IBCP - NASDAQ

Hello, everyone, and welcome to the Independent Bank Corporation Reports 2025 Third Quarter Results. My name is Ezra, and I will be your coordinator today. [Operator Instructions] I will now hand you over to 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 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 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 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 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 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 on sub debt we redeemed in the third quarter. I would characterize the NIM is 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 large credits at low levels. Nonperforming 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, 4 basis points through the first 3 quarters of 2025. The allowance for credit also stands at 1.49% of total loans. I am optimistic, we'll finish 2025 strong and I'm excited about our prospects to grow our customer base and earnings in 2026. Moving to Page 5 of our presentation. Total deposits as of September 30, 2025, we're 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 6, 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 just 6 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 are having in growing our loan portfolios and provide an update on our credit metrics.

Well, thanks, Brad, and good morning, everyone. On Page 7, 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 portfolio is contracted in the quarter. This is attributable to seasonality as well as disciplined underwriting. . Year-to-date, we've grown the commercial loan portfolio of $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 8 provides detail on our commercial loan portfolio. There's not been any significant shift in our portfolio concentrations with the portfolio remaining very well diversified. 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 9/30. 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 9. Overall, credit quality continues to be very good, as Brad alluded to a moment ago. Total nonperforming loans were $20.4 million or 48 basis points of total loans at quarter end, up from 20 basis points at 6/30. This is primarily due to one investment real estate commercial relationship as transit is in workout. Past due loans totaled $5.1 million or 12 basis points, down slightly from 16 basis points at 6/30. It's 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.

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 was 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 4 basis points from the second quarter of 2025. The decrease in 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 '25 net interest margin was positively impacted by two factors: the change in Earning Asset Mix was 2 basis points and an increase in Earning Asset Yield was 1 basis points. These were offset by a change in funding cost of 4 basis points and the acceleration of unamortized issuance cost on the subordinated debt we redeemed in the third quarter of 3 basis points. On Page 13, we provide details on the institution's interest rate risk position, the comparative simulation analysis for the third quarter '25 and the second quarter of '25 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 shocks in areas consider immediate permanent and parallel rate changes. The base case modeled NII 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 subordinated debt issuance. The NII sensitivity position shows slightly more exposure to 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 purchase floors, currently 38.4% of the assets repriced in 1 month and 49.8% reprice in the next 12 months. Moving on to Page 14, and Noninterest 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 '24. The decrease is due to lower profit margins and a lower volume of loan sales. Positively impacting noninterest income was $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 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 $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 costs that were partially offset by lower incentive-based compensation expense and higher deferred loan origination costs due to higher commercial and mortgage on 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 and 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, a 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 2025 net interest income increased 8.4% over 2024, which is within our forecasted range of 8% to 9%. The net interest margin was 3.54% for the current quarter and 3.37% for the prior year quarter and down 4 basis points from a linked quarter. The third quarter 2025 provision for credit losses was an expense of $2 million, which is been our forecasted range. Moving on to Page 17. Noninterest 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 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. Noninterest expense was $34.1 million in the third quarter, below our forecasted range of $34.5 million to $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, $0.4 million in the third quarter. That concludes my prepared remarks. I would now like to 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 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 Instructions] Our first question comes from Brendan Nosal with Hovde.

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 just offer some color on what the area of expertise is within commercial specifically, what markets they were added? And what sort of institutions did they come from?

Yes, Brendan, this is Joel. I'll take that one. The -- all three of them, very experienced at a minimum level of experience was years, and two of them are over 20 years in Commercial Banking, all in Southeast Michigan. And -- which is 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. And two came from very large regional and one came from a small regional.

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?

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. So we think there is ongoing opportunity for us to garner talent. And strategically commercial banking relationships as well.

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 an uptick, which I've certainly seen from a handful of others, if 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?

Well, I'll let -- our growth for the quarter -- Brendan, this is Gavin. Thanks for the question. Our growth for the quarter came in municipal and commercial. So 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.

It's no surprise. It's quite competitive. And we just continue to focus our we can't control the overall market. We've got to be competitive to win those relationships. But our team is just focused on comprehensive relationships to really grow both sides of our balance sheet. So the commercial team, including our country management group is very focused, and we continue to make good inroads in the market. So -- but yes, it's competitive, and we're not seeing that landscape changing.

I would add, Brendan, for the 6 basis point increase for that had to do with change in mix. And then two of it was just where deposits were landing in the tiers. So we saw a very, very healthy deposit growth. A lot of those were municipal funds tax collection for the quarter, and they were -- they're slotting in those deposits at the higher rate tiers within the product offering.

Our next question comes from Nathan Race with Piper Sandler.

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

Yes, I do. So A couple of comments on the quarter. We had -- we disclosed the 3 basis points relative to the cost associated with the sub debt issuance. And the other piece, we were a little heavier in liquidity than we maybe would target. So if I said we had excess liquidity of $50 million. That had another 3 basis points of impact on the margin for the quarter. So 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 -- around where we're at today. For the 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. So the there's still tailwind there that we're really optimistic about.

And 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?

Yes. So the security portfolio is about $138 million at 3%. And then if I look at fixed rate loans, I'll just give you -- I don't really have it broken out in the strata 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 5.59%. So we're calculating that's about 120 basis points of pickup.

Got it. 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 nonaccrual 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?

Nathan, this is Brad. I'll jump in on that. So first off, I'd say that we've had -- the portfolio has been so clean for so many quarters, year after year. That this one stands out. And so it -- 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 and we're optimistic we can get through this. So I think we'll limit our comments to that.

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

I wanted to just follow up on credit. It really has garnered quite a bit of attention this quarter that we had a few profile loans that went bad, but the question is, are you starting to see any signs of credit weakness in commercial borrowers are as you approve loans during loan committee. I mean if I think about economic growth, it's slowing job growth has been weakening, just credit in general, please.

Yes. Peter, that's a great -- I'm going to let Joel take the first shot of that and what you just share what you're seeing.

Yes. Peter, I appreciate the question. And as Brad said, we've got to -- and we were very straightforward to say 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 systemic industry-specific issues that we're watching. And our watch list, absent the one credit that we've highlighted, our watch list overall percentage is still extremely low by historical standards. So we're just -- we're not seeing it. And which I'm pleased about. But yes, the economy in Michigan is still -- I would characterize it as stable. We watched the automotive industry very carefully, especially in the early part of this year. That actually has held up quite well. Our team was just updated with an automotive industry analyst comments last week at a team meeting. And there's some turmoil within the supply base in terms of EV versus internal combustion. So 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. And so the Michigan economy, I would characterize is still very stable.

Yes. And I think it's really good to all. And I would just put in context, so the loan book today is $4.2 billion. What Joel was referencing was 50% of that is commercial. And then the other, 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 and the entire portfolio of retail, so mortgage and installment. And in the rescores, we're not seeing really a significant decline in our borrowers' payment performance. So we feel good about that. So we like the diversity. And we are -- continue to be very bullish about Michigan and in our outlook as we go forward.

Great. That's great color. 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 because expenses have been coming in below the low end of the quarterly range each quarter, and then secondly, I realize it's early, but maybe Gavin, any color you could provide in terms of expense growth next year?

Yes. So I'll start with the second question. We are 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. So I'm hesitant to comment there at this point in time. But I will say that, as you're aware, a big portion of our compensation expense is based on incentive compensation. And so we've seen this year -- at this point in time this year, 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. So 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 is as good as well as we can. We are continuing to invest in technology. And then with that, we're finding the efficiencies and usually through not replacing individuals through attrition. So yes, I think we're spending a lot of time in that area, and we hope to continue to be able to contain it.

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

I do. So as of 9/30, the spot rates on total interest-bearing was $217 in total for -- does that help?

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

Thanks, Ezra. In closing, I would like to thank our Board of Directors and our senior management for their support and leadership. Also I want to thank all our associates and continue to be so proud of the job being done by each member of our team each member -- each team member again, 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.