Independent Bank - Earnings Call - Q3 2025

Executive Summary

• Solid quarter: Net income rose 26.7% YoY to $17.5M and diluted EPS was $0.84, with sequential growth in net interest income (+1.7% QoQ) and strong efficiency (58.86%) amid stable underlying NIM after adjusting for sub-debt redemption costs.
• Consensus context: S&P Global shows EPS slightly above consensus and a clear revenue beat on their revenue definition; management-reported diluted EPS was $0.84, while Primary EPS actual per S&P Global printed higher, reflecting definitional differences between GAAP diluted vs S&P’s “Primary EPS” construct (see Estimates table).
• Credit remains healthy but watch an idiosyncratic NPA uptick: NPAs/assets rose to 0.38% from 0.16% QoQ due to one commercial relationship; allowance at 1.49% and YTD annualized NCOs of 0.04% remain benign.
• Balance sheet momentum: Core (ex‑brokered) deposits grew $148.2M QoQ (13% annualized), loans grew $33.9M (3.2% annualized), and TCE/share increased to $22.29, with sub-debt redemption executed in August and liquidity/capital strong.

What Went Well and What Went Wrong

• What Went Well

  • NII growth and operating efficiency: Net interest income rose 8.4% YoY and 1.7% QoQ; efficiency ratio improved to 58.86% (vs 62.82% in 3Q24).
  • Core funding and balance sheet: Core deposits (ex‑brokered) increased $148.2M QoQ; total deposits up $205.1M YTD; liquidity lines (FHLB/FRB) of ~$1.62B plus unpledged securities support ample capacity.
  • Management tone and NIM resilience: CEO emphasized “continued positive momentum” and stable underlying NIM excluding sub‑debt cost acceleration; CFO expects margin to remain fairly stable even with forecasted cuts, citing asset remix tailwinds (“still tailwind there that we’re really optimistic about”).

• What Went Wrong

  • Asset quality optics: Non-performing assets rose to 0.38% of assets (from 0.16% QoQ) due primarily to one commercial relationship migrating to non‑accrual; NPLs/loans rose to 0.48%.
  • Mortgage banking softer: Net gains on mortgage loans fell YoY ($1.5M vs $2.2M) on lower margins and volumes; servicing revenue is lower post sale of ~$931M MSRs in Jan 2025.
  • Funding cost mix: Total cost of funds increased 6 bps QoQ to ~1.82%, with CFO noting mix/tiering from municipal inflows drove part of the uptick.

Transcript

Operator (participant)

Hello everyone, and welcome to the Independent Bank Corporation Report 2025 Third Quarter Results. My name is Ezra, and I will be your coordinator today. If you would like to ask a question, press star followed by one on your telephone keypad. If you change your mind, press star followed by two. We will be taking questions at the end of the presentation. 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 Third Quarter 2025 results. I am Brad Kessel, President and Chief Executive Officer. Joining me this morning is Gavin Mohr, EVP and Chief Financial Officer, and Joel Rahn, Executive Vice President and Head of our 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, it can be accessed at our 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 Third 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 Third Quarter 2025 net income of $17.5 million or $0.84 per diluted share versus net income of $13.8 million or $0.65 per diluted share in the prior year period. I am proud of our team's performance and pleased to report continued momentum for most of our key metrics. Loan balances grew at an annualized rate of 3.2% and total deposits, less brokered time deposits, increased by 13% annualized.

We achieved growth in our net interest income both sequentially and year-over-year. In fact, this is the ninth consecutive quarter we have increased our net interest income. Our net interest margin displayed a small decline on a linked quarter basis, primarily due to the acceleration of unamortized issuance costs and subordinated debt we redeemed in the third quarter. I would characterize the NIM as stable when adjusting for this event. Expense management remains a strength as reflected in our Third Quarter efficiency ratio of 58.86%, which demonstrates the effectiveness of our recent investments. These solid fundamentals supported a 10.2% year-over-year increase in tangible common equity per share and strong returns, including a return on average assets of 1.27% and a return on average equity of 14.57% for the quarter. Despite market uncertainty, our credit quality remains strong with watch credits at low levels.

Non-performing assets increased from 0.16% of total assets to 0.38% on a quarter-over-quarter basis, primarily as a result of one commercial relationship where the borrower is experiencing financial difficulties. Our annualized net charge-offs continue at historically low levels, four basis points through the first three quarters of 2025. The allowance for credit also stands at 1.49% of total loans. I am optimistic we will finish 2025 strong and am excited about our prospects to grow our customer base and earnings in 2026. Moving to page five of our presentation, total deposits as of September 30th, 2025, were now $4.9 billion. Overall, core deposits increased $148.2 million during the third quarter of 2025. On a linked quarter basis, business deposits increased by $67.5 million. Municipal deposits increased by $82.5 million. These were offset by a small decrease in retail deposits.

The deposit base today is comprised of 46% retail, 37% commercial, and 17% municipal. All three portfolios are up on a year-over-year basis. 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 increased by just six basis points to 1.82%. At this time, I would 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 (EVP and Head of Commercial Banking)

Thank you, Brad, and good morning, everyone. On page seven, we share an update of the loan activity for the quarter. We had another solid quarter of commercial loan growth with that portfolio increasing $57 million. Total loans grew $33.9 million as both the mortgage and consumer loan portfolios contracted in the quarter. This is attributable to seasonality as well as disciplined underwriting. Year to date, we've grown the commercial loan portfolio $188 million, representing 12.9% annualized growth. Our ongoing strategic investment in commercial banking talent continues to supplement our growth. We added three experienced commercial bankers in the third quarter, bringing our team to 50 bankers across our statewide footprint. As noted in previous quarters, our new loan production in each segment continues to come on at yields above the respective portfolio yield.

Within the commercial loan activity, the mix of C&I lending versus investment real estate for the quarter was 58% and 42% respectively. Looking ahead, our commercial pipeline remains robust, so we expect strong loan origination in the fourth quarter. Page eight provides detail on our commercial loan portfolio. There has not been any significant shift in our portfolio concentrations, with the portfolio remaining very well diversified. C&I lending continues to be our primary focus, and as noted on the graph, that category comprises 70% of our overall commercial portfolio at $930 million. Our largest segment of the C&I category is retail, which includes a variety of truck, equipment, and marine dealerships and is performing well. Another significant C&I category is manufacturing, which contains $142 million or 6.7% of the portfolio of automotive industry exposure that we continue to monitor closely for any tariff-related impact.

Key credit quality metrics and trends are outlined on page nine. Overall, credit quality continues to be very good, as Brad alluded to a moment ago. Total non-performing loans were $20.4 million or 48 basis points of total loans at quarter end, up from 20 basis points at June 30. This is primarily due to one investment real estate commercial relationship, as Brad said, that is in workout. Past due loans totaled $5.1 million or 12 basis points, down slightly from 16 basis points at June 30. It is not reflected on this slide, but worth noting that our net charge-offs are $1.2 million year to date or 4 basis points on an annualized basis. 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 CFO)

Thanks, Joel, and good morning, everyone. I'm starting on page 10 of our presentation. Page 10 highlights our strong regulatory capital position. The reduction in our total risk-based capital ratio for the quarter is primarily due to the payoff of $40 million of subordinated debt during the quarter. Turning to page 11, net interest income increased $3.5 million from the year-ago period. Our tax equivalent net interest margin was 3.54% during the third quarter of 2025, compared to 3.37% in the third quarter of 2024, and down four basis points from the second quarter of 2025. The decrease in the net interest margin on a linked quarter basis is primarily due to the acceleration of unamortized issuance costs on the subordinated debt we redeemed in the third quarter.

Average interest earning assets were $5.16 billion in the third quarter of 2025, compared to $4.99 billion in the year-ago quarter and $5.04 billion in the second quarter of 2025. Page 12 contains a more detailed analysis of the linked quarter decrease in net interest or increase in net interest income and the net interest margin. On a linked quarter basis, our third quarter 2025 net interest margin was positively impacted by two factors. A change in earning asset mix was two basis points, and an increase in earning asset yield was one basis point. These were offset by a change in funding cost of four basis points and the acceleration of unamortized issuance costs on the subordinated debt we redeemed in the third quarter of three basis points. On page 13, we provided details on the institution's interest rate risk position.

The comparative simulation analysis for the third quarter of 2025 and the second quarter of 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. Asset yields were augmented by a shift in asset mix with good commercial loan growth partially funded by runoff of lower yielding investments, mortgages, and consumer loans. An increase in overnight liquidity offset some of this mix benefit. Funding costs benefited from the retirement of the holding company's subordinated debt issuance. The NII sensitivity position shows slightly more exposure to the declining rate environment.

Asset repricing increased due to strong growth in variable rate commercial loans, HELOCs, and overnight liquidity. Some of the increase in asset repricing was offset by purchased floors. Currently, 38.4% of the assets repriced in one month and 49.8% repriced in the next 12 months. Moving on to page 14, non-interest income totaled $11.9 million in the third quarter of 2025 as compared to $9.5 million in the year-ago quarter and $11.3 million in the second quarter of 2025. Third quarter net gains on mortgage loans totaled $1.5 million compared to $2.2 million in the third quarter of 2024. The decrease is due to lower profit margins and a lower volume of loan sales. Positively impacting non-interest income was a $0.1 million gain on mortgage loan servicing net.

This comprised of $0.6 million or $0.02 per diluted share after tax loss due to change in price, $0.9 million decrease due to paydowns, and a $0.1 million loss on sale of originated servicing rights that was offset by $1.6 million of servicing revenue for the third 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 31st, 2025. As detailed on page 15, our non-interest expense totaled $34.1 million in the third quarter of 2025 as compared to $32.6 million in the year-ago quarter and $33.8 million in the second quarter of 2025.

Compensation expense increased $1.1 million primarily due to higher salary costs and higher medical-related costs that were partially offset by lower incentive-based compensation expense and higher deferred loan origination costs due to higher commercial and mortgage loan production. Data processing costs increased by $0.4 million from the prior year period primarily due to core data processor, annual asset growth, and CPI-related cost increases, as well as the annual increases in other software solutions. Page 16 is our update for our 2025 outlook to see how our actual performance during the third quarter compared to the original outlook that we provided in January 2025. Our outlook estimated loan growth in the mid-single digits. Loans increased $33.9 million in the third quarter of 2025 or 3.2% annualized, which is below our forecasted range. Commercial loans increased in the third quarter of 2025 while mortgage and installment loans decreased.

Year-to-date loan growth is $159.5 million or 5.3% annualized, which is within our forecasted range. Third quarter of 2025, net interest income increased 8.4% over 2024, which is within our forecasted range of 8%-9%. The net interest margin was 3.54% for the current quarter and 3.37% for the prior year quarter, and down four basis points from a linked quarter. The third quarter of 2025 provision for credit losses was an expense of $2 million, which is within our forecasted range. Moving on to page 17, non-interest income totaled $11.9 million in the third quarter of 2025, which was below our forecasted range of $12 million to $13 million in the third quarter. Third quarter of 2025, mortgage loan originations, sales, and gains totaled $145.6 million, $101.6 million, and $1.5 million, respectively.

Mortgage loan servicing net generated a gain of $0.1 million in the third quarter of 2025, which is below our forecasted target. Non-interest expense was $34.1 million in the third quarter, below our forecasted range of $34.5 million-$35.5 million. Our effective income tax rate was 17.3% for the third quarter of 2025. Lastly, there were 13,732 shares of common stock repurchased for an aggregate purchase price of $0.4 million in the third quarter. That concludes my prepared remarks. 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 the last quarter of 2025 and head into 2026, our focus will be continuing to invest in our team, investing in and leveraging our technology while striving to be Michigan's most people-focused bank. At this point, we would like to now 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. Please ensure your device is unmuted locally. If you change your mind or your question has already been answered, press star followed by two. Our first question comes from Brendan Nosal with Hovde. Your line is now open. Please go ahead.

Brendan Nosal (Director in the Research Departmen)

Everybody, hope you're doing well.

Gavin Mohr (EVP and CFO)

Morning.

Joel Rahn (EVP and Head of Commercial Banking)

Morning.

Brendan Nosal (Director in the Research Departmen)

Just starting out here on this quarter's commercial banking hires, I think you said that there were three new hires this quarter. Can you offer some color on what their area of expertise is within commercial specifically, what markets they were added in, and what sort of institutions they came from?

Joel Rahn (EVP and Head of Commercial Banking)

Yeah, Brendan, this is Joel. I'll pick that one. All three of them, very experienced. I'd say minimum level of experience was 15 years, and two of them are over 20 years in commercial banking, all in Southeast Michigan, which is, you know, one of the areas that we look at strategically, no surprise, is continuing our growth. It's the largest MSA that our bank operates in. Two came from a very large regional, and one came from a small regional bank.

Brendan Nosal (Director in the Research Departmen)

Okay, fantastic. Maybe just to piggyback off that, can you just talk about the continued opportunity set from market dislocation, just given another large deal in the state of Michigan, whether it's on the client side or opportunities for additional banker ads?

Joel Rahn (EVP and Head of Commercial Banking)

Sure. That recipe has worked really well for us, Brendan, being an attractive culture for bankers that find themselves part of a larger organization, primarily that want to get back to more of a community banking organization. That has worked well for us. We continue to look for those opportunities, and it looks like the market is going to provide more of those as the industry continues to consolidate. We think there is ongoing opportunity for us to garner talent and strategically commercial banking relationships as well.

Brendan Nosal (Director in the Research Departmen)

Okay, perfect. I'm going to sneak one more in here. Just looking at funding costs for the quarter, a couple of basis points of uptick, which I've certainly seen from, you know, a handful of others. It's not many others this quarter. Maybe just talk about how competitive the environment for core funding is in your markets and how you think you and the market at large in your state will respond to additional Fed cuts.

Gavin Mohr (EVP and CFO)

Our growth for the quarter, Brendan, this is Gavin. Thanks for the question. Our growth for the quarter came in municipal and commercial. I'll let Joel maybe talk high level how his Treasury Management team is viewing that, and then I can maybe fill in if I have something to add.

Joel Rahn (EVP and Head of Commercial Banking)

It's no surprise. It's quite competitive. We just continue to focus our, you know, we can't control the overall market. We've got to be competitive to win those relationships. Our team is just focused on, you know, comprehensive relationships to really grow both sides of our balance sheet. The commercial team, including our Treasury Management group, is very focused, and we continue to make good inroads in the market. It's competitive, and we're not seeing that landscape changing.

Gavin Mohr (EVP and CFO)

I would add, Brendan, for the six basis point increase, that had to do with change in mix. Two of it was just where deposits were landing in the tiers. We saw very, very healthy deposit growth. A lot of those were municipal funds tax collection for the quarter, and they were slotting in those deposits at the higher rate tiers within the product offering.

Brendan Nosal (Director in the Research Departmen)

Okay, that's quite helpful color. All right, thanks for taking the questions.

Gavin Mohr (EVP and CFO)

Thank you.

Operator (participant)

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

Nathan Rice (Research Analyst)

Thanks for taking my questions.

Joel Rahn (EVP and Head of Commercial Banking)

Yeah, good morning.

Nathan Rice (Research Analyst)

Yeah, so maybe a question for Gavin to start, just starting on the margin. You know, if we strip out the impacts from the sub debt, the margin was roughly stable. I think last quarter you mentioned one or two cuts in the back half wouldn't have a significant impact on the margin. I guess, do you still feel the margin could remain roughly stable even with an additional cut in December? Just how you're thinking about the margin in 2026?

Gavin Mohr (EVP and CFO)

Yeah, I do. A couple of comments on the quarter. We disclosed the 3 basis points relative to the cost associated with the sub debt issuance. The other piece, we were a little heavier in liquidity than we maybe would target. If I said we had excess liquidity of $50 million, that had another 3 basis points of impact on the margin for the quarter. Going in here to the year-end with the forecasted cuts, I do anticipate to expect the margin to be fairly stable or in this where we're at today. For 2026, just on a longer-term horizon, we still have benefits of the remixing coming from just lower yielding assets and then the repricing effect of lower yielding assets. There's still tailwind there that we're really optimistic about.

Nathan Rice (Research Analyst)

Could you remind us how much you have in terms of securities or lower yielding fixed-rate loans repricing over maybe the next 12 months?

Gavin Mohr (EVP and CFO)

Yep. The securities portfolio is about $138 million at 3%. If I look at fixed-rate loans, I'll just give you, I don't really have it broken out and stratified by yield, but fixed-rate loans will be in total, there'll be $438 million repricing in the next year with an exit rate of $559 million. We're calculating that's about 120 basis points of pickup.

Nathan Rice (Research Analyst)

Got it. Yeah, that's super helpful. Maybe just switching to credit, I was wondering if you could expand on the one investment real estate commercial relationship you called out that migrated to non-accrual during the quarter. Maybe just what industry, how large is the exposure, and if there was a specific reserve allocated during the quarter and just any color there.

Brad Kessel (President and CEO)

You know, Nathan, this is Brad, I'll jump in on that. First off, I'd say that we've had the portfolio so clean for so many quarters year after year that this one stands out. We are probably going to be somewhat, I'd say, not sharing a lot on the details other than we feel like we are more than adequately reserved on the credit, and we are working with the borrower to get from point A to point B, and we're optimistic we can get through this. I think we'll limit our comments to that.

Nathan Rice (Research Analyst)

Understood. Got it. Thanks for taking my questions. I'll step back.

Gavin Mohr (EVP and CFO)

Thank you.

Operator (participant)

Thank you very much. Our next question comes from Peter Winter with D.A. Davidson. Your line is now open. Please go ahead.

Peter Winter (Senior Research Analyst)

Thanks. I want to just follow up on credit. It really has garnered quite a bit of attention this quarter that we've had a few high-profile loans that went bad. The question is, are you starting to see any signs of credit weakness in commercial borrowers or as you approve loans during loan committee? I think about economic growth, it's slowing. Job growth has been weakening, just credit in general, please.

Brad Kessel (President and CEO)

Yeah. Peter, that's a great question. I'm going to let Joel take the first shot at that and have you just share what you're seeing.

Joel Rahn (EVP and Head of Commercial Banking)

Yeah, you know, Peter, I appreciate the question. As Brad said, we've got the, and we're very straightforward to say it, it's one primary borrower that has popped up this quarter. If I look at the rest, or as I look at the rest of our customer base, performance at the individual business level still continues to be solid. I don't have any sort of, you know, systemic industry, industry-specific issues that we're watching. Our watchlist, absent the one credit that we've highlighted, our watchlist overall percentage is still extremely low by historical standards. We're just, we're not seeing it, which I'm pleased about. The economy in Michigan is still, I would characterize it as stable. We watch the automotive industry very carefully, especially the early part of this year. That actually has held up quite well.

Our team was just updated with an automotive industry analyst's comments last week at a team meeting. There's some turmoil within the supply base in terms of EV versus internal combustion. If someone had all their eggs in the EV basket, they might be feeling strained. We've not seen that in our customer base. It's pretty well diversified. The Michigan economy, I would characterize as still very stable.

Brad Kessel (President and CEO)

Yeah, and I think that's really good, Joel. I would just put in context, the loan book today is $4.2 billion. What Joel was referencing was 50% of that is commercial. The balance, 36%, is mortgage, and then we have 13% installment. An exercise that we do several times per year is rescore the credit scores on the entire portfolio of retail, so mortgage and installment. In the rescores, we're not seeing really a significant decline in our borrowers' payment performance. We feel good about that. We like the diversity, and we continue to be very bullish about Michigan and in our outlook as we go forward.

Peter Winter (Senior Research Analyst)

That's great. That's a great call. Thank you. If I could follow up, you guys have done a really nice job managing expenses. I mean, it's well on track to come in below guidance that you outlined in January. Can you maybe talk about expense management? You know, because expenses have been coming in below the low end of the quarterly range each quarter. Secondly, I realize it's early, but maybe, Gavin, any color you could provide in terms of expense growth next year?

Gavin Mohr (EVP and CFO)

Yeah, I'll start with the second question. We're right in the middle of getting the budget. We're in the second round of drafts for the budget of next year, so things are still moving around. I'm hesitant to comment there at this point in time. I will say that, as you're aware, a big portion of our compensation expense is based on incentive compensation. We've seen this year, at this point in time, if you're comparing us to last year, the expected payout is coming in lower than we were at this point in time last year. That's having an impact on it for 2025. The other thing I would just say is we continue to try to manage the technology spend as well as we can. We are continuing to invest in technology, and with that, we're finding the efficiencies, usually through not replacing individuals through attrition.

I think we're spending a lot of time in that area, and I hope to continue to be able to contain it.

Peter Winter (Senior Research Analyst)

Got it. Just one last question, just a quick question. Gavin, would you by chance have the spot rate on interest-bearing deposits?

Gavin Mohr (EVP and CFO)

I do. Give me one second. As of 9:30 A.M., the spot rates on total interest-bearing was 2.17%. Total.

Peter Winter (Senior Research Analyst)

Got it.

Gavin Mohr (EVP and CFO)

Does that help?

Peter Winter (Senior Research Analyst)

Yeah, that's great.

Gavin Mohr (EVP and CFO)

Okay.

Peter Winter (Senior Research Analyst)

Thank you. Thanks for taking the questions.

Gavin Mohr (EVP and CFO)

Got it.

Operator (participant)

Thank you very much. That concludes the Q&A session. I will now hand back over to Brad Kessel 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 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.

Operator (participant)

Thank you very much, Brad, and thank you to Gavin and Joel for being speakers on today's line. Thank you, everyone, for joining. You may now disconnect your line.