Q2 2022 Independent Bank Corp (Michigan) Earnings Call

Continue to climb as inventory levels in many of our markets remain at low levels.

On page nine we provide a couple of charts, reflecting the composition of.

Our deposit base as well as the continued growth in this portfolio, while working to effectively manage our overall cost of funds.

Our total deposits have increased by $173 5 million or eight 5%. Since December 31, 2021, and are up $428 million or 11% since June 30 of 2021.

On page 10, we provide a historical view of our cost of funds as compared to the fed funds spot rate and the fed effective rate.

From the last rate hike cycle through the most recent quarter end.

It may or may not be indicative of what we will see prospectively, but it does provide a good historical view of our company and its cost of funds during a rising rate environment.

On slide 11, we spotlight, our one wallet and treasury, one digital platforms for consumers and commercial clients. We continue to get very positive reviews on the one wallet channel with.

With an Apple App store rating of four four and 4517 reviews.

I am pleased to share we passed the 100000.

Marc during this past quarter as our one wallet customer base is now at 102886 users up from 86994 users for an eight 2% increase from the same period one year ago.

Also our bill pay customer base has increased significantly to over 28500 users, which is up 71% from the same period one year ago.

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.

Page 12 will provide an update of our $3 $3 billion loan portfolio.

The second quarter, our commercial portfolio grew by $71 6 million.

Or $77 3 million when excluding PPP loan run off.

This follows a strong first quarter commercial loan growth of $74 million also excluding PPP activity.

Our annualized commercial growth rate, excluding PPP runoff in the first half of 2022 is 24%.

While we expect that pace of growth to moderate in the second half of the year with a continued strong pipeline, we're expecting a double digit growth rate in the third and fourth quarters.

In terms of our residential mortgage activity, our balances increased by $114 million.

Our originations shifted toward more portfolio lending.

It's worth noting that 33% of our mortgage portfolio is variable rate.

Consumer installment lending remained strong during the quarter, increasing by $69 million.

Overall, we are optimistic that we can continue the earning asset rotation from lower yielding investments to higher yielding loans.

And believe we are on track to continue to grow loans at a double digit pace for the remainder of the year.

On page 13, we display the concentrations of our $1 $3 billion commercial loan portfolio.

Ni lending continues to be our primary focus representing 65% of the portfolio manufacturing has the largest concentration within the C&I segment, comprising approximately 11% or $140 million.

The remaining 35% of the portfolio is comprised of commercial real estate with the largest concentrations being retail at $111 million or eight 3% and industrial at $108 million or eight 1%.

It's worth noting that of the $342 million of new commercial loan volume generated in the first half of the year $245 million or 71% is C&I versus $97 million or 29% investment real estate.

By design the portfolio is very granular in nature, and our credit metrics, which Kevin will cover in a minute 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 comments on our investments capital.

Financials credit quality and the outlook for the remainder of 2022.

Thanks, Joel and good morning, everyone I am starting at page 14 of our presentation.

Page 14 contains detail on our investment securities portfolio on April one 2022, approximately $392 million of securities available for sale were transferred to held to maturity to reduce our exposure to an increase in unrealized losses accounted for and OCI net unrealized losses increase.

In the first half.

2022 from year end 2021 to $122 $3 million net of swaps the increase in rates in the first half of 2022 was primarily responsible for the increase in unrealized losses. These unrealized losses do not impact regulatory capital levels. The investment securities portfolio has a very strong.

Credit profile credit losses unlikely, excluding any credit impairment the investment securities will recapture the current unreal unrealized losses as they mature approximately 27% of the portfolio has a variable rate including swaps.

$66 4 million of Securities were sold in the second quarter of 2022 to accelerate the asset rotation into higher yielding loans.

Page 15.

Highlights of our strong regulatory capital position the reduction in the CET, one ratio and the total risk based capital ratio is due to risk weighted asset growth.

Page 16, net interest income increased $4 $7 million from the year ago period, our tax equivalent net interest margin was $3 two 6% during the second quarter of 2022, which is up 24 basis points from a year ago period and up 26 basis.

<unk> from the first quarter of 2022.

For more detailed comments on this topic in a moment.

Average, earning assets were $4 $49 billion in the second quarter of 2022 compared to $4 two 2 billion.

In the year ago quarter, and $4 $49 billion in the first quarter of 2022.

Page 17 contains a more detailed analysis of the linked quarter increase in the net interest income and the net interest margin. Our second quarter 2022, net interest margin was positively impacted by three factors declining cash and investments totaling six basis points change in loan yield and mix excluding PPP.

For 18 basis points and an increase in investment yield equaled 10 basis points. These increases were partially offset by an increase in funding costs of five basis points and a decline in the PPV balances.

We will comment more specifically on our outlook for net interest income and net interest margin for 2022 later in the presentation.

On page 18, we provide details on the institution's interest rate risk position. The comparative simulation analysis for second quarter 2022, and first quarter 2020 to calculate the change in net interest income over the next 12 months.

All scenarios assume static balance sheet the base rate scenario applies the spot yield curve from the valuation date, the shock scenarios consider immediate permanent in parallel rate changes the increase in the base rate forecasted net interest income in the second quarter of <unk> 22, compared to the first quarter of 2002 is primarily due to the increase in rate.

Which resulted in higher forecasted, earning asset yields lower betas on interest bearing deposits and modeled and earning asset growth. Most of the increase in net interest income consisted of higher yields on variable rate, earning assets, which outpaced rate increases on deposits secondarily actual increases.

Was it rates was less than previously modeled the shift in sensitivity to due to a combination of faster liability repricing due to higher deposit betas and slower asset repricing due to an increase in asset duration.

Currently 24, 3% of assets reprice in one month and 46% reprice in the next 12 months.

Moving on to page 19, noninterest income totaled $14 $6 million in the second quarter of 2022 as compared to $14 8 million in the year ago quarter, and $18 9 million in the first quarter of 2022.

Second quarter 'twenty to net gains on mortgage loans totaled $1 3 million compared to $9 $1 million in the second quarter 'twenty. One the decrease in these gains was due to a decrease in mortgage loan sales volume in the mortgage loan pipeline as well as lower loan sale profit margins.

Mortgage loan refinancing applications have slowed and our mortgage production mix has rotated to a lower percentage of salable mortgages.

<unk> impacting noninterest income was up $4 $2 million gain on mortgage loan servicing due to a $3 1 million or <unk> 12 per diluted share after tax increase in the fair value due to price and a $1 $1 million decrease due to paydowns of capitalized mortgage loan servicing rights in the second quarter of 'twenty two.

Hi.

As detailed on page 20, our noninterest expense totaled $32 $4 million in the second quarter of 2022 as compared to $32 5 million in the year ago quarter, and $31 $5 million in the first quarter of 2022 compensation increased $1 $4 million compared to the prior year.

Quarter due to raises that were effective at the start of the year the decreased level of compensation that was deferred in the second quarter of 2022 as direct origination costs on lower mortgage loan origination volume and increase in lending and an increase in lending personnel performance.

Performance based compensation decreased $1 million due primarily to a decrease in mortgage lending volumes compared to the second quarter of 'twenty one.

The second quarter of 2022 included.

$6 million of expense related to the reserve for unfunded lending commitments due to an increase in unfunded lending commitment balances.

We will have more comments on our outlook for noninterest expense later in the presentation.

Page 21 provides data on nonperforming loans other real estate nonperforming assets and early stage delinquencies.

Nonperforming assets were $5 million or 1% of total assets at June 32022 loans 30 to 89 days delinquent totaled $3 7 million at June 32022, compared to $2 3 million at December 31, 2021.

Page 22 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 year to date.

Page 23 provides information on our <unk> portfolio that totaled 33 million 33.0 million at June 32022. This portfolio continues to perform well with 96, 5% of these loans performing at June 32022.

Moving on to page 24, we recorded a provision for credit losses expense of $2 4 million in the second quarter of <unk> 22, compared to a provision credit of $1 $4 million in the year ago quarter, and a provision credit of $1 6 million in the first quarter of 2022.

The allowance for loan losses totaled $47 $9 million or $1, 47% of portfolio loans at June 32022.

Page 25 is our update for 2022 outlook to see how our actual performance during the second quarter compared to the original outlook that we provided in January of 2022, our outlook estimated loan growth in the low double digits loans increased $254 $8 million in the second quarter of 2022% or 30.

4% annualized which is well above our forecasted range commercial mortgage installment loans all experienced growth in the second quarter of 2022.

Second quarter 2022, net interest income increased by 14, 9% over 2021, which is a higher than which is higher than our forecast of low single digit growth. The net interest margin for the second quarter of 2022 was 24 basis points higher than the second quarter of 2021 net interest margin of three points here.

<unk>, 2%, which is higher than our original forecast.

The second quarter 2022 provision.

Yes.

The second quarter provision for loss was an expense of $2 4 million.

Or three 3% annualized this is above our forecasted 2022 full year provision range of 15 one.

One 5%, 2% of average total portfolio loans primary drivers of the increase in provision for credit losses were an increase in the full reserve allocations due to loan growth noninterest income totaled $14 $6 million in the second quarter of 2022, which was within our forecasted range of 13.

To $17 million.

Second quarter 2022 mortgage loan originations.

<unk> and gains totaled $317 seven.

$7 million $143 million and $1 $3 million respectively.

The decrease in net gains on mortgage loans sold was primarily due to lower sales volume and decreased profit margin on mortgage loan sales mortgage loan servicing generated a gain of $4 2 million in the second quarter of 2002, due primarily to a positive $3 $1 million fair value adjustment due to price noninterest expense was 30.

$2 4 million in the second quarter.

Within our forecasted range of 35% to $32 $5 million targeted quarterly.

Our effective income tax rate of 18, 1% for the second quarter of 2022 was at a lower the lower end of our forecast laterally we've.

Purchased 181586 shares at an average cost of $22 eight for the year to date period in 2022.

That concludes my prepared remarks, and I would now like to turn the call back over to Brad.

Slide 26 display is a high level view of our key strategic initiatives and.

In 2021, we made significant investments in growing our commercial sales team. In addition to investments in our overall technology platform to improve the customer experience and increased productivity amongst other goals.

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 into 2023.

At this point, we would now like to open up the call for questions.

Thank you.

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 in case you changed your mind. Please press star followed by the number two also when preparing to ask a question. Please make sure your phone is on mute locally.

Our first question comes from Brendan Nosal from Piper Sandler Brendan Your line is open.

Hey, good morning folks how are you.

Very good brand and good morning.

Yes.

Maybe just a couple of questions on the interest rate management slide 18.

I'm interpreting this correctly.

The updated Tim base rate NII like $62 million, that's quite a bit above the current quarter's run rate.

Interpretation that if spot rates held.

Throughout the third quarter youll be doing roughly $45 million and net interest income.

Sorry, sorry 45.

Can you give me to your number Brennan I'm, sorry, I was having a little bit of trouble hearing you.

Yes, no problem <unk>.

Sure.

Yes, 40 $45 million.

Spot rates stay where they are that would that imply for the third quarter based on this.

Yes.

On that math, yes. So this is a 12 month.

Scenario so yes.

Okay.

Sure.

And then a follow up on that.

Looks like thereafter relatively rate neutral, whereas previously.

A little bit asset sensitive so just help us understand how the margin would perform as short term rates continue to rise given this updated simulation.

Yes so.

The margin.

As you can see from now plus one 200 stays relatively the same.

And that's due to the increase of beta assumption within the model from where we were previously at so.

As the spot rate gets further and further away from our current cost of funds is.

Our analysis indicates there is going to be pressure to increase those betas.

Understood Alright, thanks for taking the questions.

Thank you.

Our next question comes from Damon Delmonte from K B W. Damon Your line is open.

Hi, everybody. Good morning, This is Matt Ryan filling in for Damon Delmonte <unk>.

Just one question on the provision with the higher expected loan growth do you expect the.

Provide outside of the 15 to 20 basis points for the remainder of the year or do you think it will pull back to that range.

I think Matt I think it will be.

Likely to be within that range, maybe it was at the high side of the range.

Yes.

Okay, Great and then sorry, one follow up for the <unk>.

Good question.

With the increased data assumptions is there a level of conservatism built in where you think you could maybe provide upside to those numbers.

I apologize, we have a little bit trouble hearing can you repeat the last part of that question I got most of it.

Yes, sorry, yes hiring unit.

With the.

The beta assumptions increasing in your margin outlook do you think there is any upside to those numbers still built in I think you said you finished.

Your last data has performed better in this current rate cycle.

Yes, I think that.

There is potential there.

Where we are.

We're doing everything we can to stratify.

The products in terms of pricing.

But again I don't think that were way off here.

By any means.

Okay, great. Thank you.

Thank you, ladies and gentlemen, as a reminder, 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 in case you changed your mind. Please press star followed by the number too.

So one could bank bask a question. Please make sure your phone is on mute locally.

It seems that we currently have no further questions. Therefore, I would like to hand back to Mr. Brad Kessel for any closing remarks.

Thank you Irene.

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 of our associates and continue to be so proud of the job being done by each member of our team.

Each team member and 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.

We wish each of you 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.

Yeah.