KBRA Affirms Ratings For Independent Bank Corporation

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Grand Rapids, Michigan based Independent Bank Corporation (NASDAQ: IBCP)("the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for Independent Bank, the lead subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

IBCP’s ratings reflect solid, above peer, earnings performance (ROA of ~1.20% in 1Q24 and ~1.10% in YE23), underpinned by diverse revenue streams, a strong funding profile reinforced by a durable, lower-cost, core deposit base, and disciplined expense management. Despite subdued mortgage banking income, which has historically been a meaningful revenue driver, overall noninterest income contributions were solid and balanced, representing over 20% of total revenues in both 1Q24 and for full year 2023. The ratings are also supported by solid credit performance over time, aided, in part, by a benign credit environment, with the NPA ratio over the past year tracking among the lowest within the rating category, while classified loan levels remain near historic lows. IBCP’s balanced loan portfolio, while containing a moderate mix of residential and marine/RV loans (nearly 40% and ~15%, respectively, of total loans), is underpinned by relatively conservative underwriting with reasonable LTVs and proactive tightening of standards, particularly within the niche consumer vehicle and equipment lending segments. Further mitigating concentration concerns are investor CRE exposures that are comparatively limited (<150% of RBC) with industry segmentations characterized as rather granular, including modest office (~2.5% of total loans) and multifamily exposures (~2.0% of total loans). Although we expect credit measures to normalize at some point given the higher interest rate environment and ongoing macroeconomic uncertainties, relatively stable core earnings expectations and above peer reserve coverage (1.47% of loans at 1Q24) provide adequate first line buffers should credit losses rise above peer-like levels, in KBRA’s view. The company's funding and liquidity capacity is comparatively strong, anchored by a lower-beta funding mix, including a granular deposit base that is moderately derived from a durable retail channel, a low levered balance sheet (loan-to-deposit ratio of 84% in 1Q24), and limited reliance on noncore funding. On the latter, brokered deposits and FHLB borrowings combined represented just 4% of total funding at 1Q24. Uninsured deposit levels are also low (~22% of total deposits) with available liquidity providing over 2x coverage. Regulatory capital protection as measured by the CET1 ratio (10.7% at 1Q24), while adequate for the risk profile and slightly higher than the year-ago period, has tracked slightly below the KBRA peer average in recent years. However, management is focused on further fortifying capital over the near term, supported by what we expect to be a very measured appetite for stock buybacks. The company had no repurchases in 1Q24 while share repurchase payout ratios were modest in 2023 and in 2022.

Rating Sensitivities

Sustaining above average earnings, supplemented by diverse fee income, managing regulatory capital above peers, sustaining strong asset quality measures across a credit cycle, and fortifying geographic scale could lead to positive rating momentum over time. Conversely, material degradation in credit quality, persistent earnings pressures, or aggressive capital management, particularly substantial regression in the CET1 ratio, could negatively impact ratings.

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