Q4 2022 Independent Bank Corp (Michigan) Earnings Call
Okay.
Welcome and thank you for joining the independent Bank Corporation, 2022 fourth quarter and full year earnings call. At this time, all participant I need if you're only might.
A brief question and answer session will fund the formal presentation.
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And operator assistance at any point it saw Dave I think you know that.
On the call over to Brad Kessel, President and CEO , sorry, Brian you may begin.
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 and full year 2022 results I am Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Moore, EVP and Chief financial.
Officer, and Joel Ron 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 at 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 fourth quarter 2022, net income of $15 $1 million or <unk> 71 cents per diluted share versus net income of $12 $5 million or <unk> 58 per diluted share in the prior year period.
This represents increases in net income and diluted earnings per share of <unk>, 26% and 22, 4% respectively over the fourth quarter of 2021.
For the fourth quarter of 2022, we generated an annualized return on average assets and return on average equity of $1, two 1% and 17.94% respectively.
For the full year December 31, 2000, 2022, the company reported net income of $63 $4 million or $2 97 per diluted share compared to net income of $62.9 million or $2.88 per diluted.
Sure in 2021.
Our fourth quarter performance capped a very strong year as our entire organization executed extremely well despite a macroeconomic environment with many challenges and uncertainties. This past year with our successful expansion into new markets and addition of new banking talent.
We were able to generate strong commercial loan growth and higher net interest income, which enabled us to offset a significant decline in mortgage banking revenue and deliver a higher level of earnings in 2022 than we did in 2021.
Yeah.
These full year results generating a return on average assets and return on average equity of 131% and 18, four 1% respectively.
Importantly, we have generated significant growth in our loan portfolio, while maintaining sound underwriting criteria, a little level of past dues and that recoveries credited to our allowance in 2022.
We continued to see positive trends during the fourth quarter, including double digit annualized growth in our commercial loan portfolio and further expansion in our net interest margin.
Independent Bank has grown to $5 billion in assets as of year end 'twenty, two as compared to $4 7 billion as of December 31, 2021.
Our current position in our markets has had a positive impact on business development as we consistently see more commercial clients wanting to do business with a local bank that offers superior level of responsiveness and customer service, while also having the size and scale to meet larger financing needs.
Given the health of our loan portfolio and our high level of liquidity and reserves. We believe we are well positioned to continue effectively managing through the challenging and uncertain economic environment that we're presently in and delivering strong results for our shareholders as we continue to leverage the <unk>.
Since we have made in banking talent and technology over the last several years.
During the fourth quarter, our total deposits grew to $438 billion from $4 $33 billion.
The prior quarter end.
Of the $4.38 billion, we consider 385 billion to be core <unk>.
During the fourth quarter, we did see a decline in our core balances of $91 7 million.
We believe a good portion of the decline to be seasonal but also some movement related to the competitive market conditions.
For the quarter total cost of deposits increased from three 3% to <unk>, 77% for.
For the full year total deposits increased by $295 million.
Which $53 million as core stated another way our core deposits increased for all of 'twenty to 'twenty two by one 4%.
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 EMEA.
It may or may not be indicative of what we see prospectively, but does provide a good historical view of our company and its cost of funds during a rising rate environment.
Through year end, our beta for the cycle to date is 16, 2%.
We are currently forecasting a 50 point hike in February of 25 basis point Ike in March and then 25 basis point cuts in September and December of this year.
Given the more competitive market. We are now seeing for deposit pricing, we estimate a higher beta with future rate hikes.
At this time I would like to turn the presentation over to Joe Ron to share a few comments on the success, we're having in drawing our loan portfolios as well as provide an update on our credit metrics. Thank you Brad.
Page seven we provide an update of our well diversified loan portfolio.
Total loans increased $55 $4 million in the fourth quarter led by our commercial portfolio, which increased $58 $6 million.
This continues our trend of strong quarterly commercial loan growth for.
For the year, our commercial portfolio increased $263 million or 22%.
A strategic expansion of our commercial banking team as well as marketplace disruption positively impacted growth.
While moderating slightly in the fourth quarter, we see low double digit commercial loan growth continuing into 2023 based on a solid pipeline and our continued focus on adding talent to our commercial banking team.
In terms of residential activity, despite the headwinds of higher interest rates, our mortgage portfolio increased by $13 $5 million in the quarter for the year, our mortgage portfolio grew $228 million.
Consumer installment lending softened in the quarter, because we strategically pulled back in that area.
Net portfolio declined $16 7 million in the quarter.
For the year, we grew our consumer loan portfolio was $68 $3 million.
Overall, we are extremely pleased with our loan growth and believe we are on track to continue our planned asset rotation from the investment portfolio to higher yielding loans into 2023.
On page eight we provide detail of our 1.4 dollars $7 billion 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 157 million.
The remaining 36% of the portfolio is comprised of commercial real estate with the largest concentrations being industrial at $124 million or eight 5% and retail at $118 million or 8%.
It's worth noting that of the $662 million of new commercial loan volume generated in 2000 $20 million to $411 million or 62% with CNI versus $251 million or <unk>, 38% investment real estate.
By design. This portfolio is very granular in nature, and we're maintaining our credit discipline to ensure that we maintain good diversity in this portfolio.
Page nine provides an overview of key credit quality metrics at $12 31.
Total nonperforming loans were $3 $7 million or 1% of total loans at year end.
Loans 30 to 89 days delinquent totaled $3 1 million at 12, 31 up slightly from third quarter, primarily due to an uptick in consumer loan delinquencies.
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 at page 10 of our presentation page 10 highlights our strong inventory capital positions.
CET, one ratio and the total risk based capital ratio increased in the fourth quarter of 2022.
Net interest income increased $6 $3 million from the year ago period, our tax equivalent net interest margin was three 2% during the fourth quarter of 2022, which is up 39 basis points from the year ago period, and up three basis points from the third quarter 2022, I will have some more detailed comments.
On this topic in a moment.
Average interest, earning assets were $4 six $4 billion in the fourth quarter of 2022 compared to $4 $43 billion in the year ago quarter and $4 six $1 billion in the third quarter of 2002.
Page 12 contains a more detailed analysis of the linked quarter increase in net interest income and the net interest margin our fourth quarter 2022, net interest margin was positively impacted by two factors increase in yield on investments of 13 basis points in change in loan yield and mix up 36 basis.
Points. These.
These increases were partially offset by an increase in funding cost of 46 basis points, we will comment more specifically on our outlook for net interest income and net interest margin for 2023 later in the presentation.
On page 13, we provide.
Details on the institution's interest rate risk position the.
The comparator simulation analysis fourth quarter 'twenty, two in third quarter 'twenty to calculate 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 the spot yield curve from the valuation date.
The shock scenarios consider immediate permanent and parallel rate changes the decrease in the base rate forecast of net interest income in fourth quarter 22, compared to third quarter. 'twenty. Two is primarily due to an adverse shift in the funding mix and a higher than model and higher than modeled betas on interest bearing deposits during the quarter. These chain.
These were partially offset by earning asset growth and a favorable change in earning asset composition.
The shift in sensitivity is primarily due to faster liability re pricing due to a shift in the funding mix.
Decline in less sensitive DDA and savings deposits and an increase in wholesale funding currently 28% of assets reprice in one month and 41, 3% reprice in the next 12 months.
Moving onto page 14, noninterest income totaled $11 $5 million in the fourth quarter of 2002 as compared to $15 $8 million in the year ago quarter, and $16 $9 million in the third quarter of 'twenty two.
Fourth quarter 2022, net gain on mortgage loans totaled $1 $5 million compared to $5 $6 million in the fourth quarter of '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 applications have slowed.
And the mortgage production mix has rotated to a lower percentages salable mortgages positively impacting non-interest income was $7 million gain on mortgage loan servicing due to $2 2 million of revenue that was partially offset by a $1 $5 million or <unk> <unk> per diluted share after tax.
And the fair value due to price and a $1 million decrease due to pay downs of capitalized mortgage loan servicing rights in the fourth quarter 2022.
As detailed on page 15, our noninterest expense totaled $31 $5 million in the fourth quarter of 2022 as compared to $34 million in the year ago quarter, and $32 $4 million in the third quarter of 2022 compensation increased $1 $3 million compared to the prior year quarter due to ray.
<unk> that were effective at the start of the year a decreased level of compensation that was deferred in the fourth quarter of 'twenty. Two that's direct origination costs on lower mortgage loan origination volume.
And an increase in lending personnel performance based compensation decreased <unk> $3 million due primarily to a decrease in mortgage lending volume.
And lower performance level within the corporate incentive compensation plan compared to fourth quarter 'twenty one.
The fourth quarter of 'twenty, two included a $7 million credit to the expense related to the reserve for unfunded lending.
Lending commitments due to a decrease in volume of such lending commitments as well as the expected loss rate other expenses decreased $6 million compared to the prior year quarter, primarily due to a lower fraud related losses as well as contract termination costs incurred during the prior year quarter.
I'll have more comments on our outlook for noninterest expense later in the provision presentation.
Page 16 is our update for 'twenty or 2020 to look to see how our actual performance during the fourth quarter compared to the original outlook that was provided in January of 2022.
Look estimated loan growth.
The low double digits loans increased $55 million in the fourth quarter of 2022% or six 5% annualized and $560 3 million or 19, 3% for full year 2022, which is above our forecasted range commercial and mortgage loans had positive growth in the fourth quarter of 'twenty two while install.
Net loans decreased fourth quarter 2022, net interest income increased by 18, 4% over 2021, which is higher than our forecast of low single digit growth. The net interest margin for the fourth quarter of 2022 was 39 basis points higher than the fourth quarter of 2021 net interest margin of three.
<unk>.
One, 3%, which is higher than our originally our original forecast actual results benefited from a notable increase in interest rates during 2020 to the fourth quarter 2022 provision for credit losses was an expense of $1 $4 million or 16 basis points annualized this is with.
Our forecasted 2022, four year provision range of.
15 to 20 basis points of average total portfolio loans. The primary driver of the increase in the provision for credit losses was an increase in subdued subjective allocations related to general economic conditions noninterest income totaled $11 $5 million in the fourth quarter of 'twenty, two which below our forecasted range of 13 to 17.
<unk>.
Fourth quarter 2022 mortgage loan origination sales and gains totaled $138 9 million $80 6 million and $1 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.
Bridge loans servicing generated a gain of $7 million in the fourth quarter 'twenty to noninterest expense was $31 $5 million in the fourth quarter within our forecasted range of 35 to $32 5 million targeted quarterly.
Our effective income tax.
Rate of 18, 9% for the fourth quarter of 2022 was at the lower end of our forecasted range. Lastly, we purchased 181586 shares at an average cost of $22 eight.
For the year to date period.
In 2022.
Turning to page 17, this will summarize our initial outlook for 2023. The first section is loan growth, we anticipate loan growth and low double digit range.
And are targeting a full year growth rate of 10% to 12%, we expect to see growth in commercial and mortgage loans with installment loans remaining flat. This outlook assumes a stable Michigan economy.
Next is.
As net interest income, where we are forecasting growth rate of 7% to 9% over a full year.
2020.
Two we expect the net interest margin to be stable to.
To slightly higher compared to full year 2020 to buy.
Five to 10 basis points, primarily due to increasing yields on earning assets. This forecast assumes a 50 basis point increase in February of 25 basis point increase in March followed by a 25 basis point decrease in both September and December and the target fed funds rate in 2023 with long term rates declining slightly.
By year end.
Our full year 2020 to provision expense.
Our allowance for credit losses of approximately <unk>.
Two 5% to three 5% of average portfolio loans would not be unreasonable related to noninterest income we estimate a quarterly range of 11 million to $13 million, we expect mortgage loan origination volumes to decline by approximately 20% in 2023, our outlook for noninterest expense as a core.
Thirdly range of 32 million to $33 5 million.
With the total.
For the year.
152, 5% above the 2022 actuals the primary driver as an increase in data processing.
In FDIC deposit insurance premiums our outlook for income taxes is an effective rate of approximately 18, 8% assuming the statutory federal corporate income tax rate does not change during 2023.
Lastly, the board of directors authorized share repurchases of approximately 5% in 2023. Currently we are not modeling any share repurchases in 2023 that concludes my prepared remarks, and I would like now to turn the call back over to Brad.
Thanks, Kevin.
Each quarter, we share a high level view of our key strategic initiatives as we head into 2023, our focus will continue to be on the rotation of our earning asset mix out of.
Lower yielding investments into higher yielding loans growing our deposit base and managing our cost of funds and controlling our noninterest expenses.
While there is increasing concern about a potential economic slowdown at this point, we continue to see healthy economic conditions in loan demand in Michigan. We are excited about the opportunities we have to continue to grow.
Continue our growth trends into 2023, we've build a strong franchise based on a talented team a low cost deposit base and well diversified loan portfolio, which we believe positions us well to effectively manage through a variety of economic environments and continuing to deliver strong.
Our results for our shareholders.
At this point, we would now like to open up the call for questions.
Thank you.
If you would like to ask a question. Please press Star then one on your telephone keypad.
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We have our first question from the line of Erik Zwick of Covid. Greg. Please go ahead, when you're ready.
Good morning, everyone.
Good morning.
First just wanted to start on the net interest margin.
The guide for 'twenty, three would imply some compression here from the <unk>.
<unk> 22 level. So just curious how you might expect that to trend throughout the year, if it'd be some of that compression frontloaded just as the deposit cost catch up and then if the fed stops it.
Hiking campaign towards the middle of the year with the compression potentially be slower in the back half of the year or do you expect it to be kind of more even just curious any thoughts on that topic.
Yeah, Eric this is Gavin.
You explained it very well so.
First part of the year.
We do believe we will see some compression and then with the the rate forecast we've utilized.
There would be stabilization mid year potentially slight expansion at the backend.
Okay, great. Thanks.
And then with respect to the investment Securities portfolio, I think I heard you mentioned theres still opportunities to optimize the entire asset mix. So just curious how you would expect the size of the securities portfolio.
The trend throughout the year either in terms of kind of dollar amount or percentage of total assets how it could look out at the end of 'twenty three.
Yes.
Current modeling speeds, Eric where we're looking at about $170 million of run off next year.
Okay. Thank you I appreciate that.
And then in terms of the noninterest.
Expenses that you mentioned in the presentation. Some some opportunities to gain additional efficiencies as you optimize delivery channels curious if you could talk to maybe any specific projects either.
And that had been implemented today or others you might expect to.
In 2023.
Sure Eric this spread and.
No.
Point your attention back to when we did our core conversion in May of 'twenty one.
And here we are now.
Coming up almost on the second year anniversary day post conversion.
And we continue to see opportunities for efficiencies with that conversion so.
In 2022.
Quite a bit of.
Savings in the FTE count within the.
In the branch network.
And I think there is the opportunity there.
So.
Just as we have vacancies not having to replace those.
As well as in the background.
Just not touching the paper like we did previously so.
Those are a couple of areas.
We think theres opportunity.
Okay, and then last one for me you spoke to a little bit in terms of the.
Loan growth and the outlook for 10% to 12% led primarily by commercial and installment loans flat I'm curious maybe from a geographic perspective, if theres any particular markets that are stronger today that you expect to drive that growth more relative to others in the coming year.
But I can take high level and then <unk>.
<unk> of Joel Once you go first go ahead, yes, I think it's pretty straightforward answer.
<unk>.
I'll frame it up by saying in 2022, yes, we had good growth.
In our entire footprint all of our regions contributed.
There's no question that our two largest markets southeast, Michigan and West Michigan.
R R.
We are driving a lot of our growth and we see that continuing so southeast, Michigan and West, Michigan, Our two most active growth market.
Great. Thank you for taking my question today.
Thank you.
Thank you. Your next question comes from the line of Matt <unk> with <unk>.
Please go ahead when you're ready.
Hi, guys. This is Matt rank filling in for Damon Delmonte, I hope everybody is doing well.
With respect to credit I was just curious if youre seeing any signs of stress within any of your loan categories and then more specifically with regards to the office portfolio could you just provide some more color about what types of exposure you have to office and how those loans are performing.
Yes.
This is Joel.
In terms of.
Of just the overall credit quality.
No no broad.
Trends that we're seeing.
We're seeing a little bit of a <unk>.
Stress.
The manufacturing sector.
With just upward rising prices Costco.
Manufacturing product due to increased wages and raw material.
Price inflation.
But again, there's not a there's not a broad team what were you seeing isolated cases of that.
But we continue to watch that carefully and then in terms of <unk>.
Office.
<unk> exposure.
We've got.
Yes.
About $81 million is shown on page eight it's about five five.
Five 5% of our portfolio in office and I would characterize that our office exposure.
As <unk>.
Primarily suburban.
And low rise and with a fair amount of medical.
Office usage, so we actually feel.
Very good about our office.
<unk> in our portfolio.
<unk> held up extremely well.
Yes July I'd add in.
Over on the consumer side.
We continue to watch closely but are not seeing any early signs of.
Stress there.
Got it great. Thank you for the color and then just one follow up to Eric's question about loan growth are you planning any new additions of commercial bankers or expansions into new markets.
Yes.
We are continually.
Recruiting.
Additional commercial banking talent, probably the best way I would answer that that would just be an ongoing.
Sure.
Strategy for us or our focus.
Dan.
That's what that's what we've got built into the 'twenty three plan.
Yes.
Got it great. Thank you for taking my questions.
Thanks, Matt.
Thank you your line to any further questions is star followed by one we now have Brendan Nosal with Piper Sandler Your line is now open.
Hey, good morning, guys hope you're doing well.
And maybe just to start off on kind of an equation between loan growth and funding it in the year ahead.
So the comment on the Securities book, I think you said $170 million of cash flow. There I guess that kind of funding that has roughly 10% loan growth for the year.
Just kind of thinking about the balance of that growth how much can come from core funding ideal ebrahim the need for more wholesale funding.
Yeah.
We want to grow deposits.
We're still.
Still low single digit deposit growth for next year, and then the balance would come through.
Wholesale.
Or potentially I guess I would say wholesale.
Got it got it okay.
And then maybe one more for me.
You may have kind of addressed this in a prior question already but just conceptually I'm wondering if you can be a better outcome for the margin at this point, whether its stability and the fed wraps up its tightening program or a more rapid pivot two rate cuts.
Yes.
So it's the more rapid cuts rate cuts, but the the caveat I'd give you. There is that assumes that we're able to achieve the betas going down that we've seen historically.
And so.
That.
As you get a less inverted curve.
Which we do benefit from.
Okay understood.
With the prospect for for rate cuts I mean, do you think like the first couple of cuts allows you to start pushing back on deposit pricing or maybe not so much given that fed funds will still be so far ahead of the industry's cost of funds at that point most likely.
I think thats a great question I think what it does.
Is were then you could sort of stopped to catch up.
Right.
So.
And you don't have the large gap between.
Your deposit base, so maybe alternative Monty market and.
U S treasuries and.
I think that's where the benefit comes in.
Alright fantastic Thanks for your thoughts.
Thank you as a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
We have had no further questions on the lines I would like to hand, it back to Brad for any closing remarks.
Okay.
Alright, good in closing I would like to thank our board of directors and our senior management for their support and leadership.
I want to thank all of our associates continue to be so proud of the job being done by each member of our team.
Each team member in his or her own way continues to do their part.
Toward our common goal of getting 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 all of you a great day.
Thank you all for joining this does conclude today's call. Please have a lovely day and you may now disconnect your lines.
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