Q2 2023 Independent Bank Corporation Earnings Call
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Good morning, and welcome to the Independent Bank Corporation or call. It 2023 second quarter results Conference call. My name is call out and I'll be the operator of today's call.
If you'd like to register a question if the Q&A portion of today's Koch. Please press star one on your telephone keypad when asking a question. Please ensure your telephone is muted locally Terry if I could question first off followed by Jay I would now like to pass the conference over to our host broadcast so president and CEO to begin. Please go ahead.
Are you ready.
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 second quarter 2023 results.
Kessel, President and Chief Executive Officer, and joining me is Kevin Moore, Executive Vice President and our Chief Financial Officer.
Well as Joel Ryan Executive Vice President head of 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.
Okay.
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.
Okay.
So let's get started independent Bank Corp reported second quarter 2023, net income of $14 $8 million.
<unk> 70 per diluted share versus net income of $13 million or <unk> 61 per diluted share in the prior year period.
The increase in 2023 second quarter results as compared to 2022 is primarily related due to increases in net interest income and noninterest income and a decrease in noninterest expenses that were partially offset by an increase in the provision for credit losses and income tax.
<unk> expense.
For the second quarter 2023, we generated an annualized return on average assets and return on average equity of 118% and $16 two 9% respectively.
As compared to 1.10 and 15 six 8% in the second quarter of 2022.
Significant items impacting the comparable second quarter of 2000 2023 results included the changes in fair value due to price of our mortgage servicing rights and a provision for credit losses on loans.
We delivered another quarter of strong financial results with net income and pretax pre provision income both increasing from the prior quarter.
We continue to see good performance in our deposit base and have successfully brought in many new full banking relationships.
Overall, our net interest margin is stable and our credit continues to perform very well.
Economic conditions generally remain generally healthy throughout our markets and we continue to see attractive lending opportunities, which led to our total loans increasing at a 14% annualized rate in the second quarter.
Our commercial pipeline is healthy with high quality lending opportunities.
We believe that we can continue to grow our portfolio of clients, capturing additional market share and deliver strong financial performance for our shareholders.
With the loan to deposit ratio at 89%. We believe we have the capacity to continue to support our ongoing growth of our loan portfolios. We have a very granular deposit portfolio with just 25% of our deposits uninsured.
In addition, we have a high level of available liquidity with $2.2 billion in secured borrowing access and borrowing capacity and Unpledged securities.
Overall, our deposit base continues to perform well total deposits at June 30 were $4 $49 billion down.
Down slightly from the 454 billion at March 31, 2023.
Total deposits for the first half of 2023 have increased $108 6 million or 5% annualized.
During this period, we have seen some level of remixing of our funding as customers take advantage of the interest rate spread opportunities.
Our noninterest bearing deposits are down $114 2 million savings and interest bearing checking or down $44 3 million reciprocal deposits are up $118 4 million time deposits are up $109 $8 million and brokered time deposits are up $38 $9 million.
We have included in our presentation as storage 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 32 basis points to one 5% to 7%.
Through the first quarter the cumulative through the second quarter the cumulative beta for our cost of funds is 29.
4%.
At this time I would like to turn the presentation over to Joel run to share a few comments on the success, we have in growing our loan portfolios and provide an update on our credit metrics.
Thank you Brad on page eight we provide an update of our very well diversified loan portfolio.
Total loans increased $121 million in the second quarter each of our portfolio has experienced solid growth in the quarter with the strongest segment being commercial lending growing by $66 million.
We continue to see the return on our strategic investment in the expansion of our commercial banking team the experienced.
Talent that we've added over the past 24 months has been a strong contributor to our commercial growth, which on an annualized basis was nine 8% in the first half of the year.
Looking forward based upon the strong pipeline, we expect to see continued growth in the second half of the year.
It's worth noting that the majority of our growth was in the C&I segment with.
With an emphasis on full relationships, which Brad just commented on a minute ago, including deposits and Treasury management services.
Despite the higher rate environment, our mortgage and installment portfolios experienced growth in the quarter as well with strong underlying credit profiles as noted.
Page nine provides detail on our commercial loan portfolio.
As just mentioned 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 10% or $152 million.
The remaining 35% of the portfolio is comprised of commercial real estate with the largest concentrations being industrial at $134 million or eight 7%.
In retail at $133 million or eight 6%.
It's worth noting that our exposure to the office segment stands at $79 million or five 2% of our commercial portfolio at quarter end.
This particular segment of our portfolio continues to perform very well.
For additional insight into our office exposure I refer you to the appendix.
Attached to this presentation.
Page 10 provides an overview of key credit quality metrics at June 30.
Overall credit quality continues to be excellent.
Total nonperforming loans were $4 million or one 1% of total loans at quarter end.
Loans 30 to 89 days delinquent totaled $4 4 million or one 2% at $6 30 up slightly from $3 31, primarily due to a slightly elevated consumer loan delinquency.
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 11 of our presentation page 11 highlights our strong regulatory capital position the tangible common equity ratio increased in the second quarter of 2023 without with all other capital ratios remained relatively flat from the prior quarter.
Net interest income increased $2 $3 million from the year ago period, our tax equivalent net interest margin was three 6% during the second quarter of 'twenty three in the second quarter of 2022 and down seven basis points from the first quarter.
2023 average interest, earning assets were $4 $76 billion in the second quarter of 2023. This is compared to $4 $49 billion in the year ago quarter, and $4 7 billion in.
In the first quarter of 2023.
Page 13 contains a more detailed analysis of the linked quarter decrease in net interest income and the net interest margin.
Our link on a linked quarter basis, our second quarter 23, net interest margin was positively impacted by two factors increase.
The increase in yield on loans and investments added 21 basis points in change in earning asset mix added three basis points. These increases were more than offset by an increase in funding costs of 25 basis points and six basis points.
Which were due to changes in funding mix, we will comment more specifically on our outlook for net interest income and the net interest margin for 2023 later in the presentation on page 14, we provide details on the institution's interest rate risk position. The comparative stimulation analysis from second quarter of 'twenty three in the first quarter of 'twenty three.
<unk> calculates 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 a spot yield curve from the valuation date, the shock scenario scenarios consider immediate permanent and parallel rate changes.
The increase in the base rate forecasted net interest income in the second quarter of 'twenty three compared to the first quarter of 'twenty. Three is primarily due to an improvement in asset mix with an increase in loans and a decline in investments along with a slight benefit from higher rates.
These improvements were partially offset by an adverse shift in the funding mix 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 29, 9% of assets re price in one month and 42, 5% reprice in the next 12 months.
Moving on to page 15, noninterest income totaled $15 $4 million in the second quarter of 'twenty, three as compared to $14 $6 million in the year ago quarter, and $10 6 million in the first quarter of 2023 second quarter 23, net gains on mortgage loans totaled $2 one.
$1 million compared to $1 3 million in the second quarter of 2002. The increase was primarily due to increased profit margins and fair value adjustments that were partially offset by lower mortgage loan sales volume.
The mortgage loan application mix move to a higher percentage of sale of loans in the quarter.
Positively impacting non-interest income was $3 $7 million gain on mortgage loan servicing due to $2 2 million of revenue and $2 $4 million or <unk> <unk> per diluted share after tax increase in the fair value due to price that was partially offset by a $1 million decreased due to pay downs of capitalized.
Mortgage loan servicing rights in the second quarter of 2003.
As detailed on page 16, our noninterest expense totaled $32 $2 million in the second quarter of 2023 as compared to $32 4 million in the year ago quarter and $31 million in the first quarter of 'twenty, three compensation increased $1 million compared to the prior year quarter due to raises that were in.
At the start of the year the decreased level of compensation that was deferred in the second quarter 'twenty three as direct origination costs on lower mortgage loan origination volume and an increase in lending personnel.
Performance based compensation decreased $6 million due primarily to lower expected incentive compensation payout for salaried and hourly employees and a decrease in mortgage lending related incentives attributed to the decline in mortgage lending compared to the second quarter of 2002.
Cost recoveries related to unfunded lending commitments decreased by <unk> 5 million in the second quarter compared to the same.
Prior year period, due primarily to a decrease in loss rates applied to lending commitments.
Our processing cost increased by $2 million from the prior year period, primarily due to core data process processor annual asset growth in CPI related cost increases and lower net mortgage processing related cost deferrals due to lower mortgage loan volume as well as the prior year to date period, including a credit from our coordinated process related to.
Certain expenses that have been.
I have been previously paid and Expensed.
Page 17 is our update for our 2023 outlook to see how our actual performance during the second quarter compared to the original outlook that we provided in January 2023, our outlook estimated loan growth in the low double digits loans increased $121 3 million in the second quarter of 23% or $13 nine.
Percent annualized which is above our forecasted range commercial.
Installment loans had positive growth in the commercial mortgage installment loans had positive growth in the second quarter of 'twenty three.
Second quarter 2023, net interest income increased by six 3% over 2022, which is lower than our forecast of high single digit growth. The net interest margin for both the second quarter of 'twenty, three and 'twenty two was 3.26% which is below our original forecast.
The second quarter 'twenty three provision for credit losses was an expense of $3 $3 million or <unk>, 37% annualize the second quarter 'twenty three provision expense was the result of an increase in specific reserves on one commercial credit as well as an increase in the pooled loan reserve and subjective loan allocations due primarily to loan growth.
The provision expense related to loans in the second quarter of 2023 was higher than our forecasted range noninterest.
Noninterest income totaled $15 $4 million in the second quarter of 'twenty, three which was higher than our forecasted range of $11 million to $13 million second.
Second quarter 'twenty, three mortgage loan origination sales and gains totaled $160 5 million $99 million and $2 1 million, respectively mortgage loan servicing generated a gain of $3 7 million in the second quarter of 'twenty three.
Noninterest expense was $32 2 million in the second quarter within our forecasted range of 32 to $33 $5 million targeted quarterly.
Our effective income tax rate of 18, 8% for the second quarter of 2023, which is in line with our forecast Lastly, 200000 shares were repurchased in the second quarter of 2023 at an average share price of $16 35.
Shares were purchased at a price below tangible book value of $16 45.
That concludes my prepared remarks, I would like.
Now like to turn the call back over to Brad.
Thanks, Kevin.
These strong results, which our company has been delivering quarter over quarter year. After year for some time as select directly attributable to our talented team their focus on personalized service investing in our communities and making banking easier.
Our financial results once again gained us nice recognition and American bankers 2023 annual ranking of community banks.
We were also pleased to again be listed by Forbes as one of the best in state Banks in America. This ranking was the result of their partnership with statistic as they surveyed consumers on bank service the quality of financial advice.
And whether fees are transparent and reasonable. The survey also inquire on ease of use of the digital services convenience of branch locations and overall level of trust inspired by the company.
Our team is very proud of this recognition.
Also during the second quarter. This year, we were proud to receive certification as a great place to work.
As we proceed through the second half of 2023, our focus will continue to be on investing in our team leveraging our technology and supporting our communities and doing so we will continue the rotation of our earning assets out of lower yielding investments into higher yielding loans.
With the strong value proposition offered as a leading community bank. We believe we can continue to grow our deposit base, while managing our cost of funds and controlling noninterest expenses.
Accordingly, we are excited about the opportunities we have to continue our growth trends, we've built a strong franchise, which positions us well to effectively manage through a variety of economic environments and continue delivering strong and consistent 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 followed by one on your telephone keypad now.
Sorry, if this question.
Followed by <unk>.
Thank you for your question. Please ensure your phone is on mute.
Ed.
Our first question comes from Damon Delmonte from <unk>.
Your line is now open. Please go ahead.
Hey, guys. This is Matt Ryan filling in for David Hope Everybody's doing well my first question relates to the mortgage income you guys had do you see the profit margin expansion is sustainable and maybe start of a trend or is it just kind of a normalization.
Yes, I would.
Matt This is Gavin and thanks for joining us today, so I would call it stable, where we have seen some benefit.
As in the secondary market Theres, a significant pay up right now for low loan balance mortgages. So we haven't really changed our target more more margin, but we have seen a little bit of upside in what the payoffs spin on those low loan balance.
Salable mortgages.
Okay got it and then just my second question relating to the deposit mix shift and if we get another interest rate hike.
The next few months do you think mixture.
The mix shift will start to accelerate again or you think it's kind of leveled out at this point.
Sure.
Well I want to say I think it's leveling out I don't think though I guess I would say, though that the mix shift will probably continue I don't think the pace.
We will accelerate but theres still some some mixing going on.
Got it thank you I'll step back.
Thanks, Matt.
Thank you as a reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
Our next question comes from Erik <unk> from <unk>. Please go ahead, when you're ready.
Hey, good morning, guys, just some of our commentary today.
Just curious if you had any general comments on the loan pipeline mix. If there is any sort of industry concentrations in there today.
Okay.
It's pretty diversified.
So no I would not say that we have one specific concentration I think it remains so.
Relatively true to our overall portfolio mix that two thirds of C&I, one third investment real estate is just that.
Something we watch carefully.
And even as we are.
Our bankers are looking for opportunities they know what what our appetite is and isn't.
So.
The majority of it continues to be C&I book.
Okay great.
Just curious what drove the quarter over quarter increase in other income if there is any sort of nonrecurring items in there.
Just look at here.
Yes, I think we have the swap fees.
Sorry, Youre looking.
Linked quarter or.
I didn't hear it quarter to quarter.
Yes.
Swap fees, yes, sorry, it was swap fees.
Okay.
Okay great.
And then just one last one did you have the average price on the buyback this quarter.
Yes, it was.
Yes, $16 35.
Okay, Alright, great. Thanks for taking my questions.
Thanks, Eric we have no further questions at this time, so I will now hand back to Johan <unk> for final remarks.
Yeah.
In closing I would like to thank our board of directors and our senior management for their support and leadership I would also like to thank 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 would like to thank each of you for your interest in independent Bank Corporation and for joining us on today's call.
We wish you all a great day.
Okay.
This concludes today's call. Thank you for joining if you would like to listen again, there will be a replay available. Shortly you may now disconnect your lines.
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