Independent Bank Corp (Michigan)
NASDAQ:IBCP
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
21.25
38.99
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Independent Bank Corp (Michigan)
Earnings Call Analysis
Summary
Q2-2024
Independent Bank Corporation reported strong results for Q2 2024, with net income rising to $18.5 million, up from $14.8 million in the same period last year. Earnings per share increased by 26%, and core deposits grew by 4.8% annualized. The net interest margin improved to 3.40% from 3.30% in the previous quarter, and net interest income saw year-over-year growth of 7.8%. Despite high commercial payoffs, loans increased by 1.2% annualized. Looking forward, the company remains optimistic about continuing these positive trends into the second half of 2024 and 2025.
You don't have any saved screeners yet
Hello all, and welcome to Independent Bank Corporation Reports 2024 Second Quarter Results. My name is Ezra, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, 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 second quarter 2024 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 and Head of our Commercial Banking. Before we begin today's call, I would like to direct you to 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. Independent Bank Corporation reported second-quarter 2024 net income of USD 18.5 million or USD 0.88 per diluted share versus net income of USD 14.8 million or USD 0.70 per diluted share in the prior year period. This represents a return on average assets of 1.44% and a return on average equity of 17.98%, respectively. I am proud of our team and very pleased with our second quarter 2024 results, driving organic growth on both sides of the balance sheet. Overall, loans increased 1.2% annualized, despite a higher-than-normal level of commercial payoffs and paydowns, while core deposits are up 4.8% annualized.
We were able to generate net interest margin expansion, increasing to 3.40% from 3.30% on a linked quarter basis and net interest income growth on both a linked quarter 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 nonperforming assets near historic lows. These fundamentals drove good growth in both our earnings per share at 26% and tangible book value per share, 16%, compared to the prior year quarter. Based on a robust commercial loan pipeline, the past record of our core group of professionals and the ongoing strategic initiative to add talented bankers to our team, we are optimistic about continuing these growth trends for the second half of the year and into 2025.
Total deposits at June 30, 2024, were USD 4.61 billion. Overall core deposits increased USD 53.3 million or 4.8% annualized during the second quarter of '24. On a linked-quarter basis, retail deposits declined by USD 22.2 million, business deposits increased by USD 143.6 million and municipal deposits declined by USD 68.1 million during the quarter. Our existing customer base continues to exhibit a remix out of noninterest-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 the presentation, a historical view of our cost of funds as well as compared to the Fed fund spot rate and Fed effective rate. For the quarter, our total cost of funds increased by 1 basis point to 2.22%. Through the second quarter of 2024, the cumulative cycle beta for our cost of funds is 38.8%.
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.
Thanks, Brad, and good morning, everyone. On page 7, we share an update of our USD 3.9 billion loan portfolio and quarterly activity. Total loans increased by USD 12 million in the second quarter, representing 1.2% annualized growth. Our mortgage portfolio grew USD 10.9 million, our installment portfolio increased by USD 3.9 million. Our commercial loan portfolio, as Brad mentioned earlier, declined USD 3 million in the quarter due to extraordinary payoff activity related to business sale as well as sale of various real estate investment projects. It's worth noting that Q2 commercial loan origination was stronger than first quarter, but could not offset the approximate USD 82 million of unscheduled payoffs realized in the quarter.
For the first half of the year, our commercial loan portfolio increased USD 52 million, representing 6.2% annualized growth. 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 6.91%. Based upon a solid commercial pipeline, we see continued growth opportunity in the second half of the year while maintaining our disciplined credit standards.
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 69% of the portfolio. Manufacturing continues to be the largest concentration within the C&I segment, comprising approximately 10% or USD 173 million. The remaining 31% of the portfolio is comprised of investment real estate, with the largest concentration being industrial at 7.9% or USD 123 million. It's worth noting that our exposure to the office segment stands at USD 84 million or 4.8% of our commercial portfolio at quarter end. Our office exposure consists primarily of suburban, low-rise office space with medical comprising 17% of overall office exposure. The average loan size is USD 1.3 million, which points to the granularity of the segment of our portfolio.
For additional insight into our office exposure, I refer you to page 25 of the appendix to this presentation. Key credit quality metrics and trends are outlined on page 9. Overall, credit quality continues to be excellent. Total nonperforming loans were USD 4.5 million or approximately 10 basis points of total loans at quarter end, consistent with 3/31. Past due loans totaled USD 5.3 million or 14 basis points, down slightly from March 31. While not reflected on the slide, our commercial watch list remains low at 2.2% of the commercial portfolio.
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 at page 10 of our presentation. Page 10 highlights our strong regulatory capital position. Our capital ratios increased from the linked quarter. Net interest income increased USD 3 million from the year ago period. Our tax equivalent net interest margin was 3.4% during the second quarter of 2024 compared to 3.24% in the second quarter of 2023 and up 10 basis points from the first quarter of 2024. Average interest-earning assets were USD 4.89 billion in the second quarter of 2024 compared to USD 4.76 billion in the year ago quarter and USD 4.91 billion in the first quarter of 2024. Page 12 contains a more detailed analysis of the linked quarter increase in net interest income and net interest margin. On a linked quarter basis, our second quarter 2024 net interest margin was positively impacted by 4 factors. Change in earning asset mix accreted to 3 basis points, increase in yield on loans accreted to 3 basis points. Loan fee accretion accreted to 5 basis points and change in funding mix accreted to 5 basis points. These increases were partially offset by an increase in funding costs, which resulted in 6 basis points.
On page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for the second quarter of '24 and the first quarter of '24 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 considered immediate permanent and parallel rate changes. The base case modeled NII is largely unchanged during the quarter as asset yields benefits from a shift in asset mix, a shift in loan mix and continued asset repricing was offset by liability repricing. DNI sensitivity profile is largely unchanged during the quarter for smaller rate changes of plus or minus 100 basis points.
The exposure to larger rising rate scenarios decreased modestly. Asset sensitivity increased slightly while liability sensitivity declined. Additionally, NII exposure to larger rate decline is largely unchanged. Currently, 34.3% of assets repriced in 1 month and 44.9% reprice in the next 12 months. Moving on to page 14, noninterest income totaled USD 15.2 million in the second quarter of 2024 as compared to USD 15.4 million in the year-ago quarter and USD 12.6 million in the first quarter of 2024.
Second quarter '24 net gains on mortgage loans totaled USD 1.3 million compared to USD 2.1 million in the second quarter of '23. The decrease is due to decreased profit margin as well as lower volume of loan sales. Gain on equity securities at fair value totaled USD 2.7 million during the second quarter of 2024. This gain is a consequence of the exchange of our shares of Visa Class B 1 common stock into a combination of Visa Class C common stock and Visa Class B 2 common stock. With the completion of this exchange, we will record the fair value of the Visa Class C common stock through income as it is convertible into publicly-traded Visa Class A common stock, while the Visa Class B 2 common stock continues to be carried at 0.
Positively impacting noninterest income was USD 2.1 million gain on mortgage loan servicing net.
This is comprised of USD 2.2 million of the revenue, USD 0.9 million or USD 0.03 per diluted share gain due to change in price, that was partially offset by a USD 1 million decrease due to pay downs of capitalized mortgage loan servicing rights in the second quarter of '24. As detailed on page 15, our noninterest expense totaled USD 33.3 million in the second quarter of 2024 as compared to USD 32.2 million in the year ago quarter and USD 32.2 million in the first quarter of 2024. Performance-based compensation increased USD 0.7 million, due to primarily higher expected incentive compensation payout for salary and hourly employees. Data processing costs increased by USD 0.4 million from the year ago period primarily due to core data processor annual asset growth and CPI-related cost increases as well as new solutions implemented during this time frame.
Page 16 is our update for our 2024 outlook to see how our actual performance during the second quarter compared to the original outlook we provided in January of this year. Our outlook estimated loan growth in mid-single digits. Loans increased USD 11.9 million in the second quarter of 2024 or 1.2% annualized, which is below our forecasted range. Mortgage installment loans had positive growth, while commercial loans decreased in the second quarter of '24. Second quarter of 2024, net interest income increased by 7.8% over 2023, which is within our forecast of mid-single-digit growth. The net interest margin was 3.4% in the current quarter and 3.24% for the prior-year quarter and up 10 basis points from the linked quarter. The second quarter '24 provision for credit losses was an expense of USD 20,000 below our forecasted range.
Moving on to page 17, noninterest income totaled USD 15.2 million in the second quarter of 2024, which is higher than our forecasted range of USD 11.5 million to USD 13 million. Second quarter mortgage loan origination sales gains totaled USD 142.6 million, USD 95.5 million and USD 1.3 million, respectively. Mortgage loan servicing net generated a gain of USD 2.1 million in the second quarter of '24. Gain on equity securities at fair value of USD 2.7 million or USD 0.10 per diluted share after tax in the second quarter ended June 30, 2024, which is attributed to the exchange of Visa Class B 1 common stock.
Noninterest expense was USD 33.3 million in the second quarter, within our forecasted range of USD 32.5 million to USD 33.5 million. Our effective income tax rate of 20% for the second quarter of '24 was in line with our forecast. Lastly, there were no shares repurchased in the second quarter of 2024. That concludes my prepared remarks. I would like to now turn the call back over to Brad.
I'm very pleased with our first half performance 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'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 into the second half of 2024, our 160th year of serving the communities of Michigan, 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 noninterest expenses. Accordingly, we are excited about our future. At this point in time, we'd like to open the call for questions.
[Operator Instructions] Our first question is from Brendan Nosal with Hovde Group.
Maybe just to start off on the net interest margin here, I mean expansion was really quite healthy and probably stronger than I was [ looking ] for. Just as we move to the back half of the year, could you help us walk through the moving pieces over the next few quarters and thoughts on where the margin trends from here?
Yes, sure. So we did have some fee accretion that accreted to 5 basis points for the quarter, though we view that as part of the core of the business. I anticipate we'll continue to drift higher as we forecast. I think we'll end up within that range. I'm pretty confident we'll end up in that forecasted range that we provided in January. The moving piece is always the deposit remix, and then what we're able to see in terms of repricing of the asset book that's currently well below market rates. But yes, I do believe we'll continue to see it drift higher.
It looks like M&A activity in Michigan continues to heat up with another end-market transaction announced this morning. Just curious, at this point, what your own appetite is to participate in kind of the [ renewed ] activity in the state?
Brendan, Independent Bank has a history of selective M&A. And I think prospectively, we continue to -- where it would make sense, would be interested in partnering with other institutions, but it's not a requirement. Our 5-year forecast is not dependent on doing a deal. So, I'm not surprised to see another announcement in the Michigan market, and we'll probably see more going forward. And if we can be a part of that and it makes sense for us, that would be great.
Our next question is from Damon DelMonte with KBW. Damon your line is now open.
This is Matt Renck filling in for Damon. My first question was just on loan growth. You guys mentioned strong origination activity, strong pipeline, but just looking forward to the second half of the year, how should we think about net growth? Do you think paydowns and payoffs will continue to weigh on overall growth? Or will we get back to that mid-single-digit range?
Yes. This is Joel. I really do feel that we were executing our game plan. Our originations, as I said, were slightly stronger in the second quarter than they were in the first quarter. And payoffs happened, but what was extraordinary was that USD 82 million of quarterly payoffs which I would note, we didn't lose any relationships, but we had a customer sell a business and we had a number of real estate projects sold. They were all bunched within about a 6-week time period. So it was just very unusual.
So, I look at our origination activity has been solid and steady. Our pipeline is strong as it's been since mid-last year. So, it's actually been growing as we went through the first half of this year. We're expecting a good solid second half of the year and feel like our original plan -- that we're right on our original plan. It's just this quarter looks a little weird, but I think by the time we get to year-end, we'll be right on plan or slightly ahead.
Just with expenses kind of pushing up on the higher end of the range, do you think you'll be able to maintain the range just given expected growth in the back half of the year? Are there any levers you can pull to kind of offset any expense growth?
Well, I do, and Gavin, you can jump in here, too. I think our range that was given early in the year back in January is still intact. I mean we're continuing to look at every area of the bank and how we're using our resources. And so, I think it is reasonable to still have that range in your estimates. Gav, anything different there?
No, I think it's really well said. I -- just maybe a little more focused on -- the driver this quarter was just the accrual for incentive catch up. So if -- is that -- the incentive compensation -- this quarter was a really strong quarter, so we had some catch-up to do and that on a linked quarter basis was USD 0.5 million. So, I agree with Brad.
Thank you very much. [Operator Instructions] Our next question is from Nathan Race with Piper Sandler.
Curious, maybe Gavin, if you can just update us on your margin expectations if the Fed were to cut in late September and if you were to get maybe 3 to 4 cuts as well into 2025, how do you think about an exit margin coming out of the end of that year?
Yes. So as you can see on our profile, in terms of the NII, we're in a pretty stable position. I do think that the Fed cuts could maybe lower the incentive or some of the pressure that the industry is feeling in terms of the deposit rotation, so that would be a positive. Additionally, if we could lose some of the inversion and we can see the new loans continue to go on at current levels, I think that's also positive long-term. But I don't -- as we've kind of -- again, as we're showing here in the deck, we're trying to manage to a fairly tight earnings profile. So overall, positive, but not a big, big swing.
And just curious, with the Visa share gains that you guys recognized in the quarter, how you guys think about maybe redeploying some of those proceeds that you guys contemplate maybe a partial securities portfolio restructuring? Or just kind of thinking there just to build additional excess capital for maybe some acquisitions or share repurchases down the road?
Yes. So we had that conversation. Part of the Visa transaction is it's -- there was gates on it. So at this point in time, we've actually only sold 2/3 of the shares that we're able to convert and became liquid. We won't -- the other 1/3 won't become available until next month that we anticipate. So at this point in time, Nathan, management made the decision to just book the gains, and then we'll reevaluate going forward to see what opportunities are there for us, whether we want to retain the capital or restructure by year-end.
And then maybe just one last one on fee income. Levels in the quarter came back, came in a little lower or towards the lower end of the range, excluding some of those one-time items around or I guess maybe noncore [ items ] on the MSR adjustment, the visa gains. Do think the income will maybe be towards the middle to upper end of the range as we move into 3Q and 4Q? Based on what you [indiscernible]
I think we can get back to the middle. I'm hesitant to say high because the margin pressure we're seeing on the gain on sale for loans. We did have, what I would call, Nathan, unique events in the quarter that put additional pressure on that margin. I mean, there's general market pressure on the margin, but we had to move some saleable loans to portfolio that put some pressure on the margin. Then we also had some hedge in effectiveness that we've been able to tighten up on a go-forward basis, so I think working back to the middle. The other piece there is if we could see swap B income increase, I think it would be an opportunity for us as well.
Just given it seems like you guys are expecting a pickup in loan growth in the back half of the year, do you guys see much in the way in terms of needing to provide for that growth from a provision perspective? Or do you just feel like the reserve can maybe drift lower, just given the surplus reserves that exist today?
Yes. That's a great question. And I think that prospectively, our provisioning would be directly attributable to additional loan growth. So I think those -- the guidance we gave at the start of the year on the provision probably is a little heavy. And so it's something under that, but barring a credit event. But I would expect us to have a greater provision than what we had this past quarter and directly related to loan growth. Now having said that, we do have the ACL today is, I think, at 1.46%. And probably 25% of that is in the subjective. So if the soft landing continues to materialize, like it sure feels like it could drift lower, Nathan. So sort of a long answer, but hopefully, that tells you what's in our head on it.
Thank you very much. We have no further questions, so I will hand back to Brad and the management team to conclude.
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 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.
Thank you very much, everyone, for joining. This concludes today's call. You may now disconnect your lines.