Independent Bank Corporation

Good morning and welcome to the Independent Bank Corporation third quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Brad Kessel, President and Chief Executive Officer. 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 2021 results. I'm Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Moore, EVP and Chief Financial Officer, and Joel Rahn, EVP, Commercial Banking. Before we begin today's call, I would like to direct you to the important information on page two of our presentation, specifically the cautionary note regarding forward-looking statements. If anyone does not already have a copy of the press release issued by us today, You can access it at the company's website, independentbank.com. The agenda for today's call will include prepared remarks, followed by a question and answer session, and then closing remarks. Slide four provides a good summary of our historical results. I continue to be very pleased with the high level of performance by our team generating strong core results for yet another quarter. We continue to execute on our strategies of investing in people and technology. During the third quarter, we saw good growth in net interest income, stabilization of our net interest margin, and across the board, loan growth, net of PPP. Our commercial pipeline is at its highest level in many quarters. Fueling some of this growth was the opening of two new commercial loan production offices, one in Ottawa County and the second in Macomb County. Deposit gathering continues to be robust, both via existing customers as well as through the addition of new customers. In addition, mortgage gains continue to be solid, and our card strategies are generating good growth in interchange revenue. On the asset quality front, I could not be more pleased with net recoveries for the quarter, commercial watch credits at 2.4% of the portfolio, and a very low level of past use in non-earning assets. While there are many uncertainties and challenges ahead, we are excited about the momentum we have in our markets and look forward to continuing these trends through the end of 2021 and into 2022. Turning to page five, Independent Bank Corporation reported third quarter 2021 net income of $16 million, or 73 cents per diluted share, versus net income of 19.6 million, or 89 cents per diluted share in the prior year period. The highlights included annualized return on assets and average equity of 1.4% and 15.9% respectively, an increase in net interest income of 5.7% over the third quarter of 2020, net gains on mortgage loans of $8.4 million, and total mortgage loan origination volume of $453.8 million. Net growth in portfolio loans of $69.4 million, or 9.8% annualized. Continuing strong asset quality metrics as evidenced by $1.5 million in net loan recoveries during the quarter, as well as a low level of non-performing loans and non-performing assets. And finally, the payment of a 21 cent per share dividend on common stock on August 16th of 2021. For the nine months ended September 30, 2021, the company reported net income of $50.4 million, or $2.30 per diluted share, compared to net income of $39.2 million, or $1.76 per diluted share in a prior year period. Highlights for the first nine months of 2021 include increases in net income and diluted earnings per share of 28.6% and 30.7% respectively. Annualized return on average assets and average equity of 1.53% and 17.32% respectively. Net gains on mortgage loans of $30.3 million and total mortgage loan origination volume of $1.44 billion. Net growth in portfolio loans of $150.3 million or 7.4% annualized, and net growth in deposits of $374.7 million, or 13.8% annualized. Page seven provides a good snapshot of our loan and deposit metrics for our Michigan markets. Turning to page eight, we display several key economic statistics for the state of Michigan. Overall, we are seeing continued improvement in the unemployment rate for Michigan, now at 4.6%, slightly below the national average of 4.8%. However, we have 180,000 fewer workers employed today as compared to pre-COVID. Labor shortages are having a noticeable impact in many segments of our economy, including an increase in wages in our markets and reductions in business operating hours. In addition, supply chain shortages are also constraining many businesses in our markets. Regional average home sale prices continue to climb as inventory levels in many of our markets are at record lows and negatively impacting the overall volume of home sales. On page nine, we provide a couple of charts reflecting the composition of our deposit base as well as the continued growth in this portfolio. We're working to effectively manage our overall cost of funds. Extensive government stimulus continues to result in an increased deposit levels for many of our customers. Turning to page 10, we have a few highlights relating to our independent bank's digital transformation. Following our second quarter whole bank conversion, we are seeing good utilization and growth rates of our OneWallet and TreasuryOne platforms. At this time, I would like to turn the presentation over to Joel Ryan, to share a few comments on our loan portfolio. Joel?

Thanks, Brad. On page 11, we provide an update of our $2.9 billion loan portfolio. For the third quarter, commercial balances decreased by 21.7 million. However, excluding PPP activity, our commercial balances increased by 60 million for the quarter. We're seeing a gradual increase in commercial working capital line usage, which was 36 percent in the third quarter. While it's up from prior quarters, this continues to lag the historical average. Our commercial pipeline is very strong and we expect solid commercial loan growth in the fourth quarter. Our residential mortgage balances increased by 55.9 million and installment balances increased by 35.3 million. Our mortgage pipeline, while down from peak levels continues to display strength and we remain optimistic about our ability to accelerate the earning asset rotation from lower yielding investments to higher yielding loans and continue to believe we are on track to grow loans net of PPP at the higher end of our original forecast. On page 12, we have an update of our loan modifications which declined to 6 million or 0.2% of total loans. at September 30th, 2021. Moving to page 13, we provide an update on the bank's administration of the SBA's Paycheck Protection Program. As of September 30th, 2021, we had 90.2 million in balances outstanding and 3.2 million in net unaccreted fees. We expect most of these fees to be accreted in the interest income in the next three to six months. Moving to page 14, we display the concentrations of our $1.2 billion commercial loan portfolio. You'll note that 63 percent of the portfolio is comprised of a variety of CNI categories, the largest of which is manufacturing at 132 million or 10.8 percent. The largest concentrations, or excuse me, the remaining 37 percent of the portfolio is comprised of commercial real estate with the largest concentration being retail at 108 million or 8.8%, and office, the majority of which is medical, at 74 million or 6%. Our portfolio is very granular in nature. Our credit metrics indicate this portfolio has held up very well through the pandemic. And at this time, I'd like to turn the presentation over to Gavin to share a few comments on our investments, capital, financials, credit quality, and outlook for 2021.