Q3 2023 Independent Bank Corp Earnings Call

Okay.

[music].

Hello, and welcome to independent Bank Corporation's third quarter 2023 earnings call. My name is like yeah, there'll be off rates are today.

If you'd like to ask a question during the Q&A session. You can do so by crushing stock followed by the number one on your telephone keypad.

I'll now hand, you over to Jill Hi, Brad Kessel to begin. Please go ahead.

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 third quarter 2023 results.

And Brad Kessel, President and Chief Executive Officer, and joining me is Kevin Moore, Executive Vice President and Chief Financial Officer, and Joel run Executive Vice President of commercial banking are independent.

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.

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 third quarter 2023, net income of $17 $5 million or <unk> 83 per diluted share versus net income of $17 $3 million or <unk> 81.

<unk> per diluted share in the prior year period.

The increase in the 2023 third quarter results as compared to 2022 as perimeter, primarily due to a decrease in the provision for credit losses, a decrease in noninterest expense.

Actually offset by a decrease in noninterest income and net interest income and an increase in income tax expense.

For the third quarter 2023, we generated an annualized return on average assets and return on average equity of 134% and 18.68% respectively.

As compared to 140% and 24, 8% in the third quarter of 2022.

The item most impacting the comparable third quarter 2023 results included the positive changes in fair value due to price of our mortgage servicing rights $1 6 million or six cents per diluted share after tax for the three month period ended September 30 of 'twenty three.

Three as compared to $3 2 million or 12 cents per diluted share after tax for the three months ended September 32022.

Our team continued its positive momentum in the third quarter, achieving strong financial results with solid balance sheet growth.

Cable net interest margin disciplined expense management and healthy asset quality.

Capitalizing on the current operating environment, we gained a new banking relationships with clients, who appreciate our value proposition as a leading commercial bank with robust Treasury management solutions industry expertise and client centric service.

This success led to double digit annualized growth in loans and deposits.

Despite expecting lower loan growth in the fourth quarter due to seasonality, we have a solid pipeline of high quality relationship opportunities.

With the loan to deposit ratio at 82%. We believe we have the capacity to continue to support our on ongoing growth of our loan portfolios.

We have a very granular deposit portfolio with choice just 23% of our deposits uninsured. In addition, we have a high level of available liquidity with $2 $1 billion in secured borrowing access and borrowing capacity on Unpledged securities.

Overall, our deposit base continues to perform well.

Total deposits at September 30 were $4 $6 billion up $112 $6 million or 10, 5% annualized during the third quarter.

$206 $5 million or six 3% annualized year to date.

During this nine month 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 $128 1 million savings and interest bearing checking or down $43 4 million reciprocal deposits are up 100, new.

$97 3 million in time deposits are up $156 4 million, while brokered time deposits are up $24 3 million.

This past quarter, while continuing to see some remixing of the deposit base.

<unk> significantly slowed with noninterest bearing deposits declining by $13 9 million or four 8% annualized during the third quarter.

We have included in our presentation, a historical view of our cost of funds.

Compared to the fed funds spot rate and fed effective rate for the quarter. Our total cost of funds increased by 23 basis points to 180%.

Through the third quarter, the cumulative cycle beta for our cost of funds is now at 32, 6%.

At this time I would like to turn the presentation over to Joel Ryan to share a few comments on the success, we are having in growing our loan portfolios and provide an update on our credit metrics.

Thanks, Brad.

I'll start on page seven where we provide an update on our well diversified loan portfolio.

Total loans increased $110 million in the third quarter.

<unk> segment was in the quarter was commercial lending growing by $88 million.

We also realized growth in our mortgage business would that portfolio growing by $34 million.

Alright stomach portfolio experienced a $12 million decline in the quarter as we strategically pulled back in that area.

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.

On an annualized basis was 14, 5% through the third quarter.

Looking forward based on based upon a strong pipeline and solid liquidity position, we see continued growth opportunity, while maintaining our disciplined credit standards.

Page eight provides detail on our commercial loan portfolio.

As I've indicated in prior quarters C&I lending continues to be our primary focus representing 64% of the portfolio.

Manufacturing continues to be the largest segment within the C&I segment, comprising approximately 9% or $149 million.

Lydia: Hello all, and welcome to Independent Bank Corporation's third quarter 2023 earning school. My name is Lydia and I'll be your operator today. If you'd like to ask a question during the Q&A session, you can do so by pressing star followed by the number one on your telephone keypad.

The remaining 36% of the portfolio is comprised of commercial real estate.

With the largest concentrations being industrial at $157 million or 10, 2% and retail at $136 million or eight 9%.

Brad Kessel: On our hand you over to your host, Brad Kessel, to begin, please go ahead. 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 third quarter 2023 results, I am Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Mohr, Executive Vice President and Chief Financial Officer, and Joel Rahn, Executive Vice President of Commercial Banking for Independent.

It's worth noting that our exposure to the office segment stands at $93 million or six 1% of our commercial portfolio at quarter end.

Our office exposure consists primarily of suburban low rise office space.

And medical comprises 25% of our overall office exposure.

Particular segment of our portfolio continues to perform very well.

For additional insight into our office exposure I refer you to the appendix of this presentation.

Brad Kessel: 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. Anyone does not already have a copy of the press release issued by us today. You can access it at the company's website, independentbank.com. The agenda for today's call will include prepared remarks followed by a question and answer session and then closing remarks. Independent Bank Corporation reported third quarter 2023 net income of 17.5 million dollars, or 83 cents per diluted share versus net income of 17.3 million dollars, or 81 cents per diluted share in the prior year period.

Page nine provides an overview of key credit quality metrics at 930 overall.

Overall credit quality continues to be excellent totaled.

Total nonperforming loans were $4 7 million or.

One 2% of total loans at quarter end.

Loans 30 to 89 days delinquent totaled.

$44 9 million or one 3% at 930, which is consistent with last quarter 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 10 of our presentation.

Brad Kessel: The increase in the 2023 third quarter results, as compared to 2022, is primarily due to a decrease in the provision for credit losses, a decrease in non-interest expense, partially offset by a decrease in non-interest income, and net interest income, and an increase in income tax expense. For the third quarter 2023, we generated an annualized return on average assets and return an average equity of 1.34 percent and 18.68 percent respectively, as compared to 1.40 percent and 20.48 percent in the third quarter of 2022.

Page 10 highlights our strong regulatory capital position all capital ratios were stable from the linked quarter.

Net interest income decreased $5 million from the year ago period, our tax equivalent net interest margin was three 5% during the third quarter of 2023 compared to 349% in the third quarter of 2022 and down one basis point from the second quarter of 2023 average interest earning assets were four.

Eight $9 billion in the third quarter of 2023 compared to $4 six $1 billion in the year ago quarter, and $4 $76 billion in the second quarter of 2023.

Page 12 contains a more detailed analysis of the linked quarter decrease in net interest income.

The net interest margin.

On a linked quarter basis, our third quarter 2023, and net interest margin was positively impacted by two factors increase in yield on loans and investments of 16 basis points and a change in earning asset mix of five basis points. These increases were offset by an increase in funding costs of 19 basis points and three basis points that were due to change.

Brad Kessel: The item most impacting the comparable third quarter 2023 results, included the positive changes and fair value due to price of our mortgage servicing rights. 1.6 million or 6 cents per diluted share after tax, for the three month period ended September 30th, 23, as compared to 3.2 million, or 12 cents per diluted share after tax for the three months ended September 30th, 2022. Our team continued its positive momentum in the third quarter, achieving strong financial results with solid balance, a stable net interest margin, disciplined expense management, and healthy asset quality. Capitalizing on the current operating environment, we gained a new banking relationships with clients who appreciate our value proposition as a leading commercial bank with robust treasury management solutions, industry expertise, and client-centric service.

And 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 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for the third quarter 2003 in the second quarter 'twenty III calculates the change in net interest income over the next 12 months under five rate scenarios, all scenarios assume a strategic static balance sheet.

The base scenario applies the spot yield curve from the valuation date.

Shock scenarios consider immediate permanent in parallel rate changes.

The increase in the base rate forecasted.

Net interest income in third quarter 23, compared to the second 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 sensitivity is largely unchanged during the quarter with the exposure to rising rates declining modestly larger rate increases.

Brad Kessel: Justice. The success led to double-digit annualized growth in loans and deposits, despite expecting lower loan growth in the fourth quarter due to seasonality, we have a solid pipeline of high-quality relationship opportunities. With the loaned deposit ratio at 82%, 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 23% of our deposits uninsured. In addition, we have a high level of available liquidity with $2.1 billion in secured borrowing access and borrowing capacity on unpleased securities.

Currently 32% of assets reprice in one month and 44, 2% reprice in the next 12 months.

Moving on to page 14, noninterest income totaled $15 $6 million in the third quarter of 2023 as compared to $16 $9 million in the year ago quarter to $15 4 million in the second quarter of 23% third quarter 23, net gains on mortgage loans totaled $2 $1 million compared to two.

$9 million in the third quarter of 22. The decrease was primarily due to lower mortgage loan sales volume that were partially offset by increased profit margins and fair value adjustments.

Positively impacting non-interest income was $2 $7 million of mortgage loan servicing income. This is comprised of $2 $2 million of revenue and a $1 6 million or <unk> per diluted share after tax increase in the fair value due to price, that's partially offset by a $1 $1 million decrease due to pay downs of capitalized.

Brad Kessel: Overall, our deposit base continues to perform well. Total deposits at September 30th were $4.6 billion, up $112.6 million, or 10.5% annualized during the third quarter, and $206.5 million or 6.3% annualized year-to-date. During this nine-month period, we have seen some level of remixing of our funding as customers take advantage of the interest rate spread opportunities. Our nine-interest bearing deposits are down 128.1 million, savings and interest bearing checking are down 43.4 million, reciprocal deposits are up 197.3 million, and time deposits are up 156.4 million, while broker time deposits are up 24.3 million.

Mortgage loan servicing rights in the third quarter 2023.

As detailed on page 15, our noninterest expense totaled $32 million in the third quarter of 2023 as compared to 32 four.

$1 million in the year ago quarter, and $32 $2 million in the second quarter of 2023 compensation increased $2 million compared to the prior year quarter due to raises that were effective at the start of the year and a decreased level of compensation that was deferred in the third quarter of 2023 has direct origination cost.

On lower mortgage loan origination volume.

Brad Kessel: This past quarter, while continuing to see some remixing of the deposit base, the pace significantly slowed with nine-interest bearing deposits declining by $13.9 million, or 4.8% annualized during the third quarter. We have included in our presentation a historical view of our cost of funds as compared to the Fed Fund Spot Rate and Fed Effective Rate for the quarter. Our total cost of funds increased by 23 basis points to 1.80%. Through the third quarter, the cumulative cycle beta for our cost of funds is now at 32.6%.

Performance based compensation decreased $1 $3 million due primarily to lower expected.

Incentive compensation payout for salaried and hourly employees and a decrease in mortgage lending related to incentives attributed the decline in mortgage lending compared to third quarter 'twenty to date.

Data processing costs increased by $2 4 million from the prior year period, primarily due to core data processor annual asset growth in CPI related cost increases lower net.

Mortgage processor related cost deferrals due to lower mortgage loan volume as well as the prior year to date period.

As well as the purchase of a new lending solutions software in 2023.

Joel Rahn: 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 providing an update on our credit metrics. Thanks, Fred. I'll start on page 7, where we provide an update on our well-diversified loan portfolio. Total loans increased $110 million in the third quarter. Strongest segment in the quarter was commercial lending, growing by $88 million.

Page 16 is our update for 2023 outlook to see how our actual performance during the third quarter compared to the original outlook that was provided in January 2023.

Our outlook estimated loan growth in the low double digits loans increased $110 $4 million in the third quarter of 2023, or 12, 1% annualized which is above our forecasted range.

Joel Rahn: We also realized growth in our mortgage business with that portfolio growing by 34 million. Our installment portfolio experience to $12 million declined in the quarter as we strategically pulled back in that area. 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 14.5% through the third quarter.

Emotional and mortgage had positive growth while installment loans decreased slightly in the third quarter of 'twenty three.

Third quarter 2023, net interest income decreased by one 2% over 2022, which is lower than our forecast.

<unk> forecast of high single digit growth. The net interest margin was 325% for the current quarter and $3, 49% for the prior year quarter. The third quarter 'twenty three net interest income was below our original forecast for third quarter 2023 provision for credit losses, it wasn't expense of $1 $4 million for.

Joel Rahn: Order. Looking forward, based on a strong pipeline and solid liquidity position, we see continued growth opportunity while maintaining our discipline credit standards. Page 8 provides detail on our commercial loan portfolio. As I've indicated in prior quarters, C&I lending continues to be our primary focus, representing 64% of the portfolio. Manufacturing continues to be the largest segment within the C&I segment, comprising approximately 9% or $149 million. Their meaning 36% of the portfolio is comprised of commercial real estate, with the largest concentrations being industrial at 157 million or 10.2% and retail at 136 million or 8.9%.

One 5% annualized third quarter 'twenty three provision expense was primarily the result of loan growth and a decrease in prepayment speeds primarily related to jumbo mortgages.

The provision expense related to loans in the third quarter of 23 was lower than our forecasted range.

Moving on to page 17, noninterest income totaled $15 $6 million in the third quarter of 23, which was higher than our forecasted range of $11 million to $13 million third quarter 'twenty three mortgage loan originations sales and gains totaled $172 9 million, a $115 3 million and $2 million respectively.

<unk> mortgage loan servicing that generated income of $2 7 million in the third quarter of 'twenty three.

Noninterest expense was $32 million in the third quarter within our forecasted range of 32 to $33 $5 million targeted quarterly.

Joel Rahn: It's worth noting that our exposure to the office segment stands at 93 million or 6.1% of our commercial portfolio at quarter ant. Our office exposure consists primarily of suburban, low rise office space, and medical comprises 25% of our overall office exposure. This particular segment of our portfolio continues to perform very well. For additional insight into our office exposure, I refer you to the appendix of this presentation. Page 9 provides an overview of key credit quality metrics at 9.30.

Our effective tax.

Income tax rate of 19% for the third quarter, 2023, which was a little higher than our forecast Lastly, 88 401 shares for repurchase in the third quarter of 23 at an average share price of $19 15.

Year to date 288, 401 shares have been repurchased at an average share price of $17 and 21.

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

Joel Rahn: Overall, credit quality continues to be excellent. Total non-performing loans were 4.7 million or 1.2% of total loans at quarter ant. Loans 30 to 89 days delinquent, totaled 4.9 million or 0.13% at 9.30, which is consistent with last quarter ant.

Thanks, Kevin These strong results, which our company has been delivering quarter over quarter year. After year for some time is 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 <unk>.

Gavin Mohr: At this time, I'd like to turn the presentation over to Gavin for his comments, including the outlook for the remainder of the year. Thanks, you all. Good morning, everyone.

Being named one of 31 banks and thrifts that comprise Piper Sandler.

Gavin Mohr: I'm starting at Page 10 of our presentation. Page 10 highlights our strong regulatory capital position. All capital ratios were stable from the link quarter net interest income decreased 0.5 million dollars from the year ago period. Our tax equivalent net interest margin was 3.25% during the third quarter of 2023 compared to 3.49% in the third quarter of 2022 and down one basis point from the second quarter of 2023. Average interest earning assets with 4.89 billion dollars in the third quarter of 2023 compared to 4.61 billion dollars in the year ago quarter and 4.76 billion dollars in the second quarter of 2023.

<unk> all star class.

Of 2023, our team is very proud.

Of this of this recognition.

We intend to finish 2023 strong with our focus continuing to be on investing in our team leveraging our technology and supporting our communities.

In doing so we will continue the rotation of earning assets out of lower yielding investments into higher yielding loans.

With the strong value proposition offered as a leading commercial bank.

We believe we can continue to grow our deposit base, while managing our cost of funds and controlling our noninterest expenses.

We are excited about the opportunities we have to continue our growth trends.

Gavin Mohr: Page 12 contains a more detailed analysis of the link quarter decrease in net interest income and the net interest margin. On a link quarter basis, our third quarter of 2023 net interest margin was positively impacted by two factors increase in yield on loans and investments of 16 basis points and a change in earning asset mix of 5 basis points. These increases were offset by an increase in funding costs of 19 basis points and 3 basis points that 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.

We built a strong franchise, which position 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. Please press star followed by the number one if you'd like to ask a question. Please ensure your devices Amit would likely when it shorts anticipate.

With your question's already been answered Keith Mitchell from me Keith My question, Scott followed by <unk>.

Gavin Mohr: On page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for the third quarter of 2023 and the second quarter of 2023 calculates the change in net interest income over the next 12 months under five rate scenarios. All scenarios assume a strategic 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.

Our first question today comes from Erik Zwick of highest rate.

Your line is open.

Thank you and good morning, everyone.

Good morning.

Wanted to first start.

The first start on.

Just kind of out of the loan growth.

Comment about fourth quarter likely to be a little bit slower due to seasonality, but the pipeline is still very strong. So I expect that to start to pick up again in the beginning of next year wondering if you could just add a little commentary on towards the mix of the pipeline, where youre seeing strength today from kind of a product type and maybe industry as well.

Gavin Mohr: The increase in the base rate forecasted net interest income in third quarter, 23 compared to the second quarter of 23 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 sensitivity is largely unchanged during the quarter with the exposure to rising rates declining modestly for larger rate increases. Currently, 32% of assets repriced in one month and 44.2% repriced in the next 12 months.

Yes. This is Joel.

On the pipeline.

Is still very solid.

As we head into the fourth quarter and of course commercial pipeline.

Tends to be pretty long, so that'll take us into the early part of next year.

He is a pretty diverse mix I really can't point to any one area.

Gavin Mohr: Awards. Moving on to page 14. Nine inches of income total of $15.6 million in the third quarter of 2023 is compared to $16.9 million in the year ago quarter and $15.4 million in the second quarter of 23. Third quarter of 23 net gains on mortgage loans total of $2.1 million compared to $2.9 million in the third quarter of 22. The decrease is primarily due to lower mortgage loans sales volume that were partially offset by increased profit margins and fair value adjustments.

That debt is stronger.

We're seeing growth.

C&I again is our primary focus and we are seeing those opportunities we've seen good opportunity in medical related space.

Interestingly enough and that's again because of long time relationships that our bankers have had in the community.

And.

Some select commercial real estate, primarily industrial.

Gavin Mohr: Possibly impacting non-interest income was $2.7 million of mortgage loan servicing income. This is comprised of $2.2 million of revenue and a $1.6 million or $6 cents per eluded tractor tax increase in the fair value due to price. That's partially offset by a $1.1 million decrease due to pay downs of capitalized mortgage loan servicing rights in the third quarter of 2023. As detailed on page 15 are non-interest expense total $32 million in the third quarter of 2023 is compared to $32.4 million in the year ago quarter and $32.2 million in the second quarter of 2023 compensation increased $2 million compared to the prior year quarter due to raises that were effective at the start of the year and a decreased level of compensation that was deferred in the third quarter of 2022.

It's been a focus for us right now.

So that would be just.

Some additional color from my vantage point.

Okay.

Thank you I appreciate that and then you mentioned.

Strategically pulled back from the installment portfolio just curious if you could add maybe a bit of additional commentary there is that youre, just seeing better opportunities in other areas or is that kind of a cautionary.

Stance do too.

Just kind of uncertain economic outlook or just curious how youre thinking about that portfolio today.

Yes, Eric that's a great question I think it's twofold I.

I think number one is.

We are really excited about the continued.

And for our.

Commercial banking team in our markets.

Gavin Mohr: As a direct origination cost on lower mortgage loan origination volume performance based compensation decrease $1.3 million due primarily to lower expected incentive compensation pay out for salary and hourly employees and a decrease in mortgage lending related to incentive to decline and mortgage lending compared to third quarter of 22. Data processing cost increased by $2.4 million from the prior year period primarily due to coordinator processor annual asset growth and CPI related cost increases lower net mortgage process related cost to pearls due to lower mortgage loan volume as well as prior year to date period as well as the purchase of a new lending solution software in 2023.

So and we like the.

That asset class the yields the risk profile that go with it and so I think that's one just we.

We had to prioritize our capital allocation. It goes it goes in that direction.

The second piece is.

Watching closely the consumer there's a lot written about.

A slowdown in.

The consumer itself driving.

It savings.

They are savings level declining.

And and also I think that's the second aspect.

Cognizant of what's happening with the consumer and then third you know.

<unk>.

Our consumer installment area.

Gavin Mohr: Page 16 is our update for 2023 outlook to see how our actual performance during the third quarter compared to the the original outlook that was provided in January 2023. Our outlook estimated loan growth in the low double digits loans increased $110.4 million in the third quarter 2023 or 12.1% annualized which is above our forecasted range. Commercial mortgage had positive growth while installment loans decreased slightly in the third quarter of 23.

Historically is driven out of production direct out of our branches and then our indirect channel, which is marine and RV and I'd say.

We are a little more cautious on the RV side of it I think there was a pretty strong run up during the pandemic.

So we are watching those collateral values closely hopefully that helps.

We have a very helpful and one last one for me just looking at thinking about expenses the bottom of.

Gavin Mohr: Third quarter 2023 net interest income decreased by 1.2% over 2022 which is lower than our forecast of high single digit growth the net interest margin was 3.25% for the current quarter and 3.49% for the prior year quarter the third quarter 23 net interest income was below our original forecast. The third quarter 2023 provision for credit losses was an expense of $1.4 million for 0.15% annualized the third quarter 23 provision expense was primarily the result of loan growth and a decrease in pre-payment speeds primarily related to jumbo mortgages. The provision expense related to loans in the third quarter 23 was lower than our forecasted range.

The July number wise, but that had some commentary about expenses and you mentioned opportunities exist for additional efficiencies that you've optimized delivery channels and then.

On Slide 18, you have a list of I guess kind of target areas for process improvement and cost controls and I'm just kind of curious as we think about.

Looking into 2004, even kind of what the biggest opportunities are too.

Keep expenses under control.

You have a kind of target in mind for the efficiency ratio or just generally targeting additional improvement overtime.

Okay.

So another great question I'd say.

First off I am really pleased with the.

Gavin Mohr: Cash. Moving on to page 17, non-interest income told us $15.6 million in the third quarter of 23, which was higher than our forecasted range of $11 to $13 million. Third quarter, 23, mortgage-owned originations, sales and gains total of $172.9 million, $115.3 million and $2 million respectively. Mortgage-owned servicing that generated income of $2.7 million in the third quarter of 23. Non-interest expense was $32 million in the third quarter, within our forecasted range of $32 to $33.5 million targeted quarterly.

Very.

Positive trending of our efficiency ratio.

Bolt on.

Four quarter basis, but just really.

Over time year after year end.

We've taken it from the <unk> through the <unk> an hour.

We're in the in the high Fifty's.

And we think that we can continue to.

Positively reduce that and.

First and foremost.

I would point to are.

Gavin Mohr: Our effective tax income tax rate of 19% for the third quarter of 2023, which was a little higher than our forecast. Lastly, $88,401 shares for repurchasing the third quarter of 23 at an average share price of $19.15. Here to date, $288,401 shares have been repurchased at an average share price of $17.21.

Core conversion, which we.

Uh huh.

We pulled the switch in may of 2021.

And we continue to see in <unk>.

Opportunities just efficiencies.

With all the different technology, that's interrelated and connected and so.

There's opportunities in the backroom.

Brad Kessel: That concludes my prepared remarks, and I would now like to turn the call back over to Brad. Thanks, Gavin. These current results, which our company has been delivering, order over quarter, year after year for some time, is directly attributable to our talented team. They're focused on personalized service, investing in our communities, and making banking easy. Our financial results, once again, gained us nice recognition in being named one of 31 banks and thrifts that comprise piper samers, mall, all-star class of 2023. Our team is very proud of this recognition.

And then I would I would point over towards.

Our branch.

Our footprint and and we continue to look at ways to optimize there.

We are well underway.

In a.

The use of <unk>.

Stellar recycle machines, which we see significant opportunities.

Throughout the whole footprint so.

Those are a couple of examples and obviously every area.

Is charged with curious to how do we how do we get better how do we get smarter how do we.

Have a less touches how do we better serve the customer in <unk>.

And so I'm really excited about I think there is room for us to continue to improve.

Brad Kessel: We intend to finish 2023 strong with our focus continuing to be on investing in our team, leveraging our technology and supporting our communities. In doing so, we will continue the rotation of earning assets out of lower yielding investments and to higher yielding loans. With this strong value proposition offered as a leading commercial bank, we believe we can continue to grow our deposit base while managing our cost of funds and controlling our non-interest expenses. Accordingly, we are excited about the opportunities we have to continue our growth trends.

Okay.

Thank you for taking my questions today.

Thanks, Eric.

As a reminder, if you'd like to ask a question. It still followed by one on your telephone keypad.

Our next question comes from Damon Delmonte <unk>. Please go ahead.

Yeah.

Hi, This is Matt <unk> filling in for Dan and del Monte I Hope everybody is doing good today.

My first question was are there any potential impacts from the UAW strike on your business and do you think it could drive provision higher if the local economies start to suffer.

Brad Kessel: 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.

So Matt Thanks for the call and.

I think obviously.

Lydia: At this point, we would not like to open up the call for questions. Thank you. Please press star followed by the number one if you'd like to ask a question.

Hey, we're in Michigan.

In our footprint, but I wanted to start off with the commercial side to it and Joel.

Lydia: And please ensure your device is unneeded locally when it's your time to seek. If your questions are already been answered, you can withdraw from the queue by pressing star followed by two.

<unk> been speaking with our team and with our customer base.

Give us an update there yes of course, the big unknown is how long the strike will act.

Eric Zwick: Our first question today comes from Eric's WIC of Host Group. Your line is open. Thank you.

That's the big qualifier, but we've been in regular contact with.

With the customers that we have that would be directly impacted.

Joel Rahn: Good morning, everyone. Good morning, Eric. I wanted to first start on the low growth and comments about fourth quarter likely to be a little bit slower due to seasonality, but the pipeline is still very strong. So expect that to start to pick up again in the beginning of next year. Well, then if you could just add a little commentary in towards a bit. Then the mix of the pipeline where you're seeing strength today from kind of a product type and maybe industry as well.

Fortunately in in.

Our portfolio.

It's.

It's really.

Pretty small percentage of our of our customer base in our portfolio. So we've got fixed customers that would have direct impact.

The strike.

$60 million in total outstandings today or about three 5% of our portfolio. So just to put that in perspective. So we're not again, our portfolio is very well diversified and we're not real heavy in automotive supply.

Joel Rahn: Yeah, this is Joel. You know, on the pipeline, it is still very solid as we head into the fourth quarter. And of course, you know, commercial pipeline tends to be pretty long. So that'll take us into the early part of next year. It really is a pretty diverse mix. I really can't point to any one area that is stronger. We're seeing growth in you know, CNI again is our primary focus. And we are seeing those opportunities.

And we're talking to those customers on a weekly basis, so far the strike impact has been nominal but as it continues to drag on some.

Some point it will affect.

Yes.

Even these tier two suppliers and they would be forced to lay people off but we have not seen that yet.

Yes.

Yes, I would just add then great okay.

Yes, Matt I would just add then your carryover to the consumer portfolio and.

Joel Rahn: We've seen good opportunity in medical related space. Interestingly enough. And that's again, because of long time relationships that our bankers have had in the community. And you know, some select commercial real estate primarily industrial is been a focus for us right now. So that would be just, you know, some additional color from my vantage point. Thank you. I appreciate that. And then you mentioned you could strategically pull back from the installment portfolio.

We've had.

Just minimally.

And you can count on one hand inquiries.

From the customer base in terms of Hey, if the strike continues.

What.

Can you work with me so it's been very small and is not meaningfully impacted our.

Our performance metrics up to this point.

Okay, great. Thank you and I don't know if you can share it but is there a point in time that the strike reaches that's like in your mind. That's when the trouble started midway through next year is that through the end of this year.

Joel Rahn: Just curious if you could add maybe a bit of additional commentary there is that you're just seeing better opportunities in other areas or is it kind of a cautionary stance due to, you know, uncertain economic outlook or just curious how you're thinking about that portfolio today. Yeah, you know, Eric, that's a great question. I think it's twofold. I think number one is we are really excited about the continued demand for our commercial banking team in our markets.

Sure.

That's really hard to quantify.

If I had to if I had to just provide my personal opinion on when it would start to affect ripple down into the supply base.

It's going to be.

I mean within the next 30% to 45 days when we initially talked to our customers at the very front end of the strike which was back in.

Mid September .

Joel Rahn: And so I and we like the that asset class, the yields, the risk profile that they go with it. And so I think, you know, that that's one just we had to prioritize our capital allocation. It goes, it goes in that direction. Yeah, the second piece is, you know, we're watching closer to consumer. There's a lot written about, you know, slow down and the consumer itself, driving or it's savings, their savings level declining.

The general consensus was.

We're fine for a month to six weeks, but if it drags on longer than that it will start to affect our our production. So I think it's sooner rather than later, but we're all just hoping that the strike is resolved.

Here in the next 30 to 60 days.

Yes.

Okay, great. Thank you. Thank you for the color and then one last question for me.

Just on the securities portfolio could you remind us do you have a targeted percentage of earning assets you want to work that down to or maintain.

Joel Rahn: And and also I think so that's the second aspect, just being cognizant of what's happening with the consumer. And then third, you know, our consumer installment area historically is driven out of production, direct out of our branches and then our indirect channel, which is marine and RV. And I'd say we are a little more cautious on the RV side of it. I think there was a pretty strong run up during the pandemic.

Yes, so 12% to 15% would be the target and we will just do we'll evaluate as we move down to that ratio.

Based on the broader liquidity profile of the bank.

Got it thank you very much I'll step back.

Yeah.

Thanks, Matt.

Thank you.

No further questions on the call at this time, so I'll turn the call back over to Keith <unk> for closing remarks.

Thank you Lydia in closing I would like to thank our board of directors and our senior management for their support and leadership I also want to thank all of our associates I 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 towards our <unk>.

Joel Rahn: And we are watching those collateral values closely. Hopefully that helps. We have very helpful. And one last one for me, just looking at thinking about expenses, the bottom of figure with the slide number one has some commentary about expenses and you mentioned opportunities exist for additional efficiencies as you optimize delivery channels. And then on slide 18, you have a list of, I guess, target areas for process improvements and cost control. So I'm just kind of curious as we think about, you know, looking into the 2040s and kind of what the biggest opportunities are to, you know, keep expenses under control.

Armen 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 have a great day.

This concludes today's call. Thank you for joining you may now disconnect your line.

[music].

Joel Rahn: And you have a kind of target in mind for the efficiency ratio or just generally targeting additional improvement over time. So another great question. I'd say, you know, first off, I'm really pleased with the very positive trending of our efficiency ratio, both on a four quarter basis, but just really, you know, over time year after year. And, you know, we've taken it from the 70s, through the 60s and hour, we're in the in the high 50s.

Yes.

Joel Rahn: And we think that we continue to, to positively reduce that. And first and foremost, I would point to our core conversion, which we, you know, we pulled the switch in May of 2021. And we continue to see in opportunities, just the efficiencies with all the different technology that's interrelated connected. And so, I think there's opportunities in the backroom. And then I would, I would point over towards our branch footprint. And, and, you know, we continue to look at ways to optimize there.

Joel Rahn: We are well underway in a use of teller recycle machines, which we see a significant opportunities in throughout the whole footprint. So those are a couple of examples. And obviously every area is charged with just how do we, how do we get better? How do we get smarter? How do we have less touches? How do we better serve the customer? And, and so I'm really excited about, I think there is room for us to continue to improve. Thank you for taking my questions today. Thanks Eric.

Lydia: As a reminder, if you'd like to ask a question, it's thought followed by one on your telephone keypad.

Matt Ranck: And next question comes from Damon Damont of KBW. Please go ahead.

Joel Rahn: Hi, this is Matt Ranck, filming for Damon Del Monte. I hope everybody's doing good today. My first question was, are there any potential impacts from the UAW strike on your business? And do you think it could drive provision higher if the local economy start to suffer? So Matt, thanks for the call. And I think obviously, you know, hey, we're in Michigan and it's in our footprint. But I want to, let's start off with the commercial side to it.

Joel Rahn: And Joel, you've been speaking with our team and with our customer base. Give us an update there. Yeah, of course, the big unknown is how long the strike lasts. So that's the big qualifier. But we've been in regular contact with the customers that we have that would be directly impacted. Fortunately in our portfolio, it's really a pretty small percentage of our customer base and our portfolio. So we've got six customers that would have direct impact from the strike.

Joel Rahn: That's about 60 million in total outstanding today. We're about three and a half percent of our portfolio, so just to put that in perspective. So we're not, again, our portfolio is very well diversified and we're not real heavy and automotive supply. And what we're talking to those customers on a weekly basis, so far the strike impact has been nominal. But as it continues to drag on, you know, at some point it will affect, you know, even these tier two suppliers and they would be forced to lay people off, but we have not seen that.

Joel Rahn: Yeah. Yeah, and I would just, yeah, man, I would just add, then you carry over to the consumer portfolio and we've had just minimally, you know, less than kind of one hand inquiries from the customer base in terms of, hey, if this straight continues, you know, what can you work with me? So it's been very small and has not needed being fully impacted our performance metrics up to this point. Okay, great.

Joel Rahn: Thank you. And I don't know if you can share it, but is there a point in time for the strike reaches that's like in your mind that's when the trouble starts as a midway through next year's, that through the end of this year, if you could share that. That's really hard to quantify, if I had to, if I had to just provide my personal opinion on when it would start to affect, you know, ripple down into the supply base, it's going to be, you know, I mean within the next 30 to 45 days, you know, that when we initially talked to our customers at the very front end of the strike, which was back in, you know, mid September.

Joel Rahn: The general consensus was we're fine for a month to six weeks, but if it drags on longer than that, it will start to affect our production. So I think it's sooner rather than later, but you know, we're all just hoping that the strike is resolved here in the next 30 to 60 days. Okay, great. Thank you. Thank you for the color.

Joel Rahn: And then one last question for me, just on the securities portfolio, because you remind us you've a targeted percentage of of earning assets, you want to work that down to or maintain. Yeah, so 12 to 15% would be the target, and we will just will evaluate as we move down to that ratio, based on the broader liquidity profile of the bank. Yeah, thank you very much. I'll step back. Thank you.

Lydia: We have no further questions on the call at this time.

Brad Kessel: So I'll turn the call back over to you back for closing remarks. Thank you, Lydia. In closing, I would like to thank our board of directors and our senior management for their support and leadership. I also want to thank all of our associates. I 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 towards 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 cooperation and for joining us on today's call.

Brad Kessel: Have a great day.

Lydia: This concludes today's call. Thank you for joining. You may now disconnect your line.