Independent Bank Corporation

Good morning, and welcome to the Independent Bank Corporation Report's 2021 Fourth Quarter and Full Year Results Conference Call. All participants will be in listen-only mode. So if 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'd like to turn the conference over to Brad Kessel, President and CEO. 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 fourth quarter and full year 2021 results. I am Brad Kessel, President and Chief Executive Officer. And joining me is Gavin Moore, EVP and Chief Financial Officer and Joel Ron, 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 this morning, 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 am very pleased with the high level of performance of our team generating strong core results for yet another quarter and now for the full year of 2021. We continue to execute on our strategies of investing in people and technology. During the fourth 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. Deposit gathering continues to be robust both by existing customers as well as the addition of new customers. In addition, while mortgage gains have tapered down, they continue to be solid, and our card strategies continue to generate positive growth in interchange revenue. On the asset quality front, I could not be more pleased with our net recoveries for the full year, as well as commercial watch credits at just 3.1% of the portfolio, and a very low level of past due loans. We are excited about the momentum we have in our markets, and we look forward to continuing these trends into 2022. Turning to page five, Independent Bank Corporation reported fourth quarter 2021 net income of $12.5 million, or 58 cents per diluted share. versus net income of $17 million or 77 cents per diluted share in the prior year period. The highlights included an increase in net interest income of 10.6% over the fourth quarter of 2020. Net gains on mortgage loans of 5.6 million and total mortgage loan origination volume of $424.6 million. Net growth in portfolio loans of 21 million or 2.9 percent annualized, excluding TP loans increased by 84.9 million or 11.8 percent annualized. Continued strong asset quality metrics as evidenced by low net charge-offs during the quarter as well as low level of non-performing loans and non-performing assets. and our payment of a 21 cent per share dividend and common stock on November 15th, 2021. Turning to page seven for the year ended, full year ended December 31, 2021, the company reported net income of $62.9 million or $2.88 per diluted share compared to net income of 56.2 million or $2.53 per diluted share in 2020. The increase in full year 2021 net income as compared to 2020 primarily reflects an increase in net interest income and a decrease in provision for credit losses that were partially offset by a decrease in non-interest income and an increase in non-interest expense and income tax expense. Highlights for the full year of 2021 include increases in net income and diluted earnings per share of 12% and 13.8% respectively. Annualized return on average assets and average equity of 1.41% and 16.1% respectively. Net gains on mortgage loans of $35.9 million. and record total mortgage origination volume of $1.9 billion. Net growth in portfolio loans of $171.4 million or 6.3% annualized. Net growth in deposits of $479.7 million or 13.2% annualized. We paid 84 cents in dividends, which was a 5% increase compared to 2020, and tangible common equity per share increased by 6.1% to $17.33 per share. Page 8 provides a good snapshot of our loan and deposit metrics for our Michigan markets. I would point out that our two loan production offices opened in Ottawa County and Macomb County during the third quarter of 2021 and are off to a strong start. As a result, we do plan to open a new full-service office in Ottawa County during the first half of 2022. 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 5.9%. above the national average of 3.9%. However, the state of Michigan has 282,000 fewer workers employed today as compared to pre-COVID. Labor shortages are having a noticeable impact on 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 continue to be at record lows and negatively impacting the overall volume of home sales. That said, we continue to have very strong applications levels for new home purchases. On page 10, we provide a couple of charts reflecting the composition of our deposit base as well as the continued growth in this portfolio while working to effectively manage our overall cost of funds. Extensive government stimulus continues to result in increased deposit levels for many of our customers. Turning to page 11, we have a few highlights relating to independent banks' digital transformation. Following our second quarter whole bank conversion, we continue to see good utilization and growth rates in our one wallet, One Wallet Plus and Treasury One platforms. At this time, I would like to turn the presentation over to Joel Ron to share a few comments on our loan portfolio.

Thank you, Brad. On page 12, we provide an update on our $2.9 billion portfolio. For the fourth quarter, commercial balances decreased 19.2 million. However, if you exclude PPP activity, Our commercial balances increased by $45 million for the quarter. And for the year, excluding PPP loans, our commercial portfolio grew by 9.4%. Looking more closely, if the growth of the third and fourth quarters is annualized, the commercial portfolio increased at an annualized pace of nearly 19%. As Brad said, our commercial pipeline is very strong, and we expect solid commercial loan growth in the first quarter of 2022. In the fourth quarter, our residential mortgage balances increased by $38.7 million, and installment balances increased by $1.6 million. Our mortgage pipeline, while down from peak levels, continues to display strength. We remain optimistic about our ability to accelerate the earning asset rotation from lower yielding investments to higher yielding loans, and we continue to believe we're on track to grow loans at a low double-digit pace in 2022. We turn to page 13, we provide an update on our loan COVID related modifications, which declined to 2.3 million or 0.1% of total loans in December 31st. All but one of these modifications are in our residential mortgage portfolio. Moving to page 14, we provide an update on the bank's administration of the SBA's Paycheck Protection Program. As of December 31st, 2021, We had $26.2 million in balances outstanding and $806,000 in net unaccreted fees. We expect these remaining loans to be forgiven and fees to be accreted into interest income during the first quarter of 2022. On page 15, we display the concentrations of our $1.2 billion commercial loan portfolio. Consistent with prior quarters, you'll note that 63% of the portfolio is comprised of a variety of C&I categories, the largest of which is manufacturing at 114 million, or 9.5%. The remaining 37% of the portfolio is comprised of commercial real estate, the largest concentrations being retail at 109 million, or 9%, and office, the majority of which is medical-related, at 72 million, or 6%. The portfolio is very granular in nature, and our credit metrics indicate that this portfolio has held up very well through the pandemic and the resulting supply chain pressures. So 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 our outlook for 2022.