Q3 2022 Independent Bank Corp (Michigan) Earnings Call
<unk> 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 Dot com.
The agenda for today's call will include prepared remarks, followed by a question and answer session and then closing remarks.
Independent Bank Corp reported third quarter 2022, net income of $17 $3 million or 81 per diluted share versus net income of $16 million or <unk> 73 per diluted share in the prior year period.
This represents increases in net income and diluted earnings per share of eight 4% and 11% respectively over the third quarter of 2021.
For the third quarter of 2022, we generated an annualized return on average assets and return on average equity of one point.
Four zero percent and 24, 8% respectively.
Our successful expansion into new markets and the addition of new banking talent has enabled us to continue capitalizing on the significant business investment occurring throughout our state of Michigan. This has led to core strong core results in the third quarter of 2022.
With $3 $8 million growth in net interest income a 23 basis point expansion of our net interest margin on a linked quarter basis.
Net growth in each category of loans as well as growth in total deposits, including non interest bearing deposits in.
In addition, our asset quality metrics continue to be very good with low levels of past due loans.
Commercial watch credits and nonperforming assets as well as net loan recoveries for the quarter.
The continued growth of our franchise and increase in profitability is directly related to the growth in our team our expansion into higher growth markets and our entire team capitalizing on attractive lending and deposit gathering opportunities with increasing business investment in the <unk>.
Eight of Michigan.
This investment in the state of Michigan includes the electric vehicle industry clean energy infrastructure and the trend of onshoring of supply chains, which is driving job growth business formation and expansion.
For the nine months ended September 32022, the company reported net income of $48 $3 million or $2 27 per diluted share compared to net income of 54.
$4 million or $2 30 per diluted share in the prior year period.
For 2022. This represents an annualized return on average assets and return on average equity of 135% and 18, 5% to 6% respectively.
As compared to 153% and $17 three 2% for the same period last year.
I am very pleased that we were able to continue to grow deposits, which increased three 4% during the third quarter of 2022 and now total $4 3 billion at September 32022, an increase of $209 9 million.
From the start of the year.
This increase is spread across noninterest bearing interest bearing checking reciprocal and some brokered time deposit account balances.
We have been able to generate this deposit growth, while keeping our overall cost of funds low at 33 basis points this past quarter.
That said, while we have been successful in lagging our cost of funds. During the initial fed rate hikes, we do expect to see an increased deposit beta going forward.
We have included in our presentation, 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 and it may or may not be indicative of what we will see prospectively, but does provide a good historical view of our company and its cost of funds during a rising rate environment.
At this time I would like to turn the presentation over to Joel Ryan to share a few comments on the success, we were having in growing our loan portfolios and provide an update on our credit metrics.
Thanks, Brad.
On page eight we provide an update on our well diversified loan portfolio.
In total our portfolio grew $151 million in the third quarter led by our commercial portfolio, which increased 107 or excuse me $79 million.
This continues our trend of strong quarterly earnings.
<unk> loan growth.
Through the first nine months of the year, our commercial portfolio has increased $204 7 million, representing 22, 7% annualized growth rate.
While we expect that pace of growth to moderate in the fourth quarter and into next year. Our pipeline remains strong and we believe this supports a low double digit rate of growth as we head into 2023.
In terms of our residential activity, despite economic headwinds our mortgage portfolio increased by $71 million during the third quarter.
As origination shifted towards more portfolio lending.
Consumer installment lending softened in the quarter.
That portfolio, increasing $1 3 million as we intentionally limited our new production in order to preserve our liquidity.
The strong growth, we're seeing in commercial loans.
Overall, we're very pleased with our solid loan growth and believe we are on track to continue our planned asset rotation from the investment portfolio to higher yielding loans.
Turning to page nine we provide detail on our $1 4 billion dollar commercial loan portfolio.
C&I lending continues to be our primary focus representing 64% of the portfolio manufacturing has the largest concentration within the C&I segment, comprising approximately 11% or $156 million.
The remaining 36% of the portfolio is comprised of commercial real estate with the largest concentrations being industrial at $119 million or eight 4% and retail at $113 million or eight 1%.
It's worth noting that of the $520 million of new commercial loan volume generated in the first nine months of the year three.
$334 million or 64% is C&I versus $186 million or <unk>, 36% investment real estate.
By design the portfolio is very granular in nature, and our credit metrics demonstrate that this portfolio has held up very well through the pandemic and resulting supply chain pressures.
Sure.
Page 10 provides data on our nonperforming loans other real estate nonperforming assets and early stage delinquencies.
Nonperforming assets were $4 2 million or <unk> zero, 8% of total assets at September 30.
Loans 30 to 89 days delinquent totaled $2 3 million at September 30 unchanged from December 31, 2022.
Excuse me 2021.
While there is growing concern about the health of the consumer.
Early stage delinquencies in our installment portfolio remained stable and at low levels largely due to our focus on prime and Super Prime borrowers.
And as a reminder, almost all of this portfolio is comprised of secured loans.
At this time I would like to 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 am starting on page 11 of our presentation.
Page 11 highlights our strong regulatory capital position reduction in the CET, one ratio and the total risk based capital ratios due to risk weighted asset growth.
Net interest income increased $6 $1 million from the year ago period, our tax equivalent net interest margin was 349% during the third quarter of 2022, which is up 31 basis points from the year ago period, and up 23 basis points from the second quarter of 2022 I'll have some more detailed.
Comments on this topic in a moment.
Average interest, earning assets were $4 six $1 billion in the third quarter of 2022 compared to $4 3 billion in the year ago quarter and $4 $49 billion in the second quarter of 2022.
Page 13 contains a more detailed analysis of the linked quarter increase in net interest income.
And the net interest margin our third quarter 2022, net interest margin was positively impacted by two factors the increase in yield on investments made up 15 basis points in change in loan yield and mix.
30 basis points. These increases were partially offset by an increase in funding costs of 22 basis points.
We will comment more specifically on our outlook for net interest income.
The net interest margin for 2022 later in the presentation.
On page 14, we provide details of our interest rate risk position. The comparative stimulation analysis for the third quarter 'twenty two in second quarter of 2020 to calculate the change in the net interest income over the next 12 months all scenarios assume a static balance sheet the base rate scenario applies the spot yield curve.
From the valuation date, the shocks generic scenarios consider immediate permanent and parallel rate changes the <unk>.
Increase in the base rate forecasted net interest income in the third quarter with 22 compared to the second quarter of 'twenty. Two is primarily due to the increase in rates, which resulted in higher forecasted, earning asset yields lower betas on interest bearing deposits and modeled and earning asset growth most of the increase.
And interest income consisted of higher yields on variable.
Variable rate, earning assets, which outpaced increases on deposits.
Secondarily actual increases to deposit rates was less the previously modeled.
The shift in sensitivity is primarily due to slower liability re pricing due to slightly lower deposit betas. Currently 25, 4% of assets re price in one month and 39, 3% reprice in the next 12 months.
Moving onto page 15, noninterest income totaled $16 $9 million in the third quarter of 2022 as compared to $19 $7 million in the year ago quarter, and $14 $6 million in the second quarter of 2022 third quarter 2022 net gains on mortgage loans.
<unk> totaled $2 1 million compared to $8 4 million in the third quarter of 'twenty. One the decrease in gains was due to decreases in mortgage loan sales volume and in the mortgage loan pipeline as well as lower loan sale profit margins mortgage loan applications have slowed in the mortgage.
Mortgage production mix has rotated to a lower percentage of sale of mortgages positively impacting non-interest income was $4 $3 million gain on mortgage loan servicing due to a $3 $2 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 third quarter 'twenty two.
As detailed on page 16, our noninterest expense totaled $32 4 million in the third quarter of 2022 as compared to $34 5 million in the year ago quarter, and $32 $4 million in the second quarter of 2022 compensation increased $1 3 million compared to the prior year quarter.
<unk> raises.
Our effective at the start of the year.
Decreased level of compensation that was deferred in the third quarter of 2002 as a direct origination costs on lower mortgage loan origination volume and an increase in lending personnel performance based compensation decreased $2 million due primarily to a decrease in mortgage lending volume and lower performance level within the corporate incentive.
Compensation plan compared to third quarter of 'twenty, one the third quarter of 2022 included <unk>.
$4 million of expense related to the reserve for.
Unfunded lending commitments due to an increase in the expected loss ratio.
We will have more comments on our outlook for noninterest expenses later in the presentation.
Page 17 is our update for our 2022 outlook to see how our actual performance during the third 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 $151 million in the third quarter of 2022% or 18, 4% annualized which is above our forecasted range commercial mortgage installment loans all experienced growth in the third quarter 2022.
Third quarter 2022, net interest income increased by 18% over 2021, which is higher than our forecast of low single digit growth. The net interest margin for the third quarter of 2022 was 31 basis points higher than the third quarter of 2021 net interest margin of three 8% which is higher than.
Our original forecast.
The third quarter 2022 provision for credit losses was an expense of $3 1 million or three 7% annualized. This is above our forecasted 2022 full year provision range.
One 5% to 0.20% of average total portfolio loans. The primary driver of the increase in the provision for credit losses was an increase in the Pud reserve and subjective allocations due to loan growth.
Noninterest income totaled $16 9 million in the third quarter of 2002, which was within our forecasted range of 13 million to $17 million third quarter 2022 mortgage loan origination.
Sales and gains totaled $209 million $157 5 million and $2 9 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 loans servicing generated a gain of $4 3 million in the third quarter of 2022, due primarily to a positive $3 $2 million fair value adjustment due to price noninterest.
Noninterest expense was $32 4 million in the third quarter within our forecasted range of 35% to $32 $5 million per quarter.
Our effective income tax rate of 18, 6% for the third quarter of 2022 was at the lower end of our forecast Lastly, we purchased 181586 shares and average cost of $22 and <unk> <unk> for the year to date period in 2022, but.
We did not purchase any shares in the third quarter as we are focused on preserving capital to increase our tangible common equity ratio and support our continued strong loan growth that concludes my prepared remarks, I would now like to turn the call back over to Brad.
Thanks, Kevin each quarter, we share our high level view of our key strategic initiatives as we head into the fourth quarter of 2022, our focus will continue to be on the rotation of our earning asset mix.
Out of the lower yielding investments into higher yielding loans growing our deposit base, while managing our cost of funds and controlling our noninterest expenses.
While we maintained disciplined expense management. We are also continuing to make investments that we believe will enhance our ability to generate long term profitable growth.
While there is an increasing concern about a potential economic slowdown at this point, we continue to see healthy economic conditions and loan demand in Michigan and we are excited about the opportunities we have to continue our growth trends for the remaining remainder of 2022.
And into 2023.
Okay.
Operator at this point, we would now like to open up the call for questions.
Thanks, Keith if you'd like to ask a question. Please press star followed by one on your telephone keypad.
Is there any reason you'd like to remove your question. Please press star followed by <unk>.
Again to ask a question it is star followed by Bob.
Please remember if you are using a speakerphone pick up your handset before asking your question.
Let's just pause here, while all Q&A roster is counted so our first question comes from Damon Delmonte of <unk>. Your line is now open. Please go ahead.
Hey, this is Matt rank filling in for Damon Delmonte, I hope everybody is doing well.
I just wanted to get your updated thoughts on where you see deposit balances trending given the current rate environment and then also the investments.
You mentioned earlier in the state of Michigan.
Yes.
Yes sure Matt.
We have had.
<unk> success in growing the deposit base.
That said I think it's getting harder.
Definitely more competitive.
I think.
Part of our success much of our success as a function of a number of things.
One.
The investments in C&I lenders over the last few years has resulted in growth in our commercial balances.
Two I think our investment in.
<unk>.
Our core technology platform and the one wallet.
Altus remain competitive on the consumer base.
And then thirdly, our independent has a fairly.
Strong municipal segment that we service with our Treasury team.
And the municipal base.
In our markets continues to have significant cash levels.
Funds coming in from the federal government. So I think thats been a lot of our success and I think we can continuing going forward, but I think it's going to be more difficult.
And then second part of Chile.
Sure.
Economic investment I'm, sorry, yes, the invest.
Sure the investments in Michigan, and we actually put together within a slide in our deck here.
There has been.
Quite a large number of announcements of large investments from general Motors.
Two off for LG energy Gentex Atlantis and so on all.
Talking about new dollars coming into the state and billions in the electric.
Vehicle industry in the clean energy industry, and then also we're just experiencing and seen a lot within our customer base.
More and more onshoring.
Of their supply chain. So for all those reasons, we are pretty optimistic about.
Loan growth prospects going forward.
Okay, Great and then just one last question for me given the current economic forecasts are there any areas of your loan book that Youre, keeping a closer eye on or that maybe you've stepped back from lending to.
We.
Over the years.
And worked hard to.
Build a very granular portfolio again.
<unk> segments, the largest and within that.
We tilted towards having more C&I lending, but its very granular.
And we have a very.
Strong mortgage.
Portfolio again, FICO is north of.
750 <unk>.
<unk> and Ltvs.
This past quarter, we did temper back the.
Some portions of the installment portfolio and particularly in the RV segment.
I think a continuously we're seeing some of the many.
Manufacturers their report really strong earnings, but we're just.
Cognizant of the <unk>.
The increase in collateral values that we've seen over a fairly short period of time. So that's maybe the one segment, but overall, we feel very good about all of the portfolios.
Great. Thank you I'll step back.
Thank you.
Our next question comes from Eric <unk> of High Vol. It's great. Your line is open. Please go ahead.
Good morning, guys.
Good morning.
I Wonder if I could just start and maybe a bit of a follow up to that the loan growth question. You've also indicated that you will continue to seek to rotate the assets a bit some coming out of the lower yielding securities and going into loan so is it.
The right way to think about that the average earning asset growth would likely be slower.
And then the loan growth that you are actually adding over the next few quarters.
Yes, that's an accurate statement.
Okay. Thanks.
And then just looking at the expectations.
Expectations for the noninterest expenses I know there was a new branch opened in <unk> and <unk>.
Inflation continues to be a pressure.
For a number of segments of your business, probably do you feel confident that you can stay within that targeted range I guess, it kind of get closer to the high end of the $32 five thinking.
You can stay within that range as we head into <unk> and maybe any thoughts about 23.
Yes, I think.
But you know.
And the <unk>.
Early stages.
Intermediate stages of our 2003 budgeting process.
<unk>.
No doubt a lot of effort is going into.
Looking at all of the expense categories.
And over the years I think we've done a pretty good job of.
Of keeping.
<unk> expenses down.
We are expecting to see an increase in some comp obviously is overall.
Higher levels of inflation.
But we have been making through this year reductions in.
Various segments, where volumes are down.
<unk>.
And we yes, we do have the new Holland branch that opened but.
But we have some offsets to that end.
We continue to look at investments in automation.
Sure.
As an example, recyclers within our branches.
Can can be.
Save a spotty so.
I think we can but we will have a better feel as we.
All together the.
The 23 budget and then we.
Thereafter give a little bit more guidance on 2023.
Great. Thanks for the color there and just last one just thinking about capital allocation today and that you didnt buyback any shares in <unk> and curious if that was.
Maybe kind of driven by outlook for growth and keeping hand capital on hand for sure for loan growth or whether you're just looking to be more conservative and hold onto capital with the uncertain economic environment and how youre thinking about.
Potential share repurchases in <unk> as well.
Yes. This is Gavin so yes the capital.
Focus is on loan growth I think when you're showing.
The double digit growth rates, we are that's the best use of capital.
I would say regarding the economic uncertainties.
We believe we're appropriately reserved youre going to see.
Reserve to total loans today at $1 50.
So.
I think it has much more to do with the loan growth, we are experiencing versus economic uncertainty.
Great. Thanks for taking my questions today.
Thank you.
Thank you, Sir and no additional questions at this time I'd like to hand the conference.
Buckeye pits pate for closing remarks.
Okay.
In closing, we would like to thank our board of directors and our senior management for their support and leadership.
I'd also like to thank all of our associates.
I 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.
Have a great day.
Ladies and gentlemen. This concludes today's conference call have a great day ahead, you may now disconnect your lines.
Yeah.
Okay.