Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Independent Bank Corp (Ionia MI) (IBCP, Financial) reported a significant increase in net income for Q2 2024, reaching $18.5 million or $0.88 per diluted share, compared to $14.8 million or $0.7 per diluted share in the prior year period.
- The company achieved a return on average assets of 1.44% and a return on average equity of 17.98%, indicating strong profitability.
- Core deposits increased by 4.8% annualized, demonstrating solid growth in the bank's deposit base.
- Net interest margin expanded to 3.40% from 3.30% on a linked quarter basis, reflecting improved profitability from interest-earning assets.
- Credit metrics remain excellent, with nonperforming assets and watch credits near historic lows, indicating strong asset quality.
Negative Points
- Retail deposits declined by $22.2 million on a linked quarter basis, indicating potential challenges in retaining retail customers.
- Commercial loan portfolio declined by $3 million in the quarter due to extraordinary payoff activity, which could impact future loan growth.
- Noninterest income decreased slightly to $15.2 million in Q2 2024 from $15.4 million in the year-ago quarter, reflecting challenges in generating fee-based income.
- The provision for credit losses was an expense of $20,000, which, although below forecast, indicates ongoing credit risk management challenges.
- Noninterest expense increased to $33.3 million in Q2 2024 from $32.2 million in the year-ago quarter, driven by higher performance-based compensation and data processing costs.
Q & A Highlights
Q: Could you help us walk through the moving pieces over the next few quarters and thoughts on where the net interest margin trends from here?
A: We had some fee accretion that contributed 5 basis points for the quarter, which we view as part of our core business. We anticipate the net interest margin will continue to drift higher, and we are comfortable with our forecasted range provided in January. The deposit remix and repricing of the asset book, currently below market rates, will influence this trend.
Q: What is your appetite for participating in the renewed M&A activity in Michigan?
A: Independent Bank has a history of selective M&A. While we are open to partnering with other institutions where it makes sense, our five-year forecast does not depend on doing a deal. We are not surprised by the recent M&A activity in Michigan and may participate if it aligns with our strategy.
Q: How should we think about net loan growth in the second half of the year? Will paydowns and payoffs continue to weigh on overall growth?
A: We expect solid loan growth in the second half of the year. While the second quarter saw extraordinary payoffs, our origination activity has been strong, and our pipeline is robust. We anticipate being on or slightly above our original plan by year-end.
Q: Do you think you'll be able to maintain the expense range given expected growth in the back half of the year? Are there any levers you can pull to offset any expense growth?
A: We believe the expense range provided in January is still intact. We continue to evaluate resource utilization across the bank. The primary driver for this quarter's expenses was the accrual for incentive compensation catch-up due to a strong quarter.
Q: How do you expect the margin to be impacted if the Fed cuts rates in late September and into 2025?
A: We expect Fed cuts to potentially reduce deposit rotation pressure, which would be positive. If the yield curve inversion decreases and new loans continue at current levels, it would also be positive long-term. Overall, we aim to manage a stable earnings profile.
Q: How do you plan to redeploy the proceeds from the Visa share gains recognized in the quarter?
A: We have sold two-thirds of the Visa shares that became liquid and will sell the remaining third next month. Management will reevaluate opportunities for redeploying the capital, whether through retaining it or restructuring by year-end.
Q: Do you expect fee income to be towards the middle to upper end of the range in the next quarters?
A: We expect fee income to return to the middle of the range. The margin pressure on gain on sale for loans was due to unique events in the quarter. We anticipate improvement in fee income as we tighten up on these issues.
Q: Do you foresee needing to provide for loan growth from a provision perspective, or will reserves drift lower given surplus reserves today?
A: Provisioning will be directly related to additional loan growth. The guidance provided at the start of the year was likely heavy, so we expect a lower provision barring any credit events. The current ACL is at 1.46%, with 25% in the subjective category, which could drift lower if the soft landing materializes.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
