Independent Bank Corporation

Hello ladies and gentlemen, thank you for joining and being present at the Independent Bank Corporation Q1 2022 Earnings Conference Call. My name is Irene and I will be coordinating today's call. If you would like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. In case you have joined us online, you have the possibility to press the flag icon on your web browser to ask a question. I will now hand you over to your host, Brad Kessel, President and CEO, to begin. Brad, 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 first quarter 2022 results. I am Brad Kessel, President and Chief Executive Officer of And joining me is Gavin Moore, EVP and Chief Financial Officer, and Joel Rahn, Executive Vice President, 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 am very pleased with our team's continued execution of our operating plan. In doing so, our first quarter 2022 performance generated strong core results with good growth in net interest income, stabilization of our net interest margin, and net growth in each category of loans and total deposits. We were also able to make progress in reducing our non-interest expenses. During the first quarter, inflation was reported at near 40-year highs. and we witnessed a very dramatic increase in rates on the middle and long end of the yield curve with the expectation now for multiple Fed hikes through 2022 and into 2023. This recent increase in rates has slowed our mortgage refinance origination volume and decreased this quarter's net gains on mortgage loans sales. However, we have also structured our mortgage business to have an emphasis on supporting home purchase requests, and these volumes continue to be at solid levels. Additionally, the increase in rates also significantly increased the value of our capitalized mortgage servicing rights, somewhat of a natural hedge providing a benefit with higher rates. Over the years, we have shared our intentions and success in generating a diversified revenue stream through three lines of business, commercial banking, mortgage banking, and consumer banking. During 2021, we made significant investments both in talent and technology, primarily in our commercial and consumer banking lines of business. We are seeing some of the early paybacks for these investments with a very strong commercial pipeline and some increased efficiencies in our consumer banking business. Turning to page five, Independent Bank Corporation reported first quarter 2022 net income of $18 million or 84 cents per diluted share versus net income of $22 million or $1 per diluted share in the prior year period. The decrease in the 2022 first quarter earnings as compared to the first quarter of 2021 primarily reflects a decrease in non-interest income and an increase in non-interest expense that were partially offset by an increase in net interest income and a decrease in the provision for credit losses. The first quarter 2022 highlights include an increase in net interest income of 9% over the first quarter of 2021, loan growth of $99 million, or 13.8% annualized, and deposit growth of $88.4 million, or 8.7% annualized, a return on average assets of 1.54%, and a return on average equity of 19.38%. In addition, our asset quality continues to be very good with very low net charge-offs in the first quarter, as well as commercial watch credits at just 2.44% of the portfolio and a continued very low level of past due loans. These favorable asset quality metrics combined with reduced reserves related to COVID-19 allowed us to record a negative provision for the first quarter. Page six 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 are off to a strong start. In 2020, we closed eight branch locations as part of our ongoing branch optimization reviews. During the second quarter of 2022, we will be closing in additional four locations, one each in Kent, Oakland, Lapeer, and Saginaw counties. Annual expected cost savings from the combined closings is expected to be $1.5 million. These closings will reduce our branch network to 58 locations in total. Turning to page seven, 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 4.7%, slightly above the national average of 3.8%. However, the state of Michigan has 110,000 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 also continue to constrain many businesses in our markets. Regional average home prices continue to climb as inventory levels in many of our markets continue at record lows and negatively impact the overall volume of home sales. On page eight, we provide a couple of charts reflecting the composition of our deposit days, as well as the continued growth in this portfolio while working to effectively manage our overall cost of funds. At this time, I would like to turn the presentation over to Joel Ron to share a few comments on our loan portfolio.

Thanks, Brad. On page 10, we provide an update on our $3 billion loan portfolio that I'll provide some insight on. So the first quarter, the commercial segment of the portfolio grew by $54 million. However, when you exclude PPP activity, our commercial balance has increased by $74.5 million. This falls on a strong fourth quarter of 2021, where we experienced commercial loan growth of $45 million, also excluding PPP activity. Our annualized commercial growth rate over the past six months is 21%. And based on a strong pipeline, we expect strong commercial growth in the second quarter of 2022 as well. In the first quarter, our residential mortgage balances increased by $30.4 million and our consumer installment loan portfolio grew by 14.6 million. We remain optimistic about our ability to continue the earning asset rotation from lower yielding investments to higher yielding loans and believe we're on track to grow loans at a low double digit pace throughout 2022. On page 11, we display the concentrations of our $1.3 billion commercial loan portfolio. CNI lending continues to be our primary focus, representing 65% of the portfolio. Manufacturing is the largest single concentration within the CNI segment, comprising approximately 11% or $136 million. The remaining 35% of the portfolio is comprised of commercial real estate, with the largest concentrations being retail at $112 million, or 9%, and industrial at $91 million, or 7%. By design, this portfolio is very granular in nature, and our credit metrics, which Gavin will cover in a moment, reinforce 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 comments on our investment, capital, financials, credit quality, and our outlook for 2022.