IBCP - NASDAQ

Hello, everyone, and welcome to the Independent Bank Corporation Reports 2025 Second Quarter Results. My name is Ezra, and I will be your coordinator for today. [Operator Instructions] I will now hand over to our host, Brad Kessel, President and CEO, to begin. Please go ahead.

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 second 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, EVP, Commercial Banking. Before we begin today's call, I would like to direct you to the important information on Page 2 of our presentation, specifically, the cautionary note regarding forward-looking statements. If anyone does not already have a copy of the press release issued by us 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. I am pleased to report our solid second quarter results as we advance our mission of inspiring financial independence today with tomorrow in mind. Our vision is a future where people approach their finances with confidence, clarity and the determination to succeed. Our core values of courage, drive, integrity, people-focused and teamwork are the blueprint our employees live by. We strive to be Michigan's most people-focused bank. Today, Independent Bank Corporation reported second quarter 2025 net income of $16.9 million or $0.81 per diluted share versus net income of $18.5 million or $0.88 per diluted share in the prior year period. Significant items impacting comparable second quarter '25 and '24 results include the following: Changes in the fair value due to price of capitalized mortgage loan servicing rights was a loss of $0.2 million or $0.01 per diluted share after tax for the 3 months ending June 30, '25, as compared to $0.9 million or $0.03 per diluted share after tax gain for the 3-month period June 30, 2024. Also, a gain on equity securities at fair value of $2.7 million or $0.10 per diluted share after tax in the second quarter of June 30, '24, attributable to the exchange of our Visa Class B-1 common stock. No gain or loss in equity securities at fair value was recorded in the second quarter of '25. I'm very proud of our team and pleased to see us continue our positive trends with our second quarter '25 results. Overall, loans increased by 9% annualized, while core deposits were down 1.4% annualized due to seasonality. We generated net interest income growth on both a linked-quarter basis and a year-over-year quarterly basis, producing 9 basis points of margin expansion from the prior quarter. Our expenses are well managed, and we continue to see improved operational scale from strategic investments made in recent years. The fundamentals -- these fundamentals drove positive growth in tangible common equity per share of common stock 10.8% compared to the prior year quarter, along with very healthy performance returns, a return on average assets of 1.27% and a return on average equity of 14.66%. Despite heightened uncertainty in the markets during the quarter, our credit metrics remained strong with low levels of watch credits, 16 basis points of nonperforming assets to total assets, and 2 basis points in net charge-offs to average loans of the quarter annualized. The allowance for credit losses was 1.47% of total loans. Our team has been effective in many areas during the first half of '25, including business development from the existing customer base and onboarding new relationships, which have enhanced the geographic and product line diversification of our business. We continue to succeed in recruiting talented bankers to join the Independent Bank team. During the second quarter, we rolled out several new technologies to make banking easier for both our customers and associates serving our customers. For all these reasons, I am optimistic about our prospects for growth in -- for the balance of '25 and into '26. Moving to Page 5 of our presentation. Total deposits as of June 30, '25, were $4.7 billion. Overall, core deposits decreased $15.7 million during the second quarter of '25. On a linked-quarter basis, retail deposits were down $13.8 million, business deposits were up by $60.5 million and municipal deposits decreased by $64 million. Our sales team continues to bring in new relationships well below our wholesale cost of funds. On Page 6, we have included in our presentation a historical view of our cost of funds as compared to the Fed fund spot rate and Fed effective rate. For the quarter, our total cost of funds declined by 4 basis points to 1.76%. At this time, I'd like to turn the presentation over to Joel Rahn to share a few comments on the success we're having in growing our loan portfolios and provide an update on our credit metrics. Joel?

Yes. Thanks, Brad, and good morning, everyone. On Page 7, we share an update on loan activity for the quarter. We continued to experience solid loan growth in the second quarter with total loans growing by $91.7 million or 9% annualized. Commercial loan generation was strong, resulting in $75.8 million of quarterly growth, 15.3% on an annualized basis. Our residential mortgage portfolio grew by $15.6 million, and our installment loan portfolio was up slightly for the quarter. Our continued strategic investment in commercial banking talent continues to supplement our loan growth. We added 3 experienced commercial bankers in the second quarter, bringing our team to 50 bankers across our statewide footprint. Our staff additions include launching a new LPO in Kalamazoo. We're very excited to have a commercial presence in that market. Looking ahead, we believe we will continue low double-digit growth of our commercial loan portfolio in the second half of the year based upon a strong pipeline. We continue to see market share opportunities from regional banks and are seeing some uptick in organic growth from our existing customers. As noted in previous quarters, our new loan production in all categories continues to come on at yields well above the respective portfolio yield. Looking at the commercial loan production activity on a year-to-date basis, the mix of C&I lending versus investment real estate is 59% and 41%, respectively. For our commercial portfolio, our mix is 70% C&I and 30% IRE. Page 8 provides detail on our commercial loan portfolio concentrations. There's not been any significant shift in our portfolio and the portfolio continues to be very well diversified. Our largest segment of the C&I category is manufacturing at $184 million or 8.9% of the total portfolio. It's worth noting that within the manufacturing segment is $157 million of automotive industry exposure that we're monitoring closely for any tariff-related impact. To date, the impact has been nominal. Key credit quality metrics and trends are outlined on Page 9. Overall, credit quality continues to be excellent, as Brad said. Total nonperforming loans were $8.2 million or 20 basis points of total loans at quarter end, up slightly from 17 basis points at 3/31. Past due loans totaled $6.6 million or 16 basis points, also up slightly from 10 basis points at 3/31. It's not reflected on the slide, and Brad mentioned it just a moment ago, but it's worth noting that our year-to-date charge-offs are $442,000 or 2 basis points of average loans 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.

Thanks, Joel, and good morning, everyone. I'm starting on Page 10 of our presentation. Page 10 highlights our strong regulatory capital position. Turning to Page 11. Net interest income increased $3.3 million from the year ago period. Our tax equivalent net interest margin was 3.58% during the second quarter of 2025, compared to 3.40% in the second quarter of 2024, and up 9 basis points from the first quarter of 2025. Average interest-earning assets were $5.04 billion in the second quarter of 2025, compared to $4.89 billion in the year ago quarter, and $5.08 billion in the first quarter of 2025. 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 second quarter 2025 net interest margin was positively impacted by three factors, a decrease in funding costs contributed 3 basis points, change in earning asset yield and mix contributed 6 basis points, and a loan prepayment fee that contributed 1 basis point. These were partially offset by a change in funding mix that negatively impacted the margin by 1 basis point. On Page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for second quarter '25 and first quarter '25 calculates the change in net interest income over the next 12 months under 5 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. Also, assets continued to reprice higher. This benefit was partially offset by an adverse shift in funding mix with an increase in wholesale funding to finance earning asset growth and a modest core deposit runoff. The NII sensitivity position shows slightly more exposure to a declining rate environment. Asset repricing increased due to strong growth in variable rate commercial loans and HELOCs. Some of the increase in asset repricing was offset by purchased floors and faster liability repricing given an increase in short duration wholesale funding. Currently 37.1% of assets reprice in 1 month and 49.2% reprice in the next 12 months. Moving on to Page 14. Noninterest income totaled $11.3 million in the second quarter of 2025, compared to $15.2 million in the year ago quarter, and $10.4 million in the first quarter of 2025. Second quarter '25 net gains on mortgage loans totaled $1.6 million compared to $1.3 million in the second quarter of 2024. The increase is due to higher profit margins and higher volume of loan sales. No gain or loss on equity securities at fair value is recorded for the second quarter of 2025 compared to $2.7 million gain in the prior year's quarter due to the exchange of Visa Class B-1 common stock. Positively impacting noninterest income was $0.5 million gain on mortgage loan servicing net. This is comprised of $0.2 million or $0.01 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 in the second 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, 2025. As detailed on Page 15, our noninterest expense totaled $33.8 million in the second quarter of 2025, as compared to $33.3 million in the year ago quarter, and $34.3 million in the first quarter of '25. Compensation expense decreased $0.1 million, primarily due to lower incentive-based compensation expense, lower health benefits-related costs and higher deferred loan origination costs due to higher commercial and mortgage loan production. Data processing costs increased by $0.6 million from the prior year period, primarily due to core data processor annual asset growth and CPI-related cost increases and increases in other software solutions. Page 16 is our update for our 2025 outlook to see how our actual performance during the second quarter compared to the original outlook that we provided in January 2025. Our outlook estimated loan growth in the mid-single digits. Loans increased $91.7 million in the second quarter of 2025 or 9% annualized, which is above our forecasted range. Commercial mortgage and installment loans increased in the second quarter of '25. Second quarter 2025 net interest income increased by 7.9% over 2024, which is slightly below our forecast of a high single-digit growth. The net interest margin was 3.58% for the current quarter, 3.4% for the prior year quarter and up 9 basis points from a linked- quarter perspective. The second quarter 2025 provision for credit losses was an expense of $1.5 million, which was within our forecasted range. Moving on to 17 -- Page 17. Noninterest income totaled $11.3 million in the second quarter of 2025, which was within our forecasted range of $11 million to $12 million in the second quarter. Second quarter 2025 mortgage loan origination sales and gains totaled $147.8 million, $95.4 million and $1.6 million, respectively. Mortgage loan servicing net generated a gain of $0.5 million in the second quarter of 2025, which is below our forecasted target. Noninterest expense was $33.8 million in the second quarter, below our forecasted range of $34.5 million to $35.5 million. Our effective income tax rate was 18.4% in the second quarter of 2025. Lastly, there were 251,183 shares of common stock repurchased for an aggregate purchase price of $7.3 million in the second quarter of 2025. That concludes my prepared remarks, and I would like to now turn the call back over to Brad.

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 second half of 2025, our focus will be continuing to invest in our team, leveraging our technology and supporting our communities. At this point, we'd like to open up the call for questions. Ezra?

Our first question comes from Peter Winter with D.A. Davidson.

You guys had really nice strong margin expansion this quarter. And I was just wondering, could you talk about maybe the outlook for the margin in the second half of the year, especially if we get maybe 2 rate cuts based on the forward curve?

Yes, Peter, I would -- this is Gavin. Thanks for joining today. So the margin forecast that we provided is -- we're still very confident in that we provided in January. The 2 basis point cuts is factored into that forecast. I would share that given the current positioning for our -- the balance sheet, the cut of 25 to 50 basis points does not have a significant impact in the margin, 1 or 2 basis points specifically.

Okay. That's helpful. You guys also have done a nice job matching deposit costs lower. Do you still see room to lower deposit costs absent -- if there are no rate cuts? And if so, kind of what are some of the drivers?

I think that right now, where we're at in the deposit costs, we're probably seeing a plateau, Peter. The longer we stay or the longer they hold flat and as asset growth continues, you can kind of feel the pressure build. If I look at where we're currently seeing our CDs reprice and where we're issuing new, those are at the same level. So I don't see, if we stay here, a lot of opportunity to reprice down from here.

And then, Brad, if I can ask just a question. Treasury Secretary, Scott Bessent, he seems very focused on bank regulation, trying to kind of level the playing field for the commercial banks. So the question is, have you seen anything that benefits you from a competitive standpoint against credit unions?

That's a -- Peter, that's a great question. No, not with specifically credit unions. I do think that since the change in the administration, there were quite a few rules that were under review, including like CRA, Dodd-Frank Section 1071, small business data collection and so on. And those have sort of been paused or set aside. So that's significant for banks, for community banks because it would have been, I think, costly to move forward as those regulations were being proposed. So -- and then saying on top of that, I think we are still looking for further relief and excited to see Fed Governor Miki Bowman, who's, I think, a friend of community banks in her role in charge of the compliance side. So I think there's still more to come. But again, back to your original question that fair and equitable playing field with the nonbanks, there's been no change.

Our next question comes from Brendan Nosal with Hovde Group.

Maybe just starting off here, kind of curious at a top-level walking through your local economies. Can you just kind of take us through your markets region by region and where you're seeing pockets of strength? And where, when you look at the footprint now, you see the biggest long-term opportunity?

Yes. Brendan, this is Joel. So I would just focus on the two largest MSAs in our footprint, and that's West Michigan and then the Metro Detroit market. And they're both very similar in many respects. So the manufacturing base is pretty much the same. And there's maybe -- there's certainly diversity to it, but it's still heavily automotive dependent. And that's why earlier in my comments, I specifically commented on automotive. We have a relatively small exposure to the automotive industry from a supply base and they're holding up very well. We were really concerned when things first were announced back in early April, what does this mean? And maybe you could argue that all the full impact hasn't been felt yet. So we -- I think that's a point that has credibility. So we just continue to stay really close. But so far, I think our economy has held up very well. I'd like to tell people, if I don't read the news headlines, I'd tell you, just based on customer feedback, the economy is fine. Homebuilding is still pretty strong, especially in West Michigan. And like I said, manufacturing is holding up okay. And then in our Northern Michigan offices, there's a lot of -- it's a very strong tourist economy and the consumers are still spending money. So that's just some kind of high-level thoughts to your question.

That's super helpful color. Maybe moving on just to the competitive landscape. I'm just kind of curious how it's evolved over the past couple of months. I'm certainly hearing that some larger regionals are stepping back into certain asset classes like commercial real estate. So just kind of wondering how that's been impacting you and how you're seeing that on the ground?

Yes. I guess I'll take that one as well, and Brad can chime in. But it really hasn't changed. Our -- a lot of our market share lift still comes from the larger banks. We -- as a community bank, we sell very well against the larger bank. And so that hasn't changed. Interestingly, we're seeing some opportunity. I agree with your comment that the large banks have -- they're very, very careful and maybe just not interested at all in commercial real estate right now. And that's not just the obvious office segment. That's just kind of any commercial real estate. So we have continued to put good investment real estate in our portfolio. We keep it in balance. As I mentioned earlier, we like our mix of 70% C&I and 30% investment real estate overall in our portfolio. But we continue to write deals. I was going to say the one interesting thing, Brendan, is we've actually seen deal opportunity coming off of CMBS maturities and especially like in the medical office space, we pick our spots, but medical office, we've had good success with rewriting deals that are coming off of CMBS because that market is not as robust and not as aggressive as it once was. So yes, a variety of places. But overall, the mix or where our opportunities are coming from really hasn't shifted much.

Yes, Joel, I think that was excellent. I would just add, I mean, we were on a call with a prospect last week, whereby sort of that dollar size between $10 million and $20 million, which I'd say is sort of a sweet spot for us, was considered too small by the entity's incumbent bank. And so that is a terrific opportunity for us. So we're in a good spot. Great question, Brendan.

That's really great color. I'm going to sneak one more in here. Maybe just turning to capital M&A activity. It certainly feels like deals have picked up not only across the country, but in the Midwest specifically. So just kind of curious how you're viewing the M&A landscape at the moment, whether you're seeing signs of pickup in activity on your end and just updated thoughts on your own appetite for any inorganic opportunities right now.

Well, I think that we've seen several very nice deals here in Michigan this year. And so there's definitely activity going on and there's discussions being held. And here in Michigan, we have, plus or minus, about 80 chartered banks still left. And so for Independent, I would say that, and this is not new, organic growth will continue to be the primary driver of our overall growth. But we would be interested in acquired growth where it makes sense. And so where it makes sense gets down to -- obviously, it starts with culture and there's size and there's geography, and there's also price. And so I'm hopeful that as we move forward, we'll be able to complement the organic growth with some intelligent acquired growth, too.

Our next question comes from Adam Kroll with Piper Sandler.

This is Adam Kroll on for Nathan Race. Yes. So maybe just a question for Gavin, going back to the margin. If the Fed were to remain on hold through the remainder of the year, do you think the margin can just grind higher with new loans still coming on at a higher rate than the portfolio yield? And maybe could you remind us how much cash flow is coming off the bond book and maybe in terms of what your fixed rate loan repricing looks like over the next couple of quarters?

Yes. So to answer your first question, yes. I do believe that I'm confident that if rates stay where they're at, we would continue to grind higher in the margin, barring any type of disruption in the funding market. We have -- in the next 12 months, we have about $110 million of securities forecasted to reprice. And the -- I'm just looking here on your -- I have your question here on the fixed rate loans repricing. Give me 1 second. Hold on. In the next -- I don't have it broken down by quarter, Adam, but I can tell you, in the next 12 months, we have fixed rate loans repricing at $121 million with an exit rate of [ 6.15 ] in total. So...

Okay. That's super helpful. And then maybe switching to fees. You had really solid mortgage loan volume during the quarter. And obviously, the loan sale margin saw a drop with all the rate volatility during the quarter. But I was just wondering if you have any visibility on how you see mortgage trending so far this quarter?

Yes. The gain on sale margin was -- did come in lower than what we had anticipated. A couple of things going on there. One, just the competitiveness of the market continues to be very, very competitive. And so rates were not -- the gains were not as high as what we thought they would be there. There's also some nuance going on in certain sectors of the salable market where we were -- the industry was paying a much higher premium into the secondary, the GSE specifically, that premium has pulled back pretty significantly. We didn't see that coming out of our control. So that's had an impact as well. And then we also annually go through a review of the cost of origination. And so that was higher this year, and so that pulled down the margin as well. So there's a number of moving pieces there. But I would share the main driver is just the competitiveness of the mortgage space today.

Our next question comes from Damon DelMonte with KBW.

It's Matt Renck filling in for Damon. My first question is just a follow-up to the capital management. As you guys look for that inorganic opportunity, do you think you'll still be active with buybacks? Or should we expect you guys to kind of put those on pause in the meantime?

Yes. This is Gavin, Matt. We are -- we evaluate it daily. And as we've explained in the past, we do model the buybacks like we would a M&A opportunity, and we believe it needs to be in a price range that has a reasonable earnback for our shareholders. The current range is outside or the current price is outside of that kind of that range of earnback that we're comfortable with. That being said, as we continue to go forward and build capital, we reserve the right to change those parameters. But I would say here in more of the short term, if the stock continues to trade in the current ranges, the buybacks will be limited.

Okay. Great. And then last one for me. You guys mentioned you implemented some new technologies to help customers and associates. Just kind of curious what those technologies are and if you have any other planned investments coming up.

Yes, that's a great question. So in the second quarter, we put in sort of an AI chat function on our website and within the banking platform that's getting a lot of use from our customer base. So that's essentially customers being able to maybe more quickly get answers to their questions. We're using probably several dozen AI use cases around the company that is helping our staff maybe more quickly respond to customers when we've got them, say, on the line within our call center. We are leveraging some AI use cases to identify next best product opportunities with our customers. We've also leveraged technology just in terms of maybe in the loan processing underwriting area that -- to significantly reduce time. So those are a handful, but really excited about sort of where we've been, where we're at and even where we can go, continuing to leverage our technology.

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

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 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.