Aflac Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 6 speakers on the call.

Operator

Hello all and welcome to Independent Bank Corporation's 3rd Quarter 2023 Earnings Call. My name is Lydia and I'll be your operator today. I'll now hand you over to your host, Brad Kessel to begin. Please go ahead.

Speaker 1

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 Q3 2023 results. I am Brad Kessel, President and Chief Executive Officer. And joining me is Gavin Moore, Executive Vice President and Chief Financial Officer And Joel Rahn, Executive Vice President of Commercial Banking for Independent. Before we begin today's call, I would like to direct you to the important information on Page 2 of our presentation, specifically the cautionary note regarding forward looking statements.

Speaker 1

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 3rd Quarter 2023 net income of $17,500,000 or $0.83 per diluted share Versus net income of $17,300,000 or $0.81 per diluted share in the prior year period. The increase in the 2023 Q3 results as compared to 2022 is primarily due And net interest income and an increase in income tax expense. For the Q3 of 2023, we generated an annualized return On average assets and return on average equity of 1.34% 18.68%, respectively, As compared to 1.40 percent 20.48 percent in the Q3 of 2022.

Speaker 1

The item most impacting the comparable Q3 2023 results included the positive Changes in fair value due to price of our mortgage servicing rights, dollars 1,600,000 or $0.06 per diluted share after tax For the 3 month period ended September 30, 'twenty 3, as compared to $3,200,000 or $0.12 per diluted share after tax For the 3 months ended September 30, 2022. Our team continued its positive momentum in the 3rd quarter, Achieving strong financial results with solid balance sheet growth, a stable net interest margin, disciplined expense management And healthy asset quality. Capitalizing on the current operating environment, we gained new banking relationships with clients We 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 4th quarter due to seasonality, we have a solid pipeline of high quality relationship opportunities.

Speaker 1

With the loan to 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 are insured, in addition, we have a high level of available liquidity With $2,100,000,000 in secured borrowing access and borrowing capacity on unpledged securities. Overall, our deposit base continues to perform well. Total deposits at September 30 Were $4,600,000,000 up $112,600,000 or 10.5 percent annualized during the 3rd quarter And $206,500,000 or 6.3 percent annualized year to date. During this 9 month period, We have seen some level of remixing of our funding as customers take advantage of the interest rate spread opportunities. Our non interest bearing deposits are down $128,100,000 Savings and interest bearing checking are down $43,400,000 Reciprocal deposits are up $197,300,000 and time deposits are up $156,400,000 While brokered time deposits are up $24,300,000 This past quarter, while continuing to see some remixing of the deposit base, The pace significantly slowed with non interest bearing deposits declining by $13,900,000 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 1.80%.

Speaker 1

Through the Q3, 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 Rahn to share a few comments on the success we are having in growing our loan portfolios And provide an update on our credit metrics.

Speaker 2

Thanks, Brad. I'll start on Page 7, where we provide an update on our Well diversified loan portfolio. Total loans increased $110,000,000 in the 3rd quarter. Strongest segment was In the quarter was commercial lending growing by $88,000,000 We also realized growth in our mortgage business with that portfolio growing by $34,000,000 Our installment portfolio experienced a $12,000,000 decline in the quarter as we've strategically pulled back in that area. We continue to see the return on our strategic investment in the expansion of our commercial banking team.

Speaker 2

The experienced talent that we've added over the past 24 months has been Strong contributor to our commercial growth, which on an annualized basis was 14.5% through the Q3. Looking forward, based on a strong pipeline and solid liquidity position, we see continued growth opportunity While maintaining our disciplined credit standards. Page 8 provides detail on our commercial loan portfolio. As I've indicated in prior quarters, C and I lending continues to be our primary focus, representing 64% of the portfolio. Manufacturing continues to be the largest segment within the C and I segment, comprising approximately 9% or $149,000,000 The remaining 36% of the portfolio is comprised of commercial real estate, with the largest concentrations being industrial at $157,000,000 or 10.2 percent and retail at $136,000,000 or 8.9 percent.

Speaker 2

It's worth noting that our exposure to the office segment stands at $93,000,000 or 6.1 percent 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 This particular segment of our portfolio continues to perform very well. For additional insight into our office exposure, I refer you to the appendix Page 9 provides an overview of key credit quality metrics at 9:30. Overall credit quality continues to be excellent. Total non performing loans were $4,700,000 or 1.2% of total loans at quarter end.

Speaker 2

Loans 30 to 89 days delinquent totaled $4,900,000 or 0.13 percent at ninethirty, which is consistent with last quarter end. 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.

Speaker 3

Thanks, Joel, and good morning, everyone. I'm starting at Page 10 of our presentation. Page 10 highlights our strong regulatory capital position. All capital ratios were stable from the linked quarter. Net interest income decreased $500,000 from the year ago period.

Speaker 3

Our tax equivalent net interest margin was 3.25 percent during the Q3 of 2023 compared to 3.49% in the Q3 of 2022 And down one basis point from the Q2 of 2023. Average interest earning assets were $4,800,000,000 in the Q3 of 20 $3,000,000 compared to $4,610,000,000 in the year ago quarter and $4,760,000,000 in the Q2 of 2023. Page 12 contains a more detailed analysis of the linked quarter decrease in net interest income and the net interest margin. On a linked quarter basis, our Q3 2023 net interest margin was positively impacted by 2 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.

Speaker 3

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 from the institution's interest rate risk position. The comparative simulation analysis for the Q3 In the Q2 of 2023 calculates the change in net interest income over the next 12 months under 5 rate scenarios. All scenarios assume a strategic static balance sheet. The base rate scenario applies the spot yield curve from the valuation date.

Speaker 3

The shock scenarios consider immediate, permanent and parallel rate changes. The increase in the base rate forecasted Net interest income in Q3 2023 compared to the Q2 of 2023 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 1 month and 44.2% repriced in the next 12 months. Moving on to Page 14.

Speaker 3

Non interest income totaled $15,600,000 in the Q3 of 2023 as compared $16,900,000 in the year ago quarter and $15,400,000 in the Q2 of 2023. 3rd quarter 2023 net gains on mortgage loans totaled $2,100,000 compared to $2,900,000 in the Q3 of 2022. The decrease is 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 $2,700,000 of mortgage loan servicing income. This is comprised of $2,200,000 of revenue And a $1,600,000 or $0.06 per diluted tracker tax increase in the fair value due to price, that's partially Debt by a $1,100,000 decrease due to pay downs of capitalized mortgage loan servicing rights in the Q3 of 2023.

Speaker 3

As detailed on Page 15, our non interest expense totaled $32,000,000 in the Q3 of 2023 as compared to 32.4 $1,000,000 in the year ago quarter and $32,200,000 in the Q2 of 2023. Compensation increased $200,000 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 3rd in the Q3 of 2023 as direct origination costs on lower motor zone origination volume, Performance based compensation decreased $1,300,000 due primarily to lower expected Incentive compensation pay off for salary and hourly employees and a decrease in mortgage lending related to incentives attributed to decline In mortgage lending compared to Q3 of 2022, data processing costs increased by $400,000 from the prior year period, Primarily due to core data processor annual asset growth and CPI related cost increases, lower net Mortgage process related cost deferrals 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. Page 16 is our update for 2023 outlook to see how our actual performance during the Q3 compared to The original outlook that was provided in January of 2023, our outlook estimated loan growth in the low double digits.

Speaker 3

Loans increased $110,400,000 in the Q3 of 2023 or 12.1% annualized, which is above our forecasted range. Commercial and mortgage had positive growth, while installment loans decreased slightly in the Q3 of 2023. 3rd 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 percent for the current quarter and 3.49 percent for the prior year quarter, the Q3 2023 net interest income was below our original forecast. The Q3 2023 provision for credit losses Was an expense of $1,400,000 or 0.15 percent annualized for Q3 2023 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 Q3 23 was lower than our forecasted range.

Speaker 3

Moving on to Page 17, non interest income totaled $15,600,000 in the Q3 of 2023, Which was higher than our forecasted range of $11,000,000 to $13,000,000 Q3 mortgage loan originations, Sales and gains totaled $172,900,000 $115,300,000 $2,000,000 respectively. Mortgage loan servicing net generated income of $2,700,000 in the Q3 of 2023. Non interest expense was $32,000,000 in the 3rd quarter, Within our forecasted range of $32,000,000 to $33,500,000 targeted quarterly. Our effective tax Income tax rate of 19% for the Q3 of 2023, which was a little higher than our forecast. Lastly, 88,401 shares for repurchase in the Q3 of 'twenty three at an average share price of $19.15 Year to date, 288,401 shares have been repurchased at an average share price of $17.21 That concludes my prepared remarks.

Speaker 3

And I would now like to turn the call back over to Brad.

Speaker 1

Thanks, Gavin. These strong results, which our company has been delivering quarter over quarter, year after year for some time, It's directly attributable to our talented team, their focus on personalized service, investing in our communities And making banking easy. Our financial results once again gained us nice recognition in being named 1 of 31 banks and thrifts That comprise Piper Sandler's small All Star Class of 2023. Our team is very proud Of this recognition, we intend to finish 2023 strong with our focus continuing to be I'm 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.

Speaker 1

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 non interest expenses. Accordingly, we are excited about the opportunities we have to continue our growth trends. 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, at this point, we would now like to open up the call for questions.

Operator

Thank If your questions have already been answered, you can withdraw from the queue by pressing star followed by 2. Our first question today comes from Eric Zwick of Hope Group. Your line is open.

Speaker 4

Thank you. Good morning, everyone.

Speaker 1

Good morning,

Speaker 4

Wanted to first start on, I guess, kind of the loan growth and comments about 4th 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. Wondering if you could just add a little commentary in towards the mix of the pipeline, where you're seeing strength today from kind of a product type and maybe industry as well?

Speaker 2

Yes, this is Joel. On the pipeline, it is still very solid As we head into the Q4 and of course, 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 C and I again is our primary focus and we are seeing those opportunities.

Speaker 2

We've seen good opportunity in medical related space, interestingly enough, and that's again because of long term relationships That our bankers have had in the community. And some select commercial real estate, primarily industrial It's been a focus for us right now. So that would be just some additional color from my vantage point.

Speaker 4

Thank you. I appreciate that. And then you mentioned You've got strategically pulled back from the installment portfolio. Just curious if you could add maybe a bit of additional commentary there. Is that you're just seeing better opportunities In other areas?

Speaker 4

Or is it kind of a cautionary stance due to just kind of uncertain economic outlook? Or just curious how you're thinking about that portfolio today?

Speaker 1

Yes. Eric, that's a great question. I think it's twofold. I think number 1 is We are really excited about the continued demand for our commercial banking team in our markets. And so we like that asset class, the yields, the risk Profile that go with it.

Speaker 1

And so I think that's one just we had to prioritize our capital allocation. It goes in that direction. Nick, the second piece is, we're watching closely the consumer. There's a lot written about slowdown in The consumer itself driving its savings their savings level declining And also I think, so that's the second aspect, just being cognizant of what's happening with the consumer. And then 3rd, 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.

Speaker 1

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 and we are watching those collateral values closely. Hopefully that helps.

Speaker 4

Yes, very helpful. And one last one for me. Just looking at thinking about expenses, the bottom of I think the slide number 1 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, kind of target areas for process improvements and cost controls. I'm just kind of curious as we Think about looking into 2024 even kind of what the biggest opportunities are to keep expenses under control?

Speaker 4

And do you have a kind of target in mind for the efficiency ratio or just generally targeting additional improvement over time?

Speaker 1

So another great question. I'd say, first off, I'm really pleased with the Very positive trending of our efficiency ratio, both on A 4 quarter basis, but just really over time year after year. And we've taken it from the 70s through the 60s an hour. We're in the high 50s, and we think that we can continue To positively reduce that. And, 1st and foremost, I would point to our Core conversion, which we pulled the switch in May of 2021, And we continue to see opportunities just to efficiencies with all the different technology This interrelated and connected.

Speaker 1

And so, I think there's opportunities in the backroom. And then I would point over towards Our branch footprint and we continue to look at ways to optimize there. We are well underway in the use of teller recycle machines, Which we see 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 get better, how do we get smarter, how do we I have less touches, how do we better serve the customer.

Speaker 1

And so I'm really excited about I think there is

Speaker 4

Thank you for taking my questions today.

Speaker 1

Thanks, Eric.

Operator

Our next question comes from Damon DelMonte of KBW. Please go ahead.

Speaker 5

Hi. This is Matt Ranks filling in for Damon DelMonte. 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 economy start to suffer?

Speaker 1

So Matt, thanks for the call. And I think obviously, 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. And Joel, You've been speaking with our team and with our customer base. Can you give us an update there?

Speaker 2

Yes. Of course, the big unknown is how long the Great. 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 Fortunately, in our portfolio, it's really a pretty small Percentage of our customer base and our portfolio.

Speaker 2

So we've got 6 customers that would have direct impact from the strike. That's about $60,000,000 in total outstandings today or about 3.5% of our portfolio. So just to put that in So we're not again, our portfolio is very well diversified and we're not real heavy in automotive supply. 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, at some point it will affect even these Tier 2 suppliers And they would be forced to lay people off, but we have not seen that yet.

Speaker 1

Yes. And I would just add then Yes. Matt, I would just add, then you carry over to the consumer portfolio. And we've had Just minimally, less than you can count on one hand, inquiries from the customer base in terms of, Hey, if this strike continues, what can you work with me? So it's been very small and has not meaningfully Impacted our performance metrics up to this point.

Speaker 5

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 That's when the trouble starts? Is it midway through next year? Is it through the end of this year?

Speaker 5

If you could share that?

Speaker 2

That's really hard to quantify. 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 soon, 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 Mid September, the general consensus was we're fine For a month to 6 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 we're all just hoping that the strike is resolved here in the next 30 days to 60 days.

Speaker 5

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?

Speaker 3

Yes. So I think 12% to 15% would be the target and we will just we'll evaluate as we move down to that ratio Based on the broader liquidity profile of the bank.

Speaker 5

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

Speaker 1

Thanks, ma'am.

Operator

Thank you. We have no further questions on the call at this time. So I'll turn the call back over to you, Brad, for closing remarks.

Speaker 1

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 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 guiding our customers to be independent.

Speaker 1

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.

Powered by Quartr
Earnings Conference Call
Aflac Q3 2023
00:00 / 00:00