Q1 2022 Independent Bank Corp (Michigan) Earnings Call
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Hello, Ladies and gentlemen, thank you for joining and being present in the Independent Bank Corporation Q1, 2022 earnings Conference call. My name is Irene and I would be coordinating today's call. If you would like to ask a question. During the presentation. You may do so by pressing star one on your telephone keypad in case you have.
I'm joined US online you'll have the possibility to present the frac icon on your browser to ask a question I will now hand, you over to your host Brad Kessel, President and CEO to begin Brad. Please go ahead.
Okay.
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 first quarter 2022 results.
I'm, Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Moore, EVP, and Chief Financial Officer, and Joel run 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 at the company's website independent Bank dotcom.
The agenda for today's call will include prepared remarks, followed by a question and answer session and then closing remarks.
Slide four provides a good summary of our historical results.
I am very pleased with our team's continued execution of our operating plan.
In doing so our first quarter 2022 performance generated strong core results with good growth in that interest income stabilization of our net interest margin and net growth in each category of loans and total deposits.
We were also able to make progress in reducing our noninterest expenses.
During the first quarter inflation was reported at near 40 year highs and we witnessed a very dramatic increase in rates in the middle and long end of the yield curve with.
With the expectation now for multiple fed hikes through 2022 and into 2023.
This recent increase in rates has slowed our mortgage refinance origination volumes and decrease this quarter's net gains on mortgage loans sales. However, we have also structured our mortgage business do you have an emphasis on supporting home purchase requests.
And these volumes continue to be at solid levels.
Additionally, the increase in rates also significantly increased the value of our capitalized mortgage servicing rights somewhat of a natural hedge providing a benefit with higher rates.
Over the years, we have shared our intentions and success in generating a diversified revenue stream through three lines of business commercial banking mortgage banking and consumer banking.
During 2021, we've made significant investments both in talent and technology, primarily in our commercial and consumer banking lines of business.
We are seeing some of the early paybacks for the investments for these investments with a very strong commercial pipeline and some increased efficiencies in our consumer banking business.
Turning to page five independent Bank Corp reported first quarter two.
2022, net income of $18 million or 84 cents per diluted share.
Versus net income of $22 million or $1 per diluted share in the prior year period.
The decrease in the 2022.
First quarter earnings as compared to the first quarter of 2021.
Primarily reflects a decrease in noninterest income and an increase in noninterest expense that were partially offset by an increase in net interest income.
And a decrease in the provision for credit losses.
The first quarter 2022 highlights include an increase in net interest income up 9% over the first quarter of 2021.
Loan growth of $99 million, or 13, 8% annualized and deposit growth of $88 $4 million or eight 7% annualized.
A return on average assets of 1.54% annual return on average equity of 19.38%.
In addition, our asset quality continues to be very good with very low net charge offs in the first quarter.
As well as commercial watch credits at just 2.44% of the portfolio and a continued very low level of past due loans.
These favorable asset quality metrics combined with reduced reserves related to COVID-19 allowed us to record a negative provision for the first quarter.
Page six provides a good snapshot of our loan and deposit metrics for our Michigan markets.
I would point out that our two loan production offices opened in Ottawa County, and Macomb County during the third quarter of 2021 are off to a strong start.
In 2020, we closed eight branch locations as part of our ongoing branch optimization reviews.
During the second quarter of 2022, we will be closing an additional four locations one each in Kent.
Glynn La Pierre and Saginaw colleagues.
Annual expected cost savings from the combined closings is expected to be $125 million. These.
These closings will reduced our branch network to 58 locations in total.
Turning to page seven we display several key economic statistics for the state of Michigan.
Overall, we are seeing continued improvement in the unemployment rate for Michigan now at four 7% slightly above the national average of three 8%.
However, the state of Michigan has 110000 fewer workers employed today.
As compared to pre Covid.
Labor shortages are having a noticeable impact on many segments of our economy, including an increase in wages in our markets and reductions in business operating hours. In addition.
<unk> supply chain shortages also continue to constrain many businesses in our markets.
Regional average home price prices continue to decline as inventory levels in many of our markets continue at record lows and negatively impact the over about overall volume of home sales.
On page eight we provide a couple of charts, reflecting the composition of our deposit base as well as the continued growth in this portfolio.
We are working to effectively manage our overall cost of funds.
At this time I would like to turn the presentation over to Joel run to share a few comments on our loan portfolio.
Thanks, Brad.
On page 10.
Provided.
We provide an update on our $3 billion loan portfolio that I'll provide some insight on for.
For the first quarter the commercial segment of the portfolio grew by 54 million.
However, when you exclude PPP activity, our commercial balances increased by $74 5 million.
This follows on a strong fourth quarter of 2021 will.
Where we experienced commercial loan growth of $45 million also excluding PPP activity.
Our annualized commercial growth rates over the past six months.
He is 21% and based on our strong pipeline, we expect strong commercial growth.
In the second quarter of 2022 as well.
In the first quarter, our residential mortgage balances and increased by $34 million and our consumer installment loan portfolio grew by $14 6 million.
We remain optimistic about our ability to continue the earning asset rotation from lower yielding investments to higher yielding loans and believe we are on track to grow loans at a low double digit pace throughout 2022.
On page 11.
We display the concentrations of our $1 $3 billion commercial loan portfolio.
C&I lending continues to be our primary focus representing 65% of the portfolio.
Manufacturing is the largest single concentration within the C&I segment, comprising approximately 11% or $136 million.
The remaining 35% of the portfolio is comprised of commercial real estate with the largest concentrations being retail and $112 million or 9% and industrial at $91 million or 7%.
By design. This portfolio is very granular in nature, and our credit metrics, which Gavin will cover in a moment.
Reinforced that this portfolio has held up very well through the pandemic and the resulting supply chain pressures.
So at this time I would like to turn the presentation over to Gavin to share comment on our investment capital.
Financials credit quality and our outlook for 2022. Thanks.
Thanks, Joel and good morning, everyone I'm, starting on page 12 of our presentation.
Page 12 contains details on our investment securities portfolio net unrealized losses increased in the second quarter 'twenty two from year end 'twenty $1 million to $61.5 million net swaps the increase in rates in the first quarter 'twenty. Two is primarily responsible for the increase in unrealized losses. These unrealized losses do not impact.
Toward capital levels, the investments or investment securities portfolio has a very strong credit profile, making credit losses unlikely excluding any credit impairment the investment security to recapture the current unrealized losses as they mature approximately 30% of the portfolio has a variable rate.
Structure, including swaps.
Page 13 highlights our strong regulatory capital position the reduction in the CET, one ratio and the total risk based capital ratio is due to an increase in risk weighted assets of $161.2 million in the first quarter 'twenty two.
Net interest income increased $2 $7 million from a year ago period, our tax equivalent net interest margin was 3% during the first quarter 2022, which was down five basis points from a year ago period, and down 13 basis points from the fourth quarter of 2021, I will have some more detailed comments on this topic in a moment.
Average interest, earning assets were $4 four $9 billion in the first quarter of 2022 compared to $4.05 billion in the year ago quarter and $4.43 billion in the fourth quarter of 2021.
Page 15 contains more detailed analysis of the linked quarter decrease in net interest income and net interest margin. Our first quarter 2022, net interest margin was negatively impacted by two factors.
A decline in P. P. P loan balances had Nate a 13 basis point impact.
The change in loan yield and mix excluding P. P P.
Decreased margin by one basis point.
That was partially offset by an increase in investment yield of two basis points.
In the quarter.
We will comment more specifically on our outlook for net interest income and the net interest margin for 'twenty 'twenty. Two later in the presentation.
On page 16, we provide details on the institution's interest rate risk position. The comparative simulation analysis for first quarter 2022 in fourth quarter 2021 calculates the change in net interest income over the next 12 months that the base rate scenario assumes a static balance sheet and applies the spot.
Yield curve from valuation date, the increase in the base rate forecasted net interest income in the first quarter 'twenty two compared to the fourth quarter, but 'twenty. One is primarily due to an increase in rates, which resulted in higher forecasted, earning asset yields as well as higher forecasted earning asset balances.
Most of the increase in the.
Interest income was on term, earning assets those pricing off the two to seven year part of the curve the majority of the banks funding basis.
Consists of non maturity deposits with price off overnight fed funds rate.
Management did not change our non maturity deposit rates after the first fed hike, thus the spread between term, earning assets in the bank non maturity funding wide, notably, resulting in the expansion of the forecasted net interest income currently 17% of assets reprice in one month and 31.8% reprice in the next 12 months the institution.
Maintained an asset sensitive position, primarily due to a favorable funding base and we'll continue to evaluate strategies to manage net interest income through hedging as well as product pricing and structure.
Moving on to page 17, noninterest income totaled $18 $9 million in the first quarter of 2022 as compared to $26 $4 million in the year ago quarter and $15.8 million in the fourth quarter of 2021 first quarter 2022 Tech net gains on mortgage loans totaled point.
$8 million compared to $12 $8 million in the first quarter of 'twenty. One the decrease in gains was due to a decrease in mortgage loan sales volume and in the mortgage loan pipeline as well as lower loan sale profit margins margins were negatively impacted by approximately $3 $8 million the fair value adjustment on our portfolio of salable construction loans.
Mortgage loan.
Applications remains solid although refinance refinancing applications have slowed and.
And the mortgage production mix has rotated to a low percentage of saleable.
Loans.
Positively impacting non-interest income was $9 $6 million gain on mortgage loan servicing due to an $8 5 million dollar or 31 cent per diluted share after tax increase in the fair value due to price and appoint $9 million decreased due to pay downs of capitalized capitalized mortgage loan servicing rights in the <unk>.
First quarter of 2022.
As detailed on page 18, our noninterest expense totaled $31 $5 million in the first quarter of 2022 as compared to $30 million in the year ago quarter and $33 million in the fourth quarter of 2021 compensation increased $2 $3 million compared to the prior year quarter due to raises that were.
Effectively effective at the start of the year a decreased level of compensation that was deferred in the first quarter of 2022 has direct origination costs on lower mortgage loan origination volume and increase in lending personnel and higher healthcare insurance cost performance based compensation decreased <unk> $6 million.
Due primarily to a decrease in mortgage lending volume compared to the first quarter and 21. The first quarter 2022 included <unk> $4 million recoveries related to reserve for unfunded lending commitments due to a decrease in the unfunded lending.
Lending commitments, we will have more comments on the outlook for noninterest expense later in the presentation.
Page 19 provides data on nonperforming loans other real estate nonperforming assets and early stage delinquencies.
Total nonperforming assets were $5 $4 million or one 1% of total assets at March 31, 2022 loans 30 to 89 day days delinquent totaled $2 $7 million at March 31, 2022, compared to $2.3 million at December 31st 2021.
Page 20 provides some additional asset quality data, including information on new loan defaults and on classified assets I would highlight there were no new commercial loan defaults for the first quarter of 2022.
Page 21 provides information on our TD or portfolio that totaled $36 million at March 31, 2022. This portfolio continues to perform well with 96, 5% of these loans being current at March 31 2022.
Moving on to page 22, we recorded a provision for credit losses credit of $1 $6 million in the first quarter 'twenty two compared to a provision credit of zero point $5 million in the year ago quarter, and a provision expense of zero point $6 million in the fourth quarter of 2021 the allowance.
For loan losses totaled $45 $6 million or 1.52% of the portfolio loans at March 31 2022.
Page 23 of our update for 2022 outlook to see how our actual performance during the first quarter compared to the original outlook that we provided in January of 2022, our outlook estimated loan growth in the low single digits loans increased $99 million in the first quarter of 2022 or 13.8% annualized.
Commercial mortgage installment loans all experienced growth in the first quarter of 2022, excluding PPP loans total loan portfolio grew at a 16, 7% annualized rate during the first quarter were 2022 above our forecasted range first quarter 2022, net interest income increased by 9%.
Over 'twenty, 'twenty, one which is higher than our than our forecast. However, the net interest margin.
For the first quarter 2022 was five basis points lower than the first quarter of 2021 net interest margin of three points here of 5% which is.
Less than our original forecast.
The first quarter 2022 provision for credit was $146 million. This is below our forecasted 2022 full year provision range of 0.15% to 0.2% of average total portfolio loans and primary drivers of the decrease in the provision for credit losses were a decrease in adjusted.
It's allocations based on subjective factors due in part to the expected reduction in risk related to COVID-19.
Noninterest income totaled $18 $9 million in the first quarter of 2022, which is higher than our forecasted range of $13 million to $17 million first quarter 2022 mortgage loan originations sales and gains totaled totaled $272 million $221 7 million and point $8 million respectively. The decrease.
Greece and net gains on mortgage loans sold were primarily due to lower sales volume decreased profit margin on mortgage loan sales and a decrease in fair value adjustments.
On the mortgage loan pipeline.
Mortgage loans servicing generated a gain of $9 6 million in the first quarter of 2022, due primarily to a positive.
$8.5 million fair adjustment.
Our value adjustment due to price.
The year over year decrease in noninterest income could be outside of our original forecast due to lower gain on sale of mortgages in the coming quarter.
Noninterest expense was $31.5 million in the first quarter in the middle of our 35 to $32 $5 million targeted quarterly range. Our effective income tax rate of 18, 6% for the first quarter 2022 was at the lower end of our forecast lastly, the.
<unk> purchased 59002 shares at an average cost of $23 46 for the first quarter of 2022 that concludes my prepared remarks, I would like to turn the call back over to Brad.
Slide 24 displays a high level.
You of our key strategic initiatives.
In 2021, we made significant investments to our overall technology platform to improve the customer experience.
And increased productivity amongst other goals, we have already seen some very positive results with this.
Investment and I believe we will see continued growth and improved productivity in 2022.
While the current operating environment contains numerous challenges and much uncertainty. It also provides many opportunities. We are excited about the momentum we have in our markets and look forward to continuing these growth trends for the remainder of 2022 and beyond.
At this point, we would now like to open up the call for questions.
Yeah.
Yes.
Ladies and gentlemen, if you would like to ask a question. Please do not hesitate to press star followed by the number one on your telephone keypad now.
Case, you change your mind. Please press star followed by the number too.
Oh sure when preparing to ask a question. Please make sure your phone is on mute locally.
Our next our first question comes from Brendan Nosal from Piper Sandler Brendan Your line is open.
Hey, good morning folks how are you doing.
Hey, Brendan.
Okay.
Just to start off here, maybe on the mortgage piece I was hoping you could offer a little bit more color.
The dynamics that kind of drove the compression quarter over quarter, particularly at that fair value Mark.
And then kind of tie in your thoughts on on mortgage for the rest of the year as it feeds into the overall updated guidance. Thanks.
Sure.
Maybe I'll start Brian this is gavin with with the market and with what Brad talk maybe about the.
More high level mortgage operation for the rest of the year. So.
The biggest impact to the fair value Mark for the quarter was a salable construction portfolio.
As you're aware the construction timelines are are longer than they have historically been for completion.
As these as these loans are brought on.
They are mark to market each quarter.
From from the day that from the day the loan closes to then to the ultimate to the mortgage.
And so what we've seen was that we had and we had an existing portfolio from 2021 origination with.
Lower coupons and current market. So we are as rates increased the value the market value of that portfolio that was unhedged.
<unk> decreased because it's difficult to hedge.
12 months.
Construction loans.
So that that $3 8 million for.
For the fair value Mark the majority of it is related to that $3 8 million mark to market adjustment and I would just point out.
We have taken additional risk off the table of that portfolio. So there wont a week.
There won't be any material mark to market adjustments regarding that going forward.
Alright.
That's certainly helpful.
And maybe kind of turning to the expense side of things certainly nice to see the run rate improved so much quarter over quarter and then there's the additional savings from that close branch locations later on in the year, just kind of curious about the way that you're accruing for comp at the start of the year. I mean are you accruing at a level that reflects the potential Rev.
New benefits are they.
Higher short term interest rate environment later on in the year.
Yes, yes.
Yeah.
Alright fantastic thanks for taking the questions.
Our next question comes from Damon Delmonte from K B W. Damon Your line is now open.
Hi, This is Matt Ryan filling in for Damon Delmonte day hope everybody's doing well today.
First question time.
Remix.
Hi, as you remix the earning assets you have a targeted range of our targeted percentage or proportion of securities to average earning assets.
I don't have a.
I would say this the securities I anticipate the security balances decline.
Through the through 2022.
So as we can as we can redeploy those cash flows into loans.
You will see dollar for dollar that move out of the securities portfolio. So.
Obviously, the current allocation is much higher than we would historically have.
Targeted.
So we'd like to see it okay.
Got it got it and then just one last question if I can get your updated thoughts on share repurchases for the year.
Yes.
Sure Matt Good question the spread and.
You know.
Could see from our report that we were in the market during the first quarter on a small scale.
And.
You know I think.
Prospectively.
Our decision to continue to be in the market as a function of.
Where we're trading.
How the.
Where our growth is our capital needs for growth, both organically and potentially acquisitive Lee.
And and also overall capital level so.
I think <unk>.
Probably see a continuation of what our historical pattern has been.
Okay, great. Thank you.
Our next question comes from Russell Gunther from D. A Davidson Russell you May go ahead.
Yes.
Hi, This is manuel novel on for Russell.
Yeah.
Good morning.
And looking at your loan growth performance.
For the and the outlook for the whole year.
Are you starting to get a sense for.
Perhaps stronger growth in the first half of the year and a little bit more caution for the second half or.
You've just seen how how loan growth comes in.
Joe I'll, let you.
Sure.
Attempt to answer that one.
I wish I had a crystal ball to tell you right now.
Seeing very strong growth and it's a good mix of.
A new COO.
Customers to the bank as well as organic growth I would label it to existing customers.
That wasn't that there was a very nice split in our first quarter growth growth.
We're seeing that based on our pipeline into the second quarter.
Certainly.
Not naive to.
What.
The economy starts to slow later in the year.
Hard to predict that but at this point all I can tell you is based on our pipeline.
What we're seeing.
Good demand, we're seeing businesses expand.
We're not seeing signs of pull back yet, but certainly we're following the economic conditions closely as it is difficult to say what the second half of the year will look like right now we don't see it slowing up but.
Yeah.
The world's changing rapidly too.
The economic news.
Definitely understandable.
What are you seeing right now in terms of pricing competition both on both.
Lending side like what are you seeing on new loans here in April .
And on the deposit side as well as anyone stepping up deposit competition yet.
Well this is Joel again, I'll answer the loan side.
<unk> seen a lot of pricing pressure yield crasher.
Really starting in the second half of last year is as all banks were hungry to two to grow earning assets and that hasn't changed.
Hum.
So theres still a lot of pressure on.
On yields.
And I expect that that's going to continue here throughout this year and now I'll turn it over to Brad or Gavin on thoughts on deposit rates.
I'd say.
We're not seeing a lot of pressure on the deposit side at this point and.
That's going to be very interesting to watch here with the with each fed rate hike.
And.
On the mortgage side I would say it just feels like.
The market is.
Slow.
To adjust to what's happening with the yield curve.
And so.
So it's I think been a lot of discussion internally.
About being disciplined.
In our pricing, but it is.
Very aggressive on our old alone fronts today.
I appreciate that thank you.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please do not hesitate to.
Followed by the number one on your telephone keypad now in case you changed your mind. Please press star followed by the number two or so when preparing to ask a question. Please make sure your phone is on mute locally.
Our next.
Question comes from price ROE from Holiday Group, Brian Your line is open.
Thank you good morning, I wanted to kind of follow up on that on that last comment.
Loan competition.
And curious where youre seeing kind of new loans pricing in this environment relative to the to the portfolio yield as of.
For the first quarter.
But we bought them.
Yeah.
And proud of our group.
In terms of.
The discipline that we've shown.
Two.
To hit our projected or our pro forma.
Yields on the commercial side.
It has been.
It's been very difficult because as rates were rising, especially fixed rates conventional fixed rate.
As the yield curve is rising rapidly not all of our competitors seem to be as Brad just alluded to a second ago seem to be.
On top of that are passing that along in terms of their quoted rates.
And so I think we are more proactive and at times. It means we lost business and yet we're still able to show the growth that we.
As shown.
That's the best.
Best answer I can give you of Gavin do you have anything to add to that.
Well I would I guess, Joel obviously, you highlight the spread aspect of it and the consistent pressure I do think too we're seeing a rotation into higher.
Allocation of variable.
Loans, which obviously was carrying on.
A lower yield as well if youre just looking at.
Yes.
Consolidated portfolio.
Portfolio yield.
Yes, yes, okay.
Yeah.
And the <unk>.
Asset sensitivity interest rate risk management slides you have in the deck, obviously highlight an asset sensitive position curious.
What what deposit beta you are assuming in that analysis.
Yeah.
So we took a look back rights at the curb.
Current early last rate hike and we were very low betas.
Through the first say plus 75 hikes and then they come back to a more.
A more.
Long term historical I guess.
What we would call adjustment so.
And in the in the <unk>.
Another 50 to 75, the beta assumptions as low yes.
Okay. Okay.
Let's say last one from me we've seen.
Pressure on tangible common equity from the fair value Mark.
On the securities portfolio is really across the industry here this quarter.
Does that does that compression in.
Tangible common equity ratio does that change.
Change your outlook from a repurchase perspective.
And I'm just trying to trying to gauge how how you all see that see that compression and just any views around it would be helpful. Thanks.
Yeah, you know.
Great question.
And.
You know we've had a lot of discussion about it.
Internally we have.
Ron.
<unk> stressed scenarios.
In terms of you know.
Further.
Depreciation with.
Additional rate hikes course, where we've seen the.
The bulk of the move today in the curve has been rate net belly portion, which is right where the.
Asset or security duration is.
So.
You know, we're hopeful that we're sort of past the worst part of it but you don't know and so we're watching it closely.
We continue to we.
Have conversations with all the stakeholders of course.
From the investment community too.
Regulators, which of course are focused on regulatory capital this does not impact regulatory capital.
And so on so.
It's a consideration, but it's not necessarily going to be the ultimate yes or no.
We're out of the market or we're just.
I'm going to keep doing what we're doing.
Okay. Thank you guys I appreciate the answers.
Yeah.
Thank you.
Currently we have no further questions. Therefore, I would hand back to Brad Kessel, President and CEO for any closing remarks.
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 continue.
Continue to be so proud of the job being done by each member of our team.
Each team member in his 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.
Ladies and gentlemen. This concludes today's conference call. Thank you for being with US today have a lovely day ahead you may disconnect your lines now.
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