Good morning, and welcome to the Independent Bank Corporation 2023 fourth quarter results. I'm Carla, and I'll be your operator for today. To register a question for today's Q&A, please press Star followed by one on your telephone keypad. If you wish to revoke your question at any point, please press Star followed by two. 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 two 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 non-cash adjustment, our fourth quarter 2024 annualized return on assets is 1.26% versus 1.24% for the three 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 continued 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 five. Overall, our deposit base continues to perform well. Total deposits at December 31st, 2023, were $4.62 billion.
Overall, core deposits decreased just $11.3 million during the fourth quarter of 2023, while increased $171 million or 4.1% for the full year of 2023. 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 looked for higher FDIC insurance levels and higher interest rates. We have included in our presentation on page six, a historical view of our cost of funds as compared to the Fed Funds spot rate and the 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%. 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 seven, 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 eight 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 nine provides an overview of key credit quality metrics at year-end.
Overall, credit quality continues to be excellent. Total non-performing loans were $5.2 million, or approximately 10 basis points of total loans at quarter end, which is very similar to 12/31/2022. Loans 30-89 days delinquent totaled $3.3 million, or nine basis points, down slightly from the third quarter and in line with 12/31/2022 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 three 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 2023 net interest margin was positively impacted by two factors: an increase in yield on loans and investments of 16 basis points and change in earning asset mix of four basis points. These increases were partially offset by an increase in funding cost equivalent to 12 basis points and five 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 analysis for fourth quarter 2023 and third quarter 2023 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 a spot yield curve from the evaluation date. The shock scenarios consider immediate, permanent, and parallel rate changes. The decrease in the base rate forecast and net interest income in the fourth quarter of 2023 compared to the third quarter of 2023 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 one month and 45.9% reprice in the next twelve months.
Moving on to page 14, non-interest 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 2023. Fourth quarter 2023 net gains on mortgage loans totaled $2.2 million, compared to $1.5 million in the fourth quarter of 2022. 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 non-interest income was a $2.4 million dollar 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 Servicing Rights in the fourth quarter of 2023. 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 salaried and hourly employees, and a decrease in mortgage lending related to incentives attributed to the decline in mortgage lending compared to fourth quarter 2022.
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 2023.
Full year 2023 loan growth was $325.5 million or 9.4%, which is slightly below our forecasted range of 10%-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 three basis points from the linked quarter. Fourth quarter 2023 provision for credit losses was a credit of $0.6 million below, which is below our forecasted range. The fourth quarter 2023 provision expense or credit was primarily the result of a change in allocation of rates due to subjective factors and the payoff of one problem credit.
Full year 2023 provision expense was $6.2 million, or 0.17% of average total loans. Moving on to page 17, non-interest income totaled $9.1 million in the fourth quarter of 2023, which was below our forecasted range of $11 million-$13 million. Fourth quarter 2023 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 of 2023. Full year 2023 quarterly average of $13.4 million, which is above our original forecast. Non-interest expense was $31.9 million in the fourth quarter, below our forecasted range of $32 million-$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 $19.88. 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%-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%-8% over full year 2024. We expect the Net Interest Margin to increase 10-15 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 decline slightly from year-end 2023 levels.
A full-year 2024 provision expense for the Allowance for Credit Losses of approximately 15-25 basis points of average portfolio loans would not be unreasonable. Moving to page 19, related to non-interest income, we estimate a quarterly range of $11.5 million-$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 non-interest expense is a quarterly range of $32.5 million-$33.5 million, with total for the year 3.5%-4.25% above the 2023 actuals. Primary driver is 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. These 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 non-interest 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.
Thank you. If you'd like to ask a question, you may do so by pressing star followed by one on your telephone keypad. When preparing for your question, please ensure your device is unmuted locally. If you wish to revoke your question, please press star followed by two. We will now take our first question from Eric Zwick from Hovde Group. Eric, your line is now open. Please go ahead.
Thank you. Good morning, everyone. I wanted to start with a-
Good morning
... question on the net interest margin, and the outlook for 2024. You mentioned an expectation for a 10-15 basis point increase, and I'm wondering if, you know, that increase is likely to be relatively consistent, kind of incremental throughout the year? Are there other factors to perhaps the potential Fed funds cuts that would cause increases to be, you know, more and more varied, from quarter- to- quarter?
Yeah. So, to answer the first part of your question, Eric, it is fairly smooth increase over the year. We did highlight that we do have the Fed rate cuts built into that assumption. So, should they, you know, deviate from what we anticipate, that could have an impact. I would say generally, though, we're expecting the expansion, assuming that, you know, our deposit trends remain stable. It's really driven by the repricing of the assets into higher yielding rates. So, that's where the real driver there.
Thanks. I appreciate that, the color there. And then next, curious if you could just talk a little bit about your use of, brokered deposits. At, 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, in the market. And I realize it's still, you know, again, kind of a small percentage of your total deposits at this point.
Yeah. So we use brokered or FHLB, you know, wholesale, and we take a look at what's most economical at the time based on the funding, you know, need. It's been very short-term, the funding we've been doing. There at the end of the quarter or 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 yeah, we'll use brokered as needed for short-term funding gaps.
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 you know more heavily represented or you're seeing better you know risk-adjusted opportunities today.
Yeah, hi, Eric, this is Joel. So in terms of our commercial pipeline, it's very comparable to... You know, 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 you know, most of our opportunity, I would say it's pretty diversified. We're seeing still opportunity in, you know, 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.
Then, yeah, a lot of what I would refer to as market share, you know, 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 commercial and retail customers, any new initiatives or investments that you're planning for this year?
So, Eric, as you may recall, in May of 2021, we did a whole bank core conversion, where, you know, it took, you know, quite a few quarters after that to really absorb that. And so today, here in the first quarter of 2024, 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 a-
... additional solutions that are planned to plug in in 2024 and 2025, and we'll do that. But the major lift for our company was done in 2021.
Thanks so much for taking my questions today.
Thanks, Eric.
Thanks.
Thank you. Our next question comes from Damon DelMonte from KBW. Damon, your line is now open. Please go ahead.
Hey, good morning, guys. Hope everybody's doing well today. Just a question on deposits. You know, the rotation between non-interest bearing and interest-bearing continues here. Was the decrease this quarter—was there seasonality in that number, or was that just continued trend from what we've seen earlier in the year?
Yeah. So, there is some seasonality there, but we are seeing the continued, you know, that trend that we've seen since March continued, although it is slowing. So, you know, it, you know, it's the trend has continued. Yeah.
So right now, I think non-interest bearing are around 23% of total deposits. Do you, 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?
Yeah. So our 2024 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 you know, hopefully we're right.
Got it. Okay. And then on the margin, appreciate the, the commentary, the prepared remarks, and then, the commentary around, Eric's questions, earlier. If we don't have four rate cuts like you guys are forecasting, and let's say we get two, is the impact kind of linear? Like we could just, you know, instead of it being 10-15 basis points, maybe it's closer to, you know, six to eight or, or eight to 10 basis points.
Yeah, it's not. It's not linear in that manner. So we ran it without. We've looked at it multiple ways, but the interesting way the balance sheet's currently configured and what we're anticipating to happen with deposits and then loan growth next year is, plus even rates unchanged, is marginally better, but just marginally. So, yeah, 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 than the remixing of the earning assets. Is that fair?
Yeah, that's right, Damon. Yeah, like, so like almost of our peers, time is our friend here. So we got 140 + million of securities coming off next year. You know, sub 3.5%, that we're going to redeploy, you know, in the seven range. So that's really the big driver. Now, if deposits, the deposit remix, we really miss that, as we all are aware, could be a material headwind.
Got it. Okay, great. That's all that I had. Thank you.
Thank you.
Thank you. We will now take our next question from Peter Winter from D.A. Davidson. Your line is now open. Please go ahead.
Thanks. Good morning. 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, yeah, I would say that the borrower sentiment is has been pretty stable. As I talk to our customers, our especially our significant customers, I think most of them, I would characterize their outlook for 2024 as much the same as 2023. Most businesses are doing well, I wouldn't say great, but doing well. You know, 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, you know, 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.
Yeah, that, that's a great question. We have been successful year-over-year in producing some level of recoveries. I think we've met that pretty good. There's still a portfolio that's being worked, they're probably more lumpy and smaller. And so but we feel really good about overall credit quality in each of the loan portfolios. When I look back on 2023, I think our early problem loan identification and then managing those situations either to health or to somewhere else has been really good. So you know credit quality continues to be a real strength for Independent.
Just what would you think a more normalized net charge-off is for you guys?
You know, I would probably pin it to something near the provision range that we gave in the prepared remarks. So, you know, that 15-25 basis points, say the middle of the range, 20 basis points, for a net number is sort of how we model it.
Got it. Great. Thanks for taking my questions.
Sure. Thank you.
Thank you.
Thank you. As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. We will now take our next question from John Rodis from Janney. John, your line is now open. Please go ahead.
Good morning, guys.
Good morning.
Brad, maybe-
Morning.
Brad, maybe just a big picture question for you. You've got the buyback approved, you increased the dividend, but, you know, 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, you know, M&A, you know, the like in the current environment, or is it more sort of focused internally, you know, as you guys have been doing?
Yeah, you know, 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 you know, over a very challenging period with a lot of uncertainty, we continued to stay focused on the long run, and hence you saw us with some pretty material levels of buyback in 2023, when maybe others weren't doing that. And so, you know, the dividend is an important part to our story and to have increased that again for the eleventh consecutive year here in January was important for us. So we want to continue that trend.
And, you know, ultimately, it's a function of 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, you know, 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, you know, 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.
You know, 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.
Yep. Yep. Makes sense, Brad. Thank you.
Thank you.
Thank you. 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 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.