design, we've continually tried to work volatility out of the income statement. We're really indifferent to the Fed flat or today or no rate changes or the Fed cuts 100. It's 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. Seemed to certainly buck the seasonal trend, seemingly thanks to a really strong gain on sale margin for the quarter. Just kind of curious where you see that fee line running over the next few quarters.

Gavin Mohr (CFO)

Yeah. The margin, we continue to target that 250. And we have been intentionally working to get a few extra basis points wherever we can. I think we are on trend. I think the overall question is going to be production. It is still very supply-side constrained. I think out of the gate, we feel good about the first quarter. We will just have to see how the summer develops.

Brendan Nosal (Analyst)

Okay. Fantastic. Thank you for taking the questions.

Gavin Mohr (CFO)

Thanks, Brendan.

Operator (participant)

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 what the conversations are like with the clients, just given all the uncertainty? 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. Joel, maybe give some of the highlights there.

Joel Rahn (EVP, Commercial Banking)

Yeah. Sure. No, it's a good question and a difficult one to answer, but in terms of where it's going. There is 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. It's really a blessing to have a well-diversified portfolio. What we're hearing, the business owners certainly are watching it, trying to figure this out, trying to figure out what the potential impacts are. We're not seeing any tangible impact yet today because many of the tariffs aren't even implemented yet.

Anecdotally, we were hearing from a couple of stamping customers that steel supply is getting harder to come by because the OEMs and the large Tier 1s have been purchasing up the kind of any excess domestic steel inventory and trying to get ahead of the tariff game. I mean, that's probably the most tangible piece of feedback that we heard from one of our stamping customers. Again, everyone's looking forward, trying to read the tea leaves, but there's really no immediate impact yet.

Peter Winter (Analyst)

Got it. Helpful. Yeah. 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 non-performing assets and net charge-offs. They have averaged one or two 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)

Yeah. I guess I'll take first stab at that and then Gavin maybe follow up. Today, we're at 1.47% total loans. It's $60 million. Of that, I think we have 20% is subjective. We added a little bit to the subjective here in Q1 just with the uncertainty. It was probably, I don't know, $1,500,000 plus.

Gavin Mohr (CFO)

Million two.

Brad Kessel (President and CEO)

Million two. We have a very detailed model that we utilize for CECL. You 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. 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. That is sort of what the outlook looks like there. Gavin, anything to add?

Gavin Mohr (CFO)

No. Well said.

Peter Winter (Analyst)

Got it. If I could just ask one more question just on buybacks. You did not buy back any stock last year. You do have the buyback announcement at the start of the year. The guidance really was not you were not modeling any stock buyback. In my mind, I feel like it is good to see you are in the market. Is the plan to continue to be in the market? Do you have a certain price level or is it dependent on loan demand that determines if you are going to buy back stock?

Brad Kessel (President and CEO)

Yeah. 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. 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. We had in place a 10b5-1 filing going into the blackout period. 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. 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 earnback of any dilution that's incurred as a result of it's a tangible book as a result of buying back shares. I think you'll just see us be consistent with our historical trending there. Anything to add, Gavin?

Gavin Mohr (CFO)

Nope. Nope.

Peter Winter (Analyst)

That's great. Thanks for taking the questions.

Brad Kessel (President and CEO)

Thank you.

Operator (participant)

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

Damon DelMonte (Analyst)

Hey, good morning, guys. Hope everybody's doing well. Thanks for taking my questions here. 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, you could see kind of like some pent-up demand and growth really accelerate in the coming quarters?

Joel Rahn (EVP, Commercial Banking)

Hey, Brendan, this is Joel. It's hard to say, but I think that's kind of the way I'm looking at it. I think it's common sense that if you're a business owner right now, I mean, we're seeing some activity, don't get me wrong, and some replacement of equipment, that sort of thing. In terms of significant expansion, plant additions, those are few and far between right now.

People are, I do think they're just kind of waiting for some clarity from an economic front, which way we're headed. I think there's absent the news headlines. Coming into the year, we all felt really good about the economy and felt we were kind of status quo. The automotive industry was pretty stable. A little shift with EV transition going on. Our customers were dealing with that. I do think that there could be some pent-up demand on the backside of this if the news calms down.

Damon DelMonte (Analyst)

Okay. Great. Thanks. Just kind of curious, along the topic of capital management, just kind of wondering 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. Yeah. Damon, I.

Damon DelMonte (Analyst)

All right.

Brad Kessel (President and CEO)

When you look. Yeah. I mean, when you look back at 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. I think we continue to try to build a franchise that would be viewed as a good partner for other community banks. We have shared in the past about some of the technology investments that we are making. I mentioned earlier on today's call the investment that we made in our website, and its redesign, and really making it much more interactive with chat and Zoom video and a bunch of additional features. I think we would be a good partner. We would welcome conversations there. Thanks, Damon.

Damon DelMonte (Analyst)

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

Operator (participant)

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

Nathan Rice (Analyst)

Yeah. Hi, guys. Good morning. Thanks for taking the questions. Maybe Gavin, for you, 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, 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?

Gavin Mohr (CFO)

Yeah. It's a good question. I'm not going to have an exact dollar figure or percentage figure for you. I would say that clearly the deposit downward leverage is not what it was, right, the longer we're here. It's really going to be dependent on the market. We continue to try to find a basis point here or there wherever we can. There's plenty of competition where we operate. 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. Kind of give you an indication of where the pricing's at. It really has, I think, leveled off. The other big key to this is going to, of course, is going to be the mix.

How we're funding the bank.

Nathan Rice (Analyst)

Right. Along those lines, Gavin, can you remind us how much cash flow you have come out of 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 (CFO)

Yeah. The bond book's got about $100 million projected yet to come off this year. 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%. Installment was 7.52% versus 5.03%.

Nathan Rice (Analyst)

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

Gavin Mohr (CFO)

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 Rice (Analyst)

Okay. Gotcha. 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 with some of the technology upgrades that you've done recently that could maybe drive some upside to kind of the guidance that was laid out in January?

Brad Kessel (President and CEO)

Yeah. I think that I'm looking at our deck, slide 14. Our fee income has been pretty consistent. Probably the wild card 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. Otherwise, I think the components are fairly constant.

Nathan Rice (Analyst)

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

Gavin Mohr (CFO)

Thank you.

Operator (participant)

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

Brad Kessel (President and CEO)

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. 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 (participant)

Thank you very much, Brad. 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.