Independent Bank Corporation

Hello everyone and welcome to the Independent Bank Corporation reports 2024 third 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 now. If you change your mind, please press star followed by two. I will now hand you over to your host, Brad Kessel, President and CEO to begin. Brad, please go ahead.

Thanks, Ezra. 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 2024 results. I am Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Moore, Executive Vice President and our Chief Financial Officer, and Mr. Joel Rahn, Executive Vice President, Head of Commercial Banking. Before we begin today's call, I'd like to direct you to the important information on page two of our presentation, specifically the cautionary note regarding forward-looking statements. If anyone does not already have a copy of the press release issued by us today, you can access it at the company's website, independentbank.com. The agenda for today's call will include prepared remarks, followed by a question and answer session, and then closing remarks. Independent Bank Corporation reported third quarter 2024 net income of $13.8 million or $0.65 per diluted share versus net income of $17.5 million or $0.83 per diluted share in the prior year period. I am proud of our team and very pleased with our third quarter 2024 results, driving organic growth on both sides of the balance sheet. Overall loans increased 9.3% annualized. while core deposits are up 8.9% annualized. We were able to generate net interest income growth on both a linked quarter basis and a year-over-year quarterly basis. 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. Our credit metrics continue to be excellent, with watch credits and non-performing assets near historic lows. These fundamentals continue to drive very strong growth in tangible bulk value per share, 22%, in fact, compared to the prior year quarter. Based on a robust commercial pipeline, the past record of our core group of professionals, and the ongoing strategic initiatives to add talented bankers to our team, we are optimistic about continuing these growth trends for the remainder of 2024 and into 2025. On page five, total deposits as of September 30th, 2024 were 4.6 billion. Overall core deposits increased $100 million during the third quarter of 2024. On a linked quarter basis, retail deposits declined by 21.3 million, business deposits increased by 16.7 million, and our municipal deposits increased by $105.2 million for the quarter. Our existing 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. 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 increased by eight basis points to 2.10%. At this time, I'd like to turn the presentation over to Joel Rahn to share a few comments on the continued success we are having in our growing our loan portfolios and to provide an update on our credit metrics.

Joel Rahnman, Yeah, thanks, Brad. And good morning, everyone. On page seven, we share an update on loan activity for the quarter. Total loans increased $90 million in the third quarter, as Brad said, representing 9.3% annualized growth. We had a strong quarter of commercial loan activity with that portfolio increasing $93 million. Our mortgage portfolio grew $10 million, while our installment loan portfolio declined by $12.5 million. Within the commercial loan activity, the mix of C&I lending versus investment real estate was approximately 60%, 40%. with overall 35% coming from new customers to the bank. For the year, despite significant headwinds from unscheduled payoffs in the second quarter, our commercial portfolio has grown $145 million, representing an 11.5% annualized growth rate. Based upon a solid commercial pipeline, we see continued growth opportunity in the fourth quarter while maintaining our disciplined credit standards. As noted in the material, in each portfolio, yield on new production is significantly higher than the respective portfolio yield. The commercial portfolio continues to be our highest yielding portfolio with a yield of 6.78%. Page 8 provides additional detail on our commercial loan portfolio. As pointed out in prior quarters, C&I lending continues to be our primary focus, representing 67% of the portfolio. Manufacturing continues to be the largest concentration within the C&I segment, comprising approximately 9% or $172 million. The remaining 33% of the portfolio is comprised of investment real estate, with the largest concentration being industrial at 8% or $153 million. It's worth noting that our exposure to the office segment stands at $86 million, or 4.7% of the commercial portfolio at quarter end. Our office exposure consists primarily of suburban low rise office space with medical comprising 19% of overall office exposure. The average loan size is 1.3 million, which points to the granularity of that segment of our portfolio. For additional insight on our office exposure, I refer you to page 25 of the of the appendix to this presentation. Key credit quality metrics and trends are outlined on page 9. Overall, credit quality continues to be excellent, as Brad remarked just a second ago. Total non-performing loans were 5.1 million, or approximately 13 basis points of total loans at quarter end, consistent with June 30. Past due loans totaled 4.8 million, or 12 basis points, similar to June 30. While not reflected on our slide, our commercial watch list remains low at 3.3% of the total portfolio, although up slightly from June 30th. 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.

Thanks, Joel, and good morning, everyone. I'm starting on page 10 of our presentation. Page 10 highlights our strong regulatory capital positions. All capital ratios increased from the late quarter. Net interest income increased $2.4 million from the year-ago period. or tax equivalent net interest margin was 3.37 percent during the third quarter of 24 compared to 3.23 percent in the third quarter of 23 and down three basis points from the second quarter of 2024. Worth noting the accelerated fee accretion related to a large commercial loan payoff contributed five basis points to the margin in the second quarter of 2024. Excluding this This accretion, the second quarter of 2024, that interest margin would have been 3.35% or two basis points lower than the third quarter 2024 margin of 3.37%. Average earning assets were $4.99 billion in the third quarter of 2024 compared to $4.89 billion in the year-ago quarter and $4.89 billion in the second quarter of 2024. 12 contains a more detailed analysis of the link quarter increase in net interest income in the net interest margin on a link this our third quarter 2024 net interest margin was positively impacted by three factors increase in yield on loans with seven basis points change in earning asset mix was two basis points and change in interest bearing liability mix was two basis points these increases were more than offset by an increase in funding costs of seven basis points, the reduction in loan fee accretion of five basis points, and a decline in investment yield of one basis point. On page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for the third quarter of 24 and second quarter of 24 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 scenario is considered 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 liability costs also benefited from a shift in mix. The NII sensitivity profile shifted to a more asset-sensitive position during the quarter, largely due to slightly faster repricing on commercial loans, a modest increase in mortgage loan repricing due to additional pay fix swaps, and a shift in non-maturity deposit beta assumptions. Currently, 35.6% of assets repriced in one month and 46.8% repriced in the next 12 months. Moving on to page 14, non-interest income totaled $9.5 million in the third quarter of 2024 as compared to $15.6 million in the year-ago quarter and $15.2 million in the second quarter of 2024. Third quarter, 24 net gains on mortgage loans, $2.1 million compared to $2.1 million in the third quarter of 23. The increase is due to increased profit margin as well as higher volume of loan sales. Negatively impacting non-interest incomes, $3.1 million loss on mortgage loan servicing net. This is comprise a $4.2 million or $0.16 per diluted share after tax loss due to change in price and a $1.2 million decrease due to paydowns that's partially offset by $2.2 million of revenue in the third quarter of 2024. As detailed on page 15, our non-interest expense totaled $32.6 million in the third quarter of 2024 as compared to $32 million in the year-ago quarter and $33.3 million in the second quarter of 2024. Performance-based compensation increased $.5 million due primarily to a higher expected incentive compensation payout for salaried and hourly employees. Data processing costs increased by $.3 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 decreased $0.6 million, primarily due to lower healthcare related costs. Page 16 is our update for our 2024 outlook to see how our actual performance during the third quarter compared to the original outlook that was provided in January of 2024. Our outlook estimated loan growth in mid single digits. Loans increased $90.4 million in the third quarter of 2024. or 9.3% annualized, which is above our forecasted range. Commercial and mortgage loans had positive growth while installment loans decreased in the third quarter of 24. Third quarter of 2024 net interest income increased by 6.2% over 2023, which is within our forecast of mid single digit growth. The net interest margin was 3.3%, 3.37% for the quarter, and 3.23 percent for the prior year quarter and down three percent three zero point zero three percent from the late quarter the third quarter 24 provision for credit losses was an expense of 1.5 million dollars or 15 basis points annualized of average loans which is within our forecasted range moving on to page 17 non-interest income totaled nine and a half million dollars uh in third quarter 2020 Third quarter 2024, which is below our forecasted range of $11.5 million to $13 million. Third quarter 2024 mortgage loan originations, sales, and gains totaled $147.5 million, $117 million, and $2.2 million, respectively. Mortgage loan servicing net generated a loss of $3.1 million in the third quarter of 2024. Non-interest expense was $32.6 million in the third quarter within our forecasted range. of $32.5 to $33.5 million. Our effective income tax rate of 20.1% for the third quarter of 2024 was in line with our forecast. Lastly, there were no shares repurchased in the third quarter or first nine months of 2024. That concludes my prepared remarks, and I would like to now turn the call back over to Brad. Thanks, Gavin.

I'm very pleased with another solid quarter for 2024, and it is very much in line with the strong results which our company has been delivering quarter over quarter, year after year for some time. This success is directly attributable to our talented team, their focus on connecting with customers, investing in our communities, and making banking easy. We 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 to the fourth quarter of 2024, our 160th year of serving the communities of Michigan and 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 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 in time, we'd like to open up the call for questions.

Thank you, Gavin. To ask a question, please press star followed by one on your telephone keypad now. When prepping to ask your question, please ensure your device is unmuted locally. If you change your mind, please press star followed by two. Our first question is from Brendan Nozzle with Hovda Group. Brendan, your line is now open. Please go ahead.

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

Good morning, Brendan.

Um, maybe just starting off here on, uh, mortgage gain on sales fees. I mean, it looks like it's, you know, the strongest quarter you guys have put up in quite some time. It looks like, you know, better gain on sale margins, better mix of saleable products. Um, just kind of curious, you know, what you folks are seeing at a ground level for that business, uh, and how you expect it to trend over the next few quarters. Thanks.

Yeah. Uh, thanks, Brendan. This is Gavin. Um, yeah, so we, uh, We think, you know, margins stable, but I do think we're going to see some headwinds in terms of production, and that's primarily due to seasonality as well as just continued limited supply. But overall, you know, margins have been pretty stable, and we think they're going to continue through year end.

I think I'd add there, Brandon, you know, it was interesting to sort of watch what was going on with application levels revolving around the Fed's move in September. And I think, you know, we had a lot of the client base probably more than normal floating in anticipation of, you know, further drops in the mortgage rates. And obviously the short-term rates are moved differently oftentimes than the longer-term mortgage rates. So after the move, and then we saw actually post-quarter end, we're up now at the street level, almost 100 basis points in the mortgage pricing. So customers, I think, were expecting it to go one way and in fact went the other way. So we're going to, I think, again, dovetailing what Gavin said, sort of see what happens as we here in Michigan go into typically a softer season and see what happens. But hopefully that's helpful.

Yeah, no, I appreciate the comments there. One more for me. I'm just thinking about how the balance sheet is positioned for Fed reductions. I mean, I guess the sheets may be a little bit asset sensitive, but you have the dynamic of rotating from securities into loans. I mean, if you kind of put those two pieces together, does that kind of lead to more or less a stable margin as we move ahead? Thanks.

I actually would say the margin we should continue to see expansion and just On what's disclosed, you know, that's a 12-month forward look. So we're showing some asset sensitivity and rates down in the model, but that base model margin is higher than what we're actually at today. So just another way to say that I think we anticipate with the repricing of the assets and some ability to reprice on the liability side that the margin will grind higher.

Thanks for taking the question, Gavin. Appreciate it. Thank you.

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

Thank you. You know, you guys had nice annualized loan growth this quarter. Can you just talk about, you know, loan demand, loan pipelines going forward, Peter Haslund, Secondly, do you think that there's a lot of pent up loan demand, once we get past this election and hopefully with lower rates that it could lead to even stronger growth.

James Meeker, that's a great question Peter let's go watch it share your thoughts on what you're seeing there.

Yeah, you know, right now our pipeline on the commercial side, Peter, is solid. It's, you know, so I think our, you know, fourth quarter and early in 25 look fine. You know, hard to know on the – it's a really interesting question on the pent-up demand. There could be some, but, you know, our growth has been really good, so it's difficult for me to sit here and say, oh, yeah, we can outperform – you know, our current run rate, which is, you know, 11-ish percent annualized. So, but there certainly could be some, you know, some business owners that have been sitting on the sidelines just waiting to, you know, to make a, you know, an equipment or expansion decision, you know, pending the outcome of the election. I could certainly see some of that, but it's really hard to gauge that.

Okay. And then, you know, Joel, just You've had a lot of success with the dislocation in your markets from acquisitions bringing in teams or bankers. Just wondering if you could talk about maybe what the pipeline is for hiring new bankers with that dislocation in the markets, how that's looking.

Yeah, we're just continuing to look and talk. um you know uh so it's i i don't want to put a number on it but our plan is is to continue to do what we've been doing the last few years and that is continue to where we can put good talent on our team and that that pays off in the long run for us so all this past quarter we had some bankers in a couple different markets is that right we did yep we added uh we added two in southeast michigan and one up in our northern Michigan region. Very good.

Got it. And just my final question, credit quality is great. Last quarter, you slightly released reserves. This quarter, you added a little over a million. Is that addition just kind of to support loan growth, and the thought is you want to keep the ACL ratio fairly steady from here?

Yeah, I would say yes. This quarter's provision was directly attributable to loan growth. We're at a 146-ish overall, plus or minus. But built into that is about a 25% uh, percent, uh, subjective. And I think we're still sitting on, um, a subjective, uh, reserve, um, you know, with the question out there, is this a soft landing or a hard landing? So, um, I think we'll get clear post election and in the 25. So, um, I. The reserves are very healthy today, and I think going forward you'll see provisioning consistent with how our recent record has been.

Got it. Thanks for taking the questions.

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

Hi, this is Adam Kroll on for Nathan Race. Thanks for taking my question. So just starting on deposit costs, I noticed the pace of increase was a bit higher this quarter than in prior ones. Is it fair to assume that deposit costs have peaked? And I was just wondering if you could provide any color on what you're seeing in terms of deposit pricing competition within your markets?

Yeah, thank you. So a lot of that has to do with mix. But in terms of spot rate, yes, I do believe that we have seen a peak with the recent Fed move. But again, we did continue to see some runoff in the non-interest going, and then it was rotating into interest bearing. So But from a spot rate perspective, I do agree that I think we're at a peak.

And in terms of, you know, what we're seeing in the marketplace, I think it's still aggressive, you know, I think, and watchful. So, you know, looking at your neighbor down the street and seeing what they're doing and, you know, you know who's who's going to blank first so um it's going to be interesting to see here uh through the balance of the year who does what but you know um our our pricing strategy i think um continues to to work well we're going to take very good care of our customer base um and and and and uh um you know based on what our overall wholesale borrowing costs, that really drives the overall pricing strategy. So I feel good where we're at, particularly with just a very strong deposit growth here in the third quarter.

Thanks. I appreciate all the cover on that. Just switching to expenses, it was nice to see them come in lower this quarter. and i saw in a release yesterday about using ai to kind of streamline i.t processes and couple that with you know ongoing initiative to add additional bankers i was just wondering how you guys are thinking about uh the expense run rate in 2025. on 2025 uh uh adam you know we haven't uh provided uh

any guidance at this point. Our sort of timing would be following the fourth quarter. We'll give you a full look at 2025. And so at that time, you know, we'll share that. But I would say, hey, expense management is a focus for us. We've been in that $32, $33.5 million range for some time. And we've been able to keep it there for really just resource allocation or reallocation. So while we've grown the commercial banking team significantly, we actually, our overall headcount is down significantly. We're a little over 800 FTEs. And that's been pulled out of the branch system through the use of telerecycler machines. It's been pulled out of the mortgage support area as volumes, you know, stayed low and did not, you know, as they stayed lower and as we've implemented automation on the mortgage side. So, We are excited as we go forward about our positioning with AI and application processing interfaces, as well as bots. Our technology leadership guys are doing a great job there, and we're seeing some real benefits with some use cases today internally in terms of helping our staff better serve our client base by just accessing information. And I think in 2025, what we're hopeful for is really to move that AI and leverage it on the revenue generation side. So it's an exciting time to be in banking and a community bank. Thanks.

Thanks for all the cover on that. That's it for me.

Thank you, Adam. 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 is from Damon Belmonte with KBW. Damon, your line is now open.

Hey, everybody. This is Matt Rank filling in from Dave in Del Monte. Hope everybody's doing well. Just to follow up to the last question on AI, has there been any regulator pushback or anything extra you've had to do to make sure they're okay with how you're using the systems? Or is that more for later on in 2026 when you move it to more of the revenue side?

No, I think, you know, first off, you know, this is early and And I think everybody's trying to figure out what it can do and then execute on it. But it all starts with governance. And so we're not waiting to develop the governance around AI based on what regulators tell us. I mean, we're building the governance on what we think are you know, risk management best practices. So I think we're not necessarily over our skis on that. And, you know, I think we're in a good spot. But at this point, no, there hasn't been any pushback by regulators.

Okay. Got it. And then just last one on deposit growth. Has, uh, has the lowering of rates made it easier to kind of garner the whole relationship from a loan perspective or, or has it not really affected that? I was just curious if we could see a step up in growth there.

Yeah, there could be some of that. This is Joel. Um, uh, you know, we, there were some, some, um, opportunities that really were just kind of boxed out, um, over the past, uh, year. or so, a year and a half, because they were locked in on a fixed rate that was very attractive. So, yeah, we will see time, a correct portion of that, because those loans will ultimately come up for refinance. But, yeah, there certainly could be a little bit of lift that we see with some pieces that we haven't been able to pull. um uh on customer relationships just um uh you know with the with the uh the refinance activity that's a really good question okay great thank you that's all for me our next question is from john rodis with janie john your line is now open good morning guys john

Gavin, a question for you just on the balance sheet, the securities portfolio. Could you remind us what sort of maturities you're expecting in the fourth quarter and then next year?

Yeah. So we're looking at about $25 million in the fourth quarter. And then next year is going to be in that current speeds $120 million-ish. For the full year. For the full year. That's correct. Yeah.

Okay. Is that $120 million next year? Is that weighted heavily towards any one quarter or is it fairly even?

It's fairly even. I mean, a lot of it's amortization off the MBS portfolio. Okay.

And I think maybe a quarter or two ago, you had said you, you know, sort of longer term targeting securities to assets of around 12 to 13%. Is that sort of still the case?

yeah 12 to 15 but yeah you're right there john okay okay okay that's it for me thank you guys thank you thank you that ends our q a session i will hand back to brad for any closing remarks 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'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.

Thank you very much, Brad. And thank you everyone for connecting. You may now disconnect your lines.