Q1 2023 Independent Bank Corporation Earnings Call
Believe we have the capacity to continue to support ongoing growth of our loan portfolios.
During the first quarter of 2023, our deposits grew to $4 5 billion.
Of the $4 5 billion, we consider $3 $85 billion or 84, 8% to the core.
In addition to generating $93 1 million in core deposit balance growth.
We're also pleased to report net deposit account growth of more than 600 accounts for the quarter.
We are including some additional information on the deposit base this quarter showing the metrics behind the granularity of our funding.
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 for the quarter.
Our total cost of funds increased by 46 basis points to 1.25%.
Through the first quarter of 2023, the cumulative cycle beta for our cost of funds is now at 24, 1%.
At this time I would like to turn the presentation over to Joel Ron to share a few comments on the success, we are having in growing our loan portfolios and provide an update on our credit metrics.
Well, thank you Brad and good morning, everyone.
Page nine we provide an update on our well diversified loan portfolio.
Total loans increased $44 million in the first quarter led by residential mortgage activity.
Reading to a $39 million increase in that portfolio.
Our commercial loan portfolio grew $4 $4 million and.
Tumor installment lending was flat during the quarter.
It's worth noting that our commercial loan growth reflected approximately $30 million of unplanned loan payoffs.
From the sold businesses or refinanced projects.
$9 million of these payoffs were watch list credits.
So while commercial loan growth was soft in the first quarter. We believe this strategic expansion of our commercial banking team as well as marketplace disruption will provide credit worthy growth opportunity in 2023.
Overall, we're pleased with our loan growth and believe that we're positioned to continue to gain market share in each market that we serve.
On page 10, we provide detail on our commercial loan portfolio.
C&I lending continues to be our primary focus representing 65% of the portfolio manufacturing continues to be the largest concentration within the C&I segment, comprising approximately 11% or $155 million.
The remaining 35% of the portfolio is comprised of commercial real estate with the largest concentrations being retail at $134 million or nine 5% and industrial at $126 million or eight 6%.
It's worth noting that our exposure to the office segment stands at $78 million or five 3% of our commercial portfolio at quarter end reflect decreased from five 7% of our portfolio a year ago.
We provide more insight into our office exposure on page 11.
The vast majority of our office exposure can be characterized as low rise suburban office space with 28% being medical office space.
This portfolio is also very granular with the average loan size being $1 2 million.
We did experience a charge off on one office credit in the quarter, which was a credit that had a long and spotty history with the bank.
Net loss was $960000.
Was fully reserved during 2022.
Aside from that credit our credit quality for this segment of our portfolio continues to hold up very well with no office related credits on our watch list at quarter end.
Page 12 provides an overview of key credit quality metrics at $3 31, overall credit quality continues to be excellent.
Nonperforming loans were $3 9 million or one 1% of total loans at quarter end.
And loans 30 to 89 days delinquent totaled $1 9 million or <unk> or 5% at 331 down slightly from year end.
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 13 of our presentation.
In the first quarter, we took a provision of $3 million related to the charge off on a signature bank subordinated debt security that was classified as held to maturity. Additionally, we realized a $222000 loss on the sale of our Silicon Valley Bank senior unsecured corporate security due to credit deterioration slide.
Slide 13, quantifying our holdings in financial institutions Corporate Securities, We believe signature bank and Silicon Valley Bank failures to be isolated events caused by unique liquidity characteristics of their balance sheet.
Over 44% of our portfolio is rated investment grade by Moody's and S&P with an additional 44% rated investment grade by KBR, we perform regular credit reviews of each security and are comfortable with our current holdings.
Page 14 highlights our strong regulatory capital position, the tangible common equity ratio leverage ratio.
CET, one ratio and the total risk based capital ratio increase in the first quarter of 2023.
Moving on to page 15, net interest income increased $5 $4 million from the year ago period, our tax equivalent net interest margin was 333% during the first quarter of 'twenty, three which is up 33 basis points from a year ago period, and down 19 basis points from the fourth quarter of 2022 average.
Interest, earning assets were $4 7 billion in the first quarter of 2023 and compared to $4 $49 billion in the year ago quarter and $464 billion in the fourth quarter of 2022.
Page 16 contains.
A more detailed analysis of the linked quarter decrease in net interest income and the net interest margin.
On a linked quarter basis, our first quarter 2023, net interest margin was positively impacted by two factors.
Increasing your investments in earning asset mix contributed five basis points and change in loan yield and mix contributed 20 basis points.
These increases were more than offset by an increase in funding costs of 44 basis points six basis points of which was due to changes in funding mix.
We will comment more specifically on our outlook for net interest income and the net interest margin in 2023 later in the presentation.
On page 17, we provide details on the institution's interest rate risk position.
The comparative simulation analysis for first quarter 'twenty three in fourth quarter 'twenty two calculates the change to net interest income over the next 12 months under five rate scenarios, all scenarios assume a static balance sheet. The base rate scenario applies a spot yield curve from the valuation date, the shock scenarios consider immediate permanent.
In parallel rate changes the decrease in the base rate forecast of net interest income in the first quarter 'twenty three compared to the fourth quarter of 'twenty. Two is primarily due to an adverse shift in the funding mix and higher than previously modeled betas on interest bearing deposits during the quarter.
These changes were partially offset by earning asset growth and a favorable change in earning asset composition sensitivity is largely unchanged during the quarter as the adverse impact from changes in the deposit mix were offset by additional hedging in term funding transactions currently 39% of assets reprice in one month.
Three 9% reprice in the next 12 months.
Moving on to page 18, noninterest income totaled $10 $6 million in the first quarter of 2023 as compared to $18 $9 million in the year ago quarter, and $11 $5 million in the fourth quarter of 2020 to first.
First quarter of 'twenty, three net gains on mortgage loans totaled $1 $3 million compared $2 eight.
$8 million in the first quarter of 'twenty two the increase in these gains was due to an increase in the gain on sale margin that was partially offset by a decrease in mortgage loan sales volume.
Mortgage loan application application mix continued to maintain a lower percentage of sale of loans in the quarter.
Positively impacting non-interest income was $8 $6 million gain on mortgage loan servicing due to due to $2 2 million of revenue that was partially offset by a <unk> 6 million dollar or <unk> <unk> per diluted share after tax decrease in the fair value due to price and $1 $9 million decrease.
Due to pay downs of capitalized mortgage loan servicing rights in the first quarter of 'twenty three.
As detailed on page 19, our noninterest expense totaled $31 million in the first quarter of 2023 as compared to $31 $5 million in the year ago quarter, and $32 1 million in the fourth quarter of 2022 compensation increased $8 million compared to the prior year quarter due to raises that we.
Our effective at the start of the year a decreased level of compensation that was deferred in the first quarter of 'twenty three direct origination costs on lower mortgage loan origination volume and an increase in lending personnel.
Performance based compensation decreased $1 $4 million due primarily to a decrease in mortgage lending volume and lower performance level within the corporate incentive compensation plan compared to the first quarter of 'twenty two.
The first quarter of 2023 included.
$5 million credit to expense related to the reserve for unfunded lending commitments to a decrease in the volume of such lending commitments as well as the expected loss rates.
Data processing cost increased by <unk> 8 million from the prior year period, primarily due to a credit in the prior year quarter related to certain expenses that had been previously paid.
And experiencing an increase in the expense related to asset growth.
Page 20 is our update for 2023 outlook to see how our actual performance during the first quarter compared to the original outlook that we provided in January of 2023.
Our outlook estimated loan growth in the low double digits loans increased $44 $5 million in the first quarter of 2023, or five 2% annualized which is below our forecasted range commercial mortgage and installment loans had positive growth in the first quarter of 'twenty three.
First quarter 2023, net interest income increased by 16, 5% over 2022, which is very high.
Higher than our forecast of a single digit growth the net interest margin for the <unk>.
First quarter of 2023 was 33 basis points higher than the first quarter of 2022 net interest margin of 3%, which is in line with our original forecast.
The first quarter 2023 provision for credit losses was an expense of $2 $2 million or 25%.
Two 5% annualized first quarter 'twenty three provision expense as a result of an increase in provision for credit losses for securities held to maturity due to a $3 million loss incurred on a subordinate debt security during the quarter. The provision expense related to loans was a credit in the first quarter of 'twenty, three which is lower than our forecast.
Casted range noninterest income totaled $10 $6 million in the first quarter of 'twenty, three which was below our forecasted range of 11 million to $13 million first quarter 'twenty.
First quarter 'twenty, three mortgage loan origination sales and gains totaled $113 million $106 9 million and $1 3 million respectively.
Mortgage loan servicing generated a gain of.
$7 million in the first quarter of 'twenty three.
The $1 $2 million loss on securities available for sale as it relates to the divestiture of a credit impaired corporate security.
Noninterest expense was $31 million in the first quarter.
Below our forecasted range of 32 to $33 $5 million targeted quarterly.
Our effective income tax rate of 18, 2% for the first quarter of 2023, which is slightly below where we had forecasted.
Lastly, no shares were repurchased in the first quarter of 2023.
That concludes my prepared remarks, 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 proceed through 2023, our focus will continue to be on the rotation of our earning asset mix.
Lower yielding investments into higher yielding loans growing our core deposit base, while managing our cost to funds and controlling our noninterest expenses.
While there is increasing concern about a potential economic slowdown at this point, we continue to see good demand for loans, particularly in the commercial segment as well as a renewed interest in the strong value proposition offered by community banks like Independent Bank Corp.
Finally, we are excited about the opportunities we have to continue our growth trends rebuilt.
We've built a strong franchise on a talented team a low cost deposit base and well diversified loan portfolios, which we believe positions positions us well to effectively manage through a variety of economic environments and continuing to deliver strong and consistent results for our shareholders.
<unk>.
At this point, we would now like to open up the call for questions.
Thank you.
Like to ask a question. Please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind I would like to be remains for Mccain. Please press star and then K.
I'm sorry to ask your question. Please ensure that your device is likely we will just take a brief pause to assemble the Q&A roster.
Our first question comes from Brendan Nosal with Piper Sandler. Please go ahead.
Hey, good morning, guys hope you're doing well.
Hi, Brian Good morning.
You folks did a really nice job growing deposits this quarter nice to see core deposits flat and then you brought up that tightened broker to get the balance of the growth.
Looks like it allows you to build cash quite nicely.
He is looking forward do you have a desire to build cash for rigor by bringing on more of those funding sources are you.
Pretty happy at this point kind of matching.
And the loan growth and keeping cash.
On the slide.
Yes, so we did come through quarter end with an elevated level of cash strategically just given the environment that we're.
Faced with.
On balance sheet cash.
Will.
B lower anticipate.
Throughout the rest of the year.
The growth we've seen in time and reciprocal.
Some of that was new deposit growth coming into the bank. Some of his rotation as you could see.
Non maturity so.
The answer I would have is we'll continue to grow deposits.
And we expect to continue to grow deposits.
The rest of the year.
Got it.
One more from me.
Can you maybe walk us through how deposit pricing evolved kind of month to month over the quarter and kind of give us some insight.
What period, you felt the most pressure.
Yes, so I do I do think the environment clearly changed after March 10.
We were increasing deposits in the first two months.
And ultimately.
At the end.
We just.
It's really the deposit rotation.
Was.
It was pushing <unk>.
<unk>.
The costs up, but we were increasing throughout the quarter I think we've been able to hold back as long as we could and we had to make some adjustments.
To maybe catch up a little bit.
Understood Alright, thank you for taking the questions.
Thank you.
Our next question comes from Erik Zwick with Telsey Group. Please go ahead.
Thank you good morning, everyone.
I wanted to just start a little bit on the net interest margin.
The first quarter result, wood for margin to hold here.
For the rest of year would kind of fit with your prior guidance for it to be flat to up slightly relative to the full year 2002.
Just curious you mentioned the opportunity to.
Remix into some higher earning assets, but just curious about the funding.
Certainly seems to be a little bit more competitive you talk to that just in your in your last comments just curious how you continue to view the outlook for the margin going forward here over the next quarter or two.
Yes.
Our outlook I would just remind.
Everybody on the call did you.
Use a forward curve that had two rate cuts in it on the back end of the year.
Obviously.
It was beneficial.
I would say.
Going forward.
We are feeling again as we just talked about deposit pressure.
It did build in the first quarter I don't know that I would ask.
So it's continuing to build but it's there.
A big the big question.
That makes it challenging is what does the deposit rotation look like so that was if we go back to our model that was one area, where we were.
We were light we did not anticipate this level of rotation how that non maturities.
In this time frame.
So I think that's a good point of view.
Scott.
Ed.
So I think we could I think we're in a.
The reasonable range right now for the quarter could drift a little lower.
It's really going to depend on how our our deposit mix.
Shakes out.
Kevin I think we'll probably see a little drifting lower.
Prospectively.
I think that would be given in your assumptions.
Okay. That's helpful. I appreciate the additional color there and then just moving to the fee income. The <unk> result for noninterest income was maybe a little bit below kind of the bottom end of year.
Expectation range. There just curious about I guess as I look at my expectations. It was maybe the interchange and service charges on deposits that came out at a little bit lighter. So curious if there was just some seasonality there I know some other banks have made changes to their deposit service charges non sufficient these charges things of that so curious what might.
Have been at play in the first quarter and how to think about getting into that range for the after the rest of the year.
Yes.
Eric a couple of thoughts there.
We continue to see.
Light lighter than expected hoped gain on sale.
<unk>.
And the.
And generally by this point in the.
Calendar year, we'd see a pick up on the mortgage side.
Now we did just last week take probably the I think it was the largest apps per week since the start of the year, but.
We've had an unseasonably cooler.
Weather environment here in a minute.
And that means that may be part of it but so when you.
<unk> it over to the noninterest income I think that's the big one.
Sure.
We continue to feel very good about the interchange and deposit.
The interchange and deposit service charges that we have.
<unk>.
We have made some tweaks.
In terms of.
Charging for statements and so on but.
I think that sort of those are the big movers in there right Kevin Yeah I agree.
Hey.
Thanks, and just one last one for me and I'll step back.
The majority of the bank stocks have sold off here year to date, you didn't repurchase any shares in the first quarter. So just curious how you think about the opportunity to utilize capital for.
Loan growth continues to be strong, but just given kind of where the stock is trading today, if thats changed your thought process at all on whether you'd likely to become more more active in buying back shares.
Throughout the year.
Yes.
Great question Eric.
I think first off our capital will be used for organic loan growth.
And.
We are today with the OCI marks.
Below our targeted range on TCE, so that does put some pressure on.
On our may be appetite for share repurchases, but there's.
As you point out.
The aspect of our current price.
Relative to.
Maybe what we.
The intrinsic value, we see going forward. So you may see us wished.
With some repurchases but.
It probably is not going to be that material at this point.
Okay.
Thanks for taking my questions.
Okay. Thank you.
Our next question comes from Damon Delmonte with <unk>. Please go ahead Damian.
Hi, This is Matt rank filling in for Dan and hope everybody is doing well. My first question is on provision. So the core revision so to speak was lower than the range do you think a provision expense will pick back up to that two five to three 5% as commercial loans come back online or commercial loan growth.
It starts to pick up or is there.
Economic deterioration built into that forecast.
Yeah.
So.
I would agree with you it will be driven by loan growth. So we.
Right now as Joel had highlighted in his commentary or we had one.
Commercial.
Note that we wrote down but had already addressed that in two.
<unk> 2022.
So we did come out of the gate a little slower.
On growth.
And then the forecasted indicated for the full year.
So maybe in totality of everything held.
The same we may come on a little lighter than the 25 basis points for the year.
Regarding loans, but obviously.
Given given the of the HTM write down that we took was right in line I don't anticipate that being.
Happening again, but.
Yeah. So if loan growth comes back yes, I think we can get close to where we forecasted maybe a little light lighter.
Okay got it. Thank you and then just lastly on noninterest expense you guys hired a new commercial team, what's the appetite like for new hires and then Conversely should we enter more of a recessionary environment do you have opportunities.
Cut cost or.
Cost savings more come from optimization of delivery channels.
So.
Our appetite for talent is ongoing.
We're always.
In all areas, particularly at the sales side.
Continuing to look for talented people to add to our team. So this past quarter, we added three commercial.
<unk> people and.
As well as a strong <unk>.
On the credit.
Port side.
And.
And they were not a team they were spread out in our markets. So.
One in southeast, Michigan, one in West, Michigan, and one in North Northwest, Michigan.
We're constantly also though looking at the expense structure.
Over on the retail side.
We've reduced.
The FTE count by.
About 11 here through the first quarter.
We sort of see through the third quarter.
Probably an opportunity for another 12 or 13.
Much of that is simply not filling.
Some of the.
Lower.
Paid.
Positions that.
We're able to still meet customer demand because of technology that we've put in place as well.
Reduced traffic in the branches so.
We we have a number of initiatives also.
To leverage additional technology.
Give you an example.
Thank you.
With the.
Slowdown on the mortgage side.
The support team for that group has been very very busy automating.
More and more of our mortgage process.
And we've seen the.
The benefit of using.
Robots.
Robotic automation.
<unk> performance was previously done manually by people. So we're going to continue to push down on the expense side.
And as that is one of the areas, we do have probably the most control over.
<unk>.
Great. Thank you that was great color.
I'll step back thanks for the time.
Thank you. Thank you.
Yes.
Okay.
Yeah.
Okay and on our end we're.
Not hearing any more questions.
It sounds like actually maybe we do have one more question.
Thank you guys hear me.
We can now go ahead anyway.
Hey.
Davidson.
Yeah.
Just a small follow up on the Opex conversation.
It was also a little bit down because of variable comp.
With these also.
Channel savings a little bit.
Yeah.
Do you kind of expect opex to be more in the low end of the range or even below the range, especially if fees don't don't bounce back up.
I think it will probably be on the lower end of the range.
And yes.
Prospectively, yes.
Okay.
Okay.
Do you have just switching over to the margin for a second do you have like a march and NIM or a deposit cost.
At the end of the period.
Two kind of comparison as we enter the second quarter I do.
I do.
Our March NIM was $3 28.
The deposit deposit costs were $1 51.
<unk>.
Okay I appreciate that.
Okay.
And.
What kind of are you assuming on the deposit beta side with kind of the shifts to your expectation for deposit account migration and any kind of update on how youre thinking about deposit betas.
Through the cycle.
Yeah, we spent a lot of time talking about that.
Last few weeks.
We're still modeling.
Low to mid thirties for the cycle.
Okay.
And you did indicate that it was I think I heard this right that it was.
Kind of more focused.
Focused earlier in the quarter.
And then it's less.
Less deposit rate pressure as the quarter went along at the right way to think about it still there you said, but it was so we were in <unk>.
January and February .
So this quarter, we I would say the pressure in terms of rate moves was really noticeable. It was it was more than prior quarters. So we were making adjustments along the way.
And then with March with March the events in early March that accelerated the rotation.
And we did make some adjustments to pricing then too, but it's not there's not a definitive date that we have.
We adjusted prices up right away, we do it along we meet.
Regularly review that the landscape and what's going on with our deposit base and then adjust as necessary.
Okay.
And just my last question is on loan growth.
Yes.
Alright.
You already indicated it's more the bat last three quarters weighted to growth.
How do I might have missed it but how our pipeline is looking into.
Into the second quarter and beyond.
Yes.
This is Joel.
Our pipeline actually is stronger now than it was at the end of last year we.
We had a very active fourth quarter for the second half of last year.
And I think the combination of having to rebuild our pipeline during.
During the first quarter and just the market kind of digesting that.
The higher rate environment.
Cause the slowness from my viewpoint.
But now our pipeline is stronger than it's been.
<unk>.
In several quarters and.
We're feeling very confident about good.
Good solid growth for the remainder of the year.
Thank you. Thank you I'll step back in queue. Thank you very much.
Thank you.
Okay.
Okay.
At this time, we have no further questions. So I'll hand, the call back to Brad.
Thanks, Emily and.
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 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 guiding our customers to be independent.
Finally, I'd 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.
Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
[music].