Independent Bank - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered net income of $18.5M and diluted EPS of $0.87, up from $13.7M and $0.65 in the prior-year quarter; net interest margin expanded to 3.45% (+8 bps q/q; +19 bps y/y) on improved funding costs and asset mix.
• Loans grew $96.5M (+9.7% annualized q/q), led by commercial (+$112.1M), while asset quality remained strong (NPLs/loans 0.15%; NPAs/assets 0.13%).
• Non-interest income surged to $19.1M, aided by a $7.8M gain in mortgage servicing (including a $6.5M favorable MSR price mark); management executed an LOI to sell ~$971M MSRs to reduce future volatility.
• 2025 outlook guides to 5–6% loan growth, 20–25 bps NIM expansion vs 2024, non-interest expense rising to $34.5–$35.5M per quarter, and ~19% effective tax rate; the Board raised the quarterly dividend to $0.26 (+8%) and re-authorized up to 5% share repurchases (not modeled).

What Went Well and What Went Wrong

What Went Well

• Net interest income increased $1.0M q/q to $42.9M as NIM expanded to 3.45%, driven by lower cost of funds and mix shift; ROAA/ROAE were 1.39%/16.31%.
• Commercial loan production was robust (Q4 growth +$112.1M), with new originations above portfolio yields; management highlighted a strong pipeline and ongoing banker additions.
• Asset quality metrics remained exceptional: NPLs/loans 0.15% and NPAs/assets 0.13%; net charge-offs were de minimis (2 bps of average loans for 2024).
• “Our credit metrics remain outstanding, with watch credits and non-performing assets near historic lows” — CEO Brad Kessel.

What Went Wrong

• Non-interest expenses rose to $37.0M (above forecast), driven by higher performance-based compensation (+$2.7M y/y), salary adjustments, and data processing inflation/new solutions.
• Mortgage banking gain on sale margins remained pressured (Q4 net gains $1.7M vs $2.0M y/y), with profits offset by higher volumes rather than margin expansion.
• Deposit remix continued toward higher-yielding products amid competitive pricing, though management is stepping down rates as market conditions permit.

Transcript

Operator (participant)

Hello everyone, and welcome to the Independent Bank Corporation Report 2024, fourth 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 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 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, 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 2024, but were 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 Funds 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 are having in growing our loan portfolios and provide an update on our credit metrics.

Joel Rahn (EVP and Head of Commercial Banking)

Thanks, Brad, and good morning, everyone. On page seven, we share an update on loan activity for the quarter. We had strong loan generation to end the year as our strategy of adding experienced bankers to our team continues to supplement our growth. For the quarter, total loans grew by $96.5 million or a 9.7% annualized rate. Commercial loan generation was very strong, with $112.1 million of Q4 growth, followed by $5.3 million of mortgage growth. Our installment loan portfolio declined $20.9 million in the quarter, primarily due to seasonality. As noted in the material, our new loan production continues to come on at yields well above the respective portfolio yield. For the year, we realized $248 million of loan growth, representing a 6.5% increase. The commercial portfolio grew $257 million, or 15%, for the year.

Our mortgage portfolio increased $31 million, while our installment portfolio declined $40 million due to softer consumer demand and strategic pricing discipline. Within the commercial loan activity, the mix of C&I lending versus investment real estate was 64% and 36%, respectively, and 37% came from new customers to the bank. Based upon a solid commercial pipeline, we see continued growth opportunity in 2025 while maintaining our disciplined credit standards. Page eight provides additional detail on our commercial loan portfolio. By design, it remains very well diversified, with the mix not changing appreciably over the course of 2024. It's worth noting that our exposure to the office segment stands at $82 million, or 4.3%, of our commercial portfolio at quarter end, and our office exposure consists primarily of suburban low-rise office space with medical comprising 20% of our overall office exposure.

The average loan size is $1.3 million, which points to the granularity of the segment of the portfolio. For additional insight into office exposure, I refer you to page 25 of the appendix to this presentation. Key credit quality metrics and trends are outlined on page nine. Overall, credit quality continues to be excellent, as Brad commented earlier. Total non-performing loans were $6 million, or approximately 15 basis points of total loans at quarter end, up just slightly from 13 basis points at 9/30. Past due loans totaled $7 million, or 17 basis points, again up slightly from 12 basis points at 9/30. It's not reflected on this slide, but worth noting that our net charge-offs were 2 basis points of average loans for the year.

At this time, I'd like to turn the presentation over to Gavin for his comments, including the outlook for the remainder, well, I should say for 2025. Gavin?

Gavin Mohr (EVP and CFO)

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 $2.7 million from the year-ago period. Our tax-equivalent net interest margin was 3.45% during the fourth quarter of 2024, compared to 3.26% in the fourth quarter of 2023, and up eight 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 2024 net interest margin was positively impacted by three factors: a decrease in funding costs of 17 basis points, change in earning asset mix positive four basis points, and change in earning and interest-bearing liability mix added three 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 2024 and third 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 model, the NII, is modestly higher during the quarter as asset yields were augmented 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. 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% repriced 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 2024 net gains on mortgage loans totaled $1.7 million compared to $2 million in the fourth quarter of 2023. The decrease is due to lower profit margins that was 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 is comprised of $6.5 million, or $0.24 per diluted share after tax gain due to change in price and $2.2 million of revenue that was partially offset by a $1 million decrease due to paydowns in the fourth quarter 2024. 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 will represent approximately $13.5 million, or 27% of the total capitalized mortgage servicing right asset.

There was no financial impact in the fourth quarter of 2024 related to this transaction. The intention of this sale is to lower the 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, as compared to $31.9 million in the year-ago quarter and $32.6 million in the third quarter of 2024. Compensation expense increased $0.8 million, primarily due to salary increases related to adjustments made at the beginning of the year, as well as additions to the commercial banking team. Performance-based compensation increased $2.7 million due primarily to higher expected incentive compensation payout 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 timeframe.

Payroll taxes and employee benefits increased $0.3 million, primarily due to higher healthcare-related costs. Page 16 is an update for our 2024 outlook to see how our actual performance during the fourth quarter compared to the original outlook we provided in January 2024. Our outlook estimated loan growth in the mid-single digits. Loans increased $96.5 million in the fourth quarter of 2024, or 9.7% annualized, which is above the forecasted range. Commercial and mortgage loans had growth, while installment loans decreased in the fourth quarter of 2024. Full-year loan growth totaled $247.9 million, or 6.5%, which is within our forecasted range. Fourth quarter of 2024, net interest income increased by 6.8% over 2023, which is within our forecast of mid-single digit growth. The net interest margin was 3.45% for the current quarter and 3.26% for the prior year quarter, and up eight basis points from a linked quarter of 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. The full year 2024 provision was $4.5 million, or 14 basis points annualized of average loans, which was below our forecasted range. Moving on to page 17, non-interest income totaled $19.1 million in the fourth quarter of 2024, which was higher than our forecasted range of $11.5 million-$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, an increase of 11.2%, which is higher than our forecasted range.

Non-interest expense was $37 million in the fourth quarter, higher than our forecasted range of $32 million-$33.5 million. For full year 2024, non-interest expense increased 6.3%, which was higher than the forecasted range provided in January. Our effective income tax rate of 18.9% and 19.6% for the fourth quarter of 2024 and full year 2024, respectively. Lastly, there were no shares repurchased in the fourth quarter or for full year 2024. Turning to page 18, this will summarize our initial outlook for 2025. The first column is loan growth. We anticipate loan growth in the mid-single digit range and are targeting full year growth rate of 5%-6%. We expect to see growth in commercial and mortgage loans, with installment loans declining. This outlook assumes a stable Michigan economy. Next is interest income, where we are forecasting a growth rate of 8%-9% over full year 2024.

We expect the net interest margin to increase 20 basis points-25 basis points in 2025 compared to full year 2024, primarily due to decreasing yields on interest-bearing liabilities that 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 increase slightly from year-end 2024 levels. A full year 2025 provision expense for the allowance for credit losses of approximately 0.15-0.25 of average portfolio loans would not be unreasonable. Related to non-interest income, we estimate a range of $11 million-$12 million in the first and second quarter, followed by a range of $12 million-$13 million in the third and fourth quarter of 2025. We estimate total for the year to decrease 14% as compared to 2024.

We expect mortgage loan origination volumes and net gains on sales to be similar to 2024. Our outlook for non-interest expense is a quarterly range of $34.5 million-$35.5 million, with a total for the year 3%-4% higher than the 2024 actuals. The primary driver is the increase in compensation and employee benefits, data processing, and occupancy. Our outlook for income tax is at an effective rate of approximately 19%, assuming the statutory federal corporate income tax rate does not change during 2025. Lastly, the board of directors authorized share repurchase of approximately 5% for 2025. Currently, we're not modeling any share repurchase in the year 2025. That concludes my prepared remarks. I would like to 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 and 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 (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 Adam Kroll with Piper Sandler. Adam, your line is now open. Please go ahead.

Adam Kroll (Research Analyst)

Hi, this is Adam Kroll. Good morning and thanks for taking my question.

Gavin Mohr (EVP and CFO)

Good morning, Adam. We're having trouble hearing you breaking up.

Adam Kroll (Research Analyst)

Yeah.

Operator (participant)

Sorry, Adam, could you double-check your line as you are breaking up? Adam, can you hear us?

Gavin Mohr (EVP and CFO)

Sorry, Adam, your line is breaking up.

Operator (participant)

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 (Director)

Hey, good morning, folks. Can you hear me?

Joel Rahn (EVP and Head of Commercial Banking)

Yes.

Yeah.

Brad Kessel (President and CEO)

Good morning, Brendan.

Brendan Nosal (Director)

Fantastic. Hey, good morning. Sorry, I was having some phone issues earlier. I wanted to make sure you could hear me. Maybe to start off on the lending outlook for 2025, you've had a lot of success in recent years in adding commercial bankers to your platform. Just wondering how you view opportunities for continued banker adds across 2025, especially given M&A disruption in your markets and how that might factor into your strong commercial loan growth guidance for the year. Thanks.

Brad Kessel (President and CEO)

Yeah, sure. I'll take the first shot, and then I'd like maybe Joel to jump in a little bit. And we've really had the green light in recruiting now for quarter after quarter, year after year, and not necessarily adding teams, but just individuals. And I think the pace that we've displayed in recent history, we would like to continue. And I do think that there continues to be disruption in the marketplace, maybe different entities, but definitely opportunity. And so Joel maybe jump in and.

Joel Rahn (EVP and Head of Commercial Banking)

Yeah, 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 that want to join a solid community bank organization, so we'll just continue that focus as we move through the year, Brendan.

Brendan Nosal (Director)

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 (EVP and CFO)

Yeah, this is Gavin. It is, I think, ratable is a fair label, Brendan. And then, again, as we put in the deck, we're expecting full year expansion in the 20 basis points-25 basis points range over where we finished up for 2024, so.

Brendan Nosal (Director)

Okay. Great. Well, thank you for taking the questions. Appreciate it.

Joel Rahn (EVP and Head of Commercial Banking)

Thanks.

Operator (participant)

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's doing well.

Brad Kessel (President and CEO)

Hi, Matt.

Matt Renck (Analyst)

My first question just on the hi, everybody. Just as a follow-up to the loan growth question, just given the momentum you guys have in commercial from the years past, should we expect a more even growth profile throughout the year, or will it be more similar to this one where it kind of dips back down and strengthens towards year-end?

Joel Rahn (EVP and Head of Commercial Banking)

This is Joel. It's always difficult to predict exactly the timing of things booking, but first quarter generally is a little bit softer, and so I would not be surprised to see the early part of the year being that way. That is pretty much true to history. But I think it comes across pretty evenly throughout the year. This past year, we had a very unusual second quarter where we just happened to have a number of large payoffs. Companies sold. Some real estate projects that sold. So the second quarter this year was extraordinary. And yet, if you dig beneath the numbers and look at our production, it was pretty smooth throughout the year. So I don't think there's a ton of difference one quarter to the next.

Matt Renck (Analyst)

Okay. Got it. Thank you. And then just followed 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 (EVP and CFO)

Yeah. 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 mixes we've budgeted. It's a three to five basis point decline in margin.

Matt Renck (Analyst)

Okay. Got it. Thank you.

Gavin Mohr (EVP and CFO)

Yep.

Matt Renck (Analyst)

I'll step back now.

Operator (participant)

Thank you. Just as a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad now. Our next question comes from Nathan Race with Piper Sandler. Nathan, your line is now open. Please go ahead.

Adam Kroll (Research Analyst)

Hi, this is Adam Kroll on for Nathan Race. Can you guys hear me okay?

Joel Rahn (EVP and Head of Commercial Banking)

Yes, Adam. We can hear you clearly.

Adam Kroll (Research Analyst)

Okay. 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 (EVP and CFO)

So the portfolio is about, well, hang on. Let me get the, so I'll give you the asset base. So 35.7% of total assets repriced in one month and 47% repriced in the next 12 months. Now, that does include $120 million of securities runoff.

Adam Kroll (Research Analyst)

Okay. 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 (EVP and CFO)

Deposit growth for the year on a core basis, we're targeting that to 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 (Research Analyst)

Okay. I appreciate the color there. And then last one for me is just, what are you folks seeing 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 (EVP and CFO)

Yeah. There's still plenty of competition out there. We have been able to, and you can see it on the deck. It's page six. I've been really pleased with our ability to make some adjustments as they've lowered, the Fed has lowered short-term rates. That being said, because of the market and the competition, there is some lag there. But overall, rates have stepped down, but there is no shortage of one-off specials in our markets that are being offered.

Adam Kroll (Research Analyst)

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

Gavin Mohr (EVP and CFO)

Thank you.

Operator (participant)

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

Brendan Nosal (Director)

Hey, just to follow up on the margin commentary with no cuts, you said a three to five basis points decline in the margin. That's versus the current outlook, not versus 2024 margin, correct?

Gavin Mohr (EVP and CFO)

Yeah. Thanks for clarifying that. That's right, Brendan. Yep.

Brendan Nosal (Director)

Got it. Okay. So instead of 20 basis points-25 basis points, it would be 18 basis p oints-22 basis points, something like that, right?

Gavin Mohr (EVP and CFO)

Yes. Yeah. Perfect.

Brendan Nosal (Director)

Fantastic. Okay. Thanks for taking the follow-up. Much appreciated.

Operator (participant)

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 (participant)

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.