Independent Bank Corporation

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Independent Bank Corporation Second Quarter 2022 Earnings Conference Call. My name is Irene and I will be coordinating this event. I would like to turn the conference over to our host, Brad Castle, President and CEO. Brad, please go ahead.

Thanks, Irene. 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 2022 results. I am Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Moore, Executive Vice President and our Chief Financial Officer, and Joel Rahn, Executive Vice President, Head of Commercial Banking for 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. 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. I am pleased with our second quarter of 2022 performance in which we generated strong core operating results with $3.1 million growth in net interest income, a 26 basis point expansion of our net interest margin on a linked quarter basis, and a $255 million increase in loans, including growth in each category of loans, as well as a $48 million increase in total deposits. In addition, our asset quality metrics continue to be very good, with a low level of past dues, low level of commercial watch credits, low level of nonperforming assets, and net loan recoveries for the quarter, and an allowance for credit losses to total loans of 1.47%. As we head into the second half of 2022, our focus will continue to be on the rotation of our earning asset mix out of lower-yielding investments into higher-yielding loans. growing our deposit base while managing our cost of funds and, of course, controlling our expenses. While there exists much uncertainty in the marketplace, we are excited about the momentum we have in our markets, and we look forward to continuing these growth trends for the remainder of 2022. Turning to page five, Independent Bank Corporation is reporting second quarter 2022 net income of $13 million. or $0.61 per diluted share versus net income of $12.4 million or $0.56 per diluted share in the prior year period. The 4.9% increase in 2022 second quarter net income as compared to 2021 is primarily due to an increase in net interest income and a decrease in non-interest expense that were partially offset by a decrease in non-interest income and increases in the provision for credit losses and income tax expense. For the six months ended June 30th, the company reported net income of $31 million or $1.45 per diluted share compared to net income of $34.4 million or $1.56 per diluted share in the prior year period. The decrease in the 2022 year-to-date results as compared to 2021 is primarily due to increases in non-interest expense and the provision for credit losses and a decrease in non-interest income that were only partially offset by an increase in net interest income and a decrease in income tax expense. For the six months ended June 30th, 2022, our return on average assets and return on average equity is 1.32% and 17.63% respectively. This compares to 1.60% and 18.06% for the same period in 2021. Page seven provides a good snapshot of our loan and deposit metrics for our Michigan markets. I would point out that our two loan production offices, which opened in Ottawa County and Macomb County during the third quarter of 2021 continue their strong pace of new loan generation. Accordingly, we are excited to announce our intent to open a new full-service branch in the Holland Market during the third quarter of 2022. During this past quarter, as part of our regular branch optimization review, we closed four branch locations. one in each in Kent, Oakland, Lapeer, and Saginaw counties. Annual cost savings from these combined four closings is expected to be $1.5 million. The closings, along with the new branch opening, will bring our branch network to 59 locations in total. Turning to page eight, we displayed several key economic statistics for the state of Michigan. Overall, we are seeing continued improvement in the unemployment rate for Michigan, now at 4.3%, slightly above the national average of 3.6%. However, the state of Michigan has 167,000 fewer workers employed today as compared to pre-COVID. Labor shortages continue to have a noticeable impact on many segments of our local economies. In addition, supply chain shortages also continue to constrain many businesses in our markets. Regional average home sale prices continue to climb as inventory levels in many of our markets remain at low levels. On page 9, 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. Our total deposits have increased by $173.5 million, or 8.5%, since December 31, 2021, and are up $428 million, or 11%, since June 30 of 2021. On page 10, we provide a historical view of our cost of funds as compared to the Fed fund spot rate and the Fed effective rate from the last rate hike cycle through the most recent quarter end. It may or may not be indicative of what we will see prospectively, but it does provide a good historical view of our company and its cost of funds during a rising rate environment. On slide 11, we spotlight our OneWallet and TreasuryOne digital platforms for consumers and commercial clients. We continue to get very positive reviews on the OneWallet channel. with an Apple App Store rating of 4.4 on 4,517 reviews. I'm pleased to share we passed the 100,000 mark during this past quarter as our one wallet customer base is now at 102,886 users, up from 86,994 users for an 8.2% increase from the same period one year ago. Also, our bill pay customer base has increased significantly to over 28,500 users, which is up 71% from the same period one year ago. 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 12, we'll provide an update of our $3.3 billion loan portfolio. The second quarter, our commercial portfolio grew by 71.6 million or 77.3 million when excluding PPP loan runoff. This follows on strong first quarter commercial loan growth of 74 million, also excluding PPP activity. Our annualized commercial growth rate, excluding PPP runoff in the first half of 2022 is 24%. While we expect that pace of growth to moderate in the second half of the year, With a continued strong pipeline, we're expecting a double-digit growth rate in the third and fourth quarters. In terms of our residential mortgage activity, our balance has increased by $114 million as our originations shifted toward more portfolio lending. It's worth noting that 33% of our mortgage portfolio is variable rate. Consumer installment lending remained strong during the quarter, increasing by $69 million. Overall, we're optimistic that we can continue the earning asset rotation from lower-yielding investments to higher-yielding loans and believe we're on track to continue to grow loans at a double-digit pace for the remainder of the year. On page 13, 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 concentration within the C&I segment, comprising approximately 11%, or 140 million. The remaining 35% of the portfolio is comprised of commercial real estate, with the largest concentrations being retail at 111 million, or 8.3%, and industrial at 108 million, or 8.1%. It's worth noting that of the $342 million of new commercial loan volume generated in the first half of the year, $245 million, or 71%, is CNI versus $97 million, or 29%, investment real estate. By design, the portfolio is very granular in nature, and our credit metrics, which Gavin will cover in a minute, 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 investments, capital, financials, credit quality, and the outlook for the remainder of 2022.