Independent Bank Corp (Michigan)
NASDAQ:IBCP
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Independent Bank Corp (Michigan)
Earnings Call Analysis
Q4-2023 Analysis
Independent Bank Corp (Michigan)
The story begins with Independent Bank Corporation revealing its financial performance for the fourth quarter of 2023, where it reported a net income of $13.7 million, or $0.65 per diluted share, which was a decline from the net income of $15.1 million or $0.71 per diluted share in the prior year. Over the full year, the company reported net income of $59.1 million or $2.79 per diluted share compared to $63.4 million. Amidst this backdrop, they boasted strong growth metrics, notably a double-digit annual growth in the commercial portfolio and a 4.1% year-over-year increase in the core deposit base. However, net interest income experienced a slight dip of $0.5 million from the year ago, despite an incremental quarter-on-quarter increase in net interest margin from 3.23% to 3.26%.
The bank's deposits at the end of 2023 remained robust at $4.62 billion. Slight fluctuations occurred in retail and business deposits and a shift in reciprocal and time deposits, driven by customers seeking higher FDIC insurance and rates. Total loans escalated by $50 million in the final quarter with a standout performance in commercial lending. Unfortunately, this was shadowed by a decline in installment loans due to seasonality. Overall, this contributed to a less than forecasted annualized loan growth of 5.2% for the fourth quarter and 9.4% for the full year, which was slightly beneath their projection of 10% to 12%.
Highlighting the tenacity of their credit portfolio, nonperforming loans remained low at $5.2 million, a mere 10 basis points of the total loan volume, underpinning their credit quality consistency.
The financial picture was mixed, with performance-based compensation retreating due to lower than expected payouts which subsequently led to a reduction in expenses. However, they did incur a $2.4 million loss on mortgage loan servicing net, pressing down noninterest income to $9.1 million, falling short of the $11 to $13 million forecast. On the flip side, the annual tax rate edged higher to 19.8%, nudging up the financial burden slightly.
Peering into 2024, hopeful eyes are set on a mid- to high single-digit range for loan growth with an emphasis on commercial and mortgage loans, pegging it at a hopeful 6% to 8%. The net interest income is poised for a 6% to 8% escalation, with a net interest margin anticipated to lift by 10 to 15 basis points thanks to increasing asset yields. Notably, this optimism comes with an assumption of multiple Fed fund rate cuts. Noninterest income expectations remain uniform year-over-year, with estimates hovering around $11.5 million to $13 million per quarter. A necessary caveat for investors - noninterest expenses could swell by 3.5% to 4.25%, due to investments in people, processes, and promotional spendings.
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Good morning, and welcome to the Independent Bank Corporation Report 2023 Fourth Quarter Results. I'm Carla, and I will be your operator for today. [Operator Instructions].
I will now hand over to your host, Brad Kessel, President and CEO, to begin. Brad, please go ahead when you're ready.
Good morning, and welcome to today's call. Thank you for joining us for Independent Bank Corporation's conference call and webcast to discuss the company's fourth quarter 2023 results. I am Brad Kessel, President and Chief Executive Officer; joining me is Gavin Mohr, Executive Vice President and Chief Financial Officer; and Joel Rahn, Executive Vice President 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 on our website at independentbank.com.
The agenda for today's call will include prepared remarks, followed by a question-and-answer session and then closing remarks.
Independent Bank Corporation reported fourth quarter 2023 net income of $13.7 million or $0.65 per diluted share versus net income of $15.1 million or $0.71 per diluted share in the prior year period. For the year ended December 31, 2023, the company reported net income of $59.1 million or $2.79 per diluted share compared to net income of $63.4 million or $2.97 per diluted share for the prior year.
Our fourth quarter results capped off another remarkably strong year with our organization performing exceptionally well despite unexpected challenges in the macroeconomic environment. For the fourth quarter of 2023, I'm particularly pleased with the double-digit annualized growth in our commercial portfolio; the year-over-year 4.1% growth in our core deposit base; the linked quarter growth in our net interest income and our strong asset quality metrics, which enabled us to release a small amount of our loan loss reserves.
I am also pleased to see our NIM expanding from 3.23% to 3.26% on a linked-quarter basis. Significantly impacting our quarterly results was the decline in price of the fair value of our capitalized mortgage servicing rights of $3.6 million or $0.14 per diluted share after tax for the quarter. Adding back this noncash adjustment, our fourth quarter 2024 annualized return on assets is 1.26% versus 1.24% for the 3 months ended December 31, 2022.
I am also pleased to see a $1.43 or 8.7% increase in our tangible book value per share for the quarter and $2.92 or 19.4% increase in tangible book value per share for the full year. During 2023, we continue to make investments in talent and technology, which we believe will enable us to consistently add new clients, grow our market share, increase profitability and further increase the value of our franchise in 2024 and beyond.
Turning to Page 5. Overall, our deposit base continues to perform well. Total deposits at December 31, 2023, were $4.62 billion. Overall, core deposits decreased just $11.3 million during the fourth quarter of '23, while increased $171 million or 4.1% for the full year of '23.
Retail deposits increased for the quarter but were down $81 million for the year. Business deposits increased for the quarter and were up $150 million for the year. Our public fund deposits decreased for the quarter but were up $99 million for the year. During both periods, we continued to see a shift in reciprocal and time deposits as customers look for higher FDIC insurance levels and higher interest rates.
We have included in our presentation on Page 6 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 increased by 19 basis points to 1.99%. Through the fourth quarter, the cumulative cycle beta for our cost of funds is 36%.
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 credit metrics.
Thanks, Brad, and good morning, everyone.
On Page 7, we share an update of our $3.8 billion loan portfolio. Total loans increased by $50 million in the fourth quarter. The strongest segment was commercial lending growing by $54 million. We also realized growth in our mortgage business with that portfolio growing by $10 million for the quarter. Our installment portfolio experienced a $14 million decline predominantly related to seasonality. As noted in the material in each portfolio, yield on new production is significantly higher than the respective portfolio yield.
We continue to see the return on our strategic investment and the expansion of our commercial banking team. The experienced talent that we've added over the past 24 months has been a strong contributor to our commercial growth, which on an annualized basis, was 13% in the fourth quarter and 14.6% for the year.
Looking forward, based on a strong pipeline and a solid liquidity position, we see continued growth opportunity while maintaining our disciplined credit standards.
Page 8 provides additional detail on our commercial loan portfolio. As I pointed out in prior quarters, C&I lending continues to be our primary focus, representing 68% of the portfolio. Manufacturing continues to be the largest concentration within the C&I segment comprising approximately 9% or $149 million. The remaining 32% of the portfolio is comprised of investment in real estate with the largest concentrations being industrial at $157 million, or 10.2% and retail at $136 million or 8.9%. It's worth noting that our exposure to the office segment stands at $93 million or 6.1% of our commercial portfolio at quarter end. Our office exposure consists primarily of suburban, low-rise office space and medical comprises 25% of our overall office exposure. Average loan size is $1.3 million, which points to the granularity of this particular segment of our portfolio. For additional insight into our office exposure, I refer you to the appendix of this presentation.
Page 9 provides an overview of key credit quality metrics at year-end. Overall, credit quality continues to be excellent. Total nonperforming loans were $5.2 million or approximately 10 basis points of total loans at quarter end, which is very similar to 12/31/22. Loans 30 to 89 days delinquent totaled $3.3 million or 9 basis points, down slightly from the third quarter and in line with 12/31/22 delinquency.
At this time, I'll 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, all capital ratios increased from the linked quarter.
Moving on to Page 11. Net interest income decreased $0.5 million from the year ago period. Our tax equivalent net interest margin was 3.26% during the fourth quarter of 2023 compared to 3.52% in the fourth quarter of 2022 and up 3 basis points from the third quarter of 2023. Average interest-earning assets were $4.93 billion in the fourth quarter of 2023 compared to $4.64 billion in the year ago quarter and $4.89 billion in the third quarter of 2023.
Page 12 contains a more detailed analysis of the linked quarter increase in net interest income and the net interest margin. On a linked quarter basis, our fourth quarter '23 net interest margin was positively impacted by 2 factors; an increase in yield on loans and investments of 16 basis points and change in earning asset mix of 4 basis points. These increases were partially offset by an increase in funding cost equivalent to 12 basis points and 5 basis points that were due to change in the funding mix.
On Page 13, we provide details on the institution's interest rate risk position. The comparative simulation analyses for fourth quarter '23 and third quarter '23 calculates a 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 a spot yield curve from the valuation date.
The shock scenarios consider immediate, permanent and parallel rate changes. The decrease in the base rate forecasted net interest income in the fourth quarter of '23 compared to the third quarter of '23 is primarily due to an adverse shift in the funding mix and the change in rates during the quarter, which caused the yield curve to invert further. Sensitivity is largely unchanged during the quarter with the exposure to rising rates increasing modestly for larger rate increases. Currently, 33% of the assets reprice in 1 month and 45.9% reprice in the next 12 months.
Moving on to Page 14. Noninterest income totaled $9.1 million in the fourth quarter of 2023 as compared to $11.5 million in the year ago quarter and $15.6 million in the third quarter of '23. Fourth quarter '23 net gains on mortgage loans totaled $2.2 million compared to $1.5 million in the fourth quarter of '22. The increase is primarily due to an increase in profit margins and fair value adjustments as well as higher mortgage loan sales volume.
Negatively impacting noninterest income was a $2.4 million loss on mortgage loan servicing net. This is comprised of $2.2 million of revenue. That was more than offset by $3.6 million or $0.14 per diluted share after tax decrease in the fair value due to price and a $1 million decrease due to paydowns of capitalized mortgage loan servicing rights in the fourth quarter '23.
As detailed on Page 15, our net interest expense totaled $31.9 million in the fourth quarter of 2023 as compared to $32.1 million in the year ago quarter and $32 million in the third quarter of 2023. Performance-based compensation decreased $1.5 million due primarily to lower expected incentive compensation payout for salary and hourly employees, and a decrease in mortgage lending related to incentives attributed to the decline in mortgage lending compared to fourth quarter of '22.
Data processing costs increased by $0.2 million from the prior year period, primarily due to core data processors, annual asset growth and CPI-related cost increases, lower net mortgage processing-related cost deferrals due to lower mortgage loan volume as well as the purchase of a new lending software solution.
Page 16 is our update for our 2023 outlook to see how our actual performance during the fourth quarter compared to the original outlook that we provided in January 2023. Our outlook estimated loan growth in the low double digits. Loans increased $49.4 million in the fourth quarter of 2023 or 5.2% annualized, which is below our forecasted range. Commercial and mortgage had positive growth while installment loans decreased in the fourth quarter of '23. Full year 2023 loan growth was $325.5 million or 9.4%, which is slightly below our forecasted range of 10% to 12%.
Fourth quarter 2023 net interest income decreased by 0.5% over 2022, which is lower than our forecast of high single-digit growth. The net interest margin was 3.26% for the current quarter and 3.52% for the prior year quarter and up 3 basis points from the linked quarter. Fourth quarter '23 provision for credit losses was a credit of $0.6 million below -- which is below our forecasted range. The fourth quarter '23 provision expense was primarily -- expenses credit was primarily the result of a change in allocation of rates due to subjective factors and the payoff of 1 problem credit. Full year 2023 provision expense was $6.2 million or 0.17% of average total loans.
Moving on to Page 17. Noninterest income totaled $9.1 million in the fourth quarter of '23, which was below our forecasted range of $11 million to $13 million. Fourth quarter '23 mortgage loan originations, sales and gains totaled $108 million, $86.5 million and $2 million, respectively. Mortgage loan servicing net generated a loss of $2.4 million in the fourth quarter '23. Full year '23 quarterly average of $13.4 million, which is above our original forecast.
Noninterest expense was $31.9 million in the fourth quarter below our forecasted range of $32 million to $33.5 million. The 2023 quarterly average of $31.8 million was below our original forecasted range as well. Our effective income tax rate of 19.8% for the full year 2023 was higher than our forecast. In the fourth quarter, we did realize a $0.6 million accrual expense related to -- accrual catch-up related to federal tax withholdings. This was $0.03 per share.
Lastly, 10,200 shares were repurchased in the fourth quarter of 2023 at an average share price of $19.08. Year-to-date, 298,601 shares have been repurchased at an average share price of $17.22.
Turning to Page 18. This will summarize our initial outlook for 2024. The first column is loan growth. We anticipate loan growth in the mid- to high single-digit range and are targeting full year growth rate of 6% to 8%. We expect to see growth in commercial and mortgage loans with installment loans remaining flat. This outlook also assumes a stable Michigan economy.
Next is net interest income, where we are forecasting a growth rate of 6% to 8% over full year 2024. We expect the net interest margin to increase 10 to 15 basis points in 2024 compared to full year 2023, primarily due to increasing yields on earning assets. This forecast assumes 25 basis point cuts in May, June, August and October of the Fed funds target rate, while long-term interest rates declined slightly from year-end 2023 levels. A full year 2024 provision expense for the allowance for credit losses of approximately 15 to 25 basis points of average portfolio loans would not be unreasonable.
Moving to Page 19. Related to noninterest income, we estimate a quarterly range of $11.5 million to $13 million, with the total for the year flat as compared to 2023. We expect mortgage loan origination volumes to increase by 7% in 2024. Our outlook for noninterest expense is a quarterly range of $32.5 million to $33.5 million with total for the year 3.5% to 4.25% above the 2023 actuals. Primary drivers, an increase in compensation and employee benefits, data processing, loan and collections and advertising.
Our outlook for income tax is an effective rate of approximately 20%, assuming the statutory federal corporate income tax rate does not change during 2024. Lastly, the board of directors authorized share repurchases of approximately 5% in 2024. Currently, we are not modeling any share repurchases in the 2024 period.
That concludes my prepared remarks, and I would like to now turn the call back over to Brad.
Thanks, Gavin.
The strong results, which our company has been delivering quarter-over-quarter, year after year for some time is directly attributable to our talented team, their focus on personalized service, investing in our communities and making banking easy. We've built a strong franchise, which positions us well to effectively manage through a variety of economic environments and continue delivering strong and consistent results for our shareholders.
For 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 leading commercial community bank, we believe we can continue to grow our deposit base while managing our cost of funds and controlling our noninterest expenses. Accordingly, we are excited about the opportunities we have to grow the business.
At this point in time, we'd like to open up the call for questions.
[Operator Instructions] We will now take our first question from Erik Zwick from Hovde Group.
I wanted to start with a question on the net interest margin and the outlook for 2024. You mentioned an expectation for a 10 to 15 basis point increase, and I'm wondering if that increase is likely to be relatively consistent kind of incremental throughout the year? Are there other factors that perhaps the potential Fed fund cuts that would cause the increases to be more and more varied from quarter-to-quarter?
Yes. So to answer the first part of your question, Erik, it is a fairly smooth increase over the year. I did -- we did highlight that we do have the Fed rate cuts built into that assumption. So should they deviate from what we anticipate, that could have an impact. I would say generally, though, we are seeing -- we're expecting the expansion, assuming that our deposit trends remain stable. It's really driven by the repricing of the assets into higher-yielding rates. So that were the real driver there.
I appreciate the color there. And then next, curious if you could just talk a little bit about your use of brokered deposits at this point, your loan-to-deposit ratio is still very strong. And just given your focus on adding new commercial customers that come along with deposits. It doesn't seem like you necessarily need to use them, but I'm wondering if it's just so that you kind of stay active in the market. And I realize it's still, again, kind of a small percentage of your total deposits at this point?
Yes. So we use broker or FHLB, a wholesale, and we would take a look at what's most economical at the time based on the funding need. It's been very short term, the funding we've been doing. There at the end of the quarter or at the end of the year here, we did carry a little more cash just to position the balance sheet in preparation of some maturing brokered. So that's why you see the cash balance is a little higher at year-end. But yes, we'll use a broker as needed for short-term funding gaps.
And turning next to loan growth. You outlined the expectations for growth in the year. I'm wondering if you could provide just a little bit of commentary in terms of what the pipeline looks like today and the mix particularly in terms of if there's any industries that are more heavily represented or you're seeing better risk-adjusted opportunities today?
Erik, this is Joel.
So in terms of our commercial pipeline, it's very comparable to -- there's some seasonality to it. So I have to compare kind of point-to-point, I look back at last year-end, and we're very comparable to how we started 2023 as we move into now 2024. And most of our opportunity, I would say it's pretty diversified. We're seeing still opportunity in -- with our manufacturing customer base. There are equipment acquisitions and that sort of thing going on. We've had good success with medical-related growth, with medical practices. That's been an area of growth for us, and we've got some good opportunities coming up there. And then a lot of what I would refer to as market share opportunity for us as we continue to win business from the large regional banks.
And then last one for me. Just curious, as you look at your current technology profile and offerings to your both the commercial and retail customers. Any new initiatives or investments that you're planning for this year?
So Erik, as you may recall, in May of '21, we did a whole bank core conversion where it took quite a few quarters after that to really absorb that. And so today here in the first quarter '24, we feel very good about our technology stack. We think it's a very attractive stack, it's agile and provides us significant flexibility. We do have additional solutions that are planned to plug in in '24 and '25 and we'll do that. But the major lift for our company was done in '21.
Our next question comes from Damon DelMonte from KBW.
Just a question on deposits. The rotation between noninterest-bearing and interest-bearing continues here. Was the decrease this quarter, was that -- was there seasonality in that number? Or was that just continued trend from what we've seen earlier in the year?
Yes. So there is some seasonality there, but we are seeing that trend that we've seen since March continued, although it is slowing. So the trend has continued. Yes.
And so right now, I think noninterest bearing around 23% of total deposits. Do you feel like you've kind of reached a floor there? Or do you think there's still more room for that to remix lower?
So our '24 forecast is showing that fairly stable, maybe down another 1% or 2%, but we think we're coming to -- we're optimistic we're coming to a place of stability there. So hopefully, we're right.
Got it. Okay. And then on the margin, I appreciate the commentary, the prepared remarks and then the commentary around Erik's questions earlier. If we don't have 4 rate cuts like you guys are forecasting and let's say we get 2, is the impact kind of linear, like we could just -- instead of it being 10 to 15 basis points, maybe it's closer to 6 to 8 or 8 to 10 basis points?
Yes, it's not. It's not linear in that manner. And so we ran it without -- we've looked at it multiple ways. But interestingly, the balance sheet is currently configured and what we're anticipating to happen with deposits and loan growth next year plus rates unchanged is marginally better, but just marginally. So, yes. It's not linear.
Got it. Okay. So the benefit to the margin is not truly dependent on rates being cut. It's more of -- I think you noted continued loan growth at higher rates and the remixing of the earning assets. Is that fair?
Yes, that's right, Damon. Like all -- most of our peers, time is our friend here. So we got $140-plus million of securities coming off next year, sub 3.5% that we were going to redeploy in the 7 range. So that's really the big driver. Now if deposits -- the deposit remix, we really miss that as we all are aware, it could be a material headwind.
We will now take our next question from Peter Winter from D.A. Davidson.
I was wondering, could you talk about maybe borrower sentiment today versus 90 days ago? And secondly, would you expect that loan growth would pick up more in the second half of the year if the Fed cuts rates?
On the commercial side, I would say the borrower sentiment has been pretty stable. As I talked to our customers, especially our significant customers, I think most of them, I would characterize their outlook for '24 as much the same as '23. Most businesses are doing well. I wouldn't say great but doing well. Automotive strike fortunately was resolved before it really inflicted a lot of pain on the supply base.
So I think the outlook is pretty stable. And I do think that if we get to the second half of the year and rates do start to come down, that could provide some lift to things like commercial construction and future project planning would be my take on it.
Got it. And then just the credit quality. Net charge-offs have really been excellent. Is there much left in terms of recoveries? And I'm just wondering what a more normalized level of net charge-offs looks like?
Yes. That's a great question. We have been successful year-over-year in producing some level of recoveries. I think we've milked that pretty good. There's still a portfolio that's being worked. They're probably more lumpy and smaller. And so we feel really good about overall credit quality in each of the loan portfolios.
When I look back on '23, I think our early problem, loan identification and then managing those situations, either to health or to somewhere else, has been really good. So credit quality continues to be a real strength for Independent.
And just what would you think a more normalized net charge-off is for you guys?
I would probably pen it to something near the provision range that we gave in the prepared remarks. So that 15 to 25 basis points, say, the middle of the range, 20 basis points for a net number is sort of how we model it.
[Operator Instructions] We will now take our next question from John Rodis from Janney.
Brad, maybe just a big picture question for you. You've got the buyback approved, you increased the dividend. But in the guidance, you said you don't -- at least right now, you're not modeling repurchases. So maybe your thoughts on other capital use, M&A the like in the current environment? Or is it more sort of focused internally as you guys have been doing?
Yes. So John, that's a great question. And first off, I'm really pleased with the improved TCE levels that we've seen year-over-year. And over a very challenging period with a lot of uncertainty, we continue to stay focused on the long run. And hence, you saw us with some pretty material levels of buyback in '23 when maybe others weren't doing that. And so that -- the dividend is an important part to our story and to have increased that again for the 10th -- the 11th consecutive year here in January was important for us. So we want to continue that trend. And ultimately, it's a function of excess, excess capital. Our first priority would be to support the growth, and you heard a little bit about what we think on the organic growth side of it.
Now having said all that, I also believe that -- and I talked about our investments in technology, I think we have a lot of strengths as an institution from our people, to our technology, to the markets that we operate in and -- so on the M&A front, we are very open to somebody that has an interest in partnering with a strong organization like Independent. So that is also there.
Our last acquisition was in 2018 and up in the Traverse City market, and that has just proved to be better than even we expected. So some acquisitive growth would be welcome, but our long-term strategy is not dependent on it.
We have no further questions. So with that, I will hand back to Brad Kessel for final remarks.
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 that's being done by each member of our team. Each team member in his or her own way continues to do their part toward a common goal of guiding our customers to be independent.
Finally, I'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.
This concludes today's call. Thank you for your participation. You may now disconnect your lines.