Q4 2019 Earnings Call

Welcome. Please hold an operator will be with you shortly. Good morning. This is Deborah. How may I help you?

Yes, I may I have your first and last name, please.

like the color

Okay. What company are you calling from?

Sorry a i e r a.

Okay, join the writing. Goodbye.

You're welcome by discuss the company's 2019 employer results. I am president and chief executive officer in joining me is Rob Schuster Executive Vice President and retiring Chief Financial Officer. Also joining is Steve Erickson Executive Vice President and incoming Chief Financial Officer.

Before we begin today's call. It is my responsibility to direct you to the important information on page to the cautionary note regarding forward-looking statements. If anything does not already have a copy of the press release issued by independent 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.

Before we begin reviewing our financial results as previously announced Steve Erickson is the incoming Chief Financial Officer for IVC following Rob's retirement, January 31st, 2020 as this is Rob's last earnings called I want to take a moment and thank Rob for his service to IVC over the last twenty-five years his contributions to the organization Have Been instrumental to our success and I want to wish Rob. Well as he embarks on his well-deserved retirement.

Rob do you have

Comments that you'd like to make before we begin today's session. Yes first I would like to thank the board of directors the executive management team and all of my fellow Associates at Independent Bank Corporation for their support being the CFO of ibcp is truly been a labor of love for me in particular. I want to thank Jim towards in ski our controller and the entire accounting team Dean Morris our head of finance and his team and Amy Anderson our head of secondary marketing and her team their hard work and professionalism over all these years is very much appreciated.

There are countless external business associates who have made my job better and who have been of great assistance over the years and I wish that I could recognize them all off. However to one particular Mike Wooldridge and Kim Weber from our outside Law Firm varnum have been with me nearly every step of the way during my Dodge Journey at ibcp finally since this is an earnings conference call. I think our analysts are investment bankers in our shareholders wage their support. I would like to recognize some institutional investors who I have known in some cases for nearly thirty years and who have taught me so much first Rich Lashley and John Palmer from p l Capital who I have known since their days at KPMG next month.

and Terry Maltese

From Maltese Capital Management, who who I have known since my days back to Mutual Savings Bank and finally Joe Steven from Steven Kath advisers who I have known for a very long time and who taught me how much time it takes the sun to set once it touches the Horizon stege. I wish you much success in Brad. I appreciate the opportunity to make a few remarks in my special. Thanks to you for all of your support, but especially for your friendship.

Thank you Rob and best wishes to you and Diane.

At a high level. I am very pleased with our fourth quarter and full-year 2019 results for all of 2019. We continue to execute on our operating plan delivering strong in earnings growth in loans, while maintaining excellent asset quality growth in core deposits and effectively managing our Capital our fourth quarter growth in that income and earnings per share was fueled by an increase in net gains and mortgage loans and a credit loan loss provision primarily as a result of net recoveries on previously charged off.

Seaside growth in our mortgage loan portfolio more than offset the higher than usual payoffs we experienced in our commercial loan portfolio to yield net overall growth for the 23rd consecutive quarter mortgage loan origination surpassed 1 billion dollars in production for only the second time in our company's history.

Turning to slide five of our presentation with a little more detail on the quarter. We are reporting fourth-quarter 2019. Net income of 13.9 million or 61 cents per diluted share versus net income of 9.9 million dollars or $0.41 per diluted share in the prior year.

This represents year-over-year increases and net income and diluted earnings per share of 39.7% and 48.8% respectively.

impact you

Fourth-quarter results for both 2019 and 2018 are the changes in the fair value due to price of are capitalized mortgage loan servicing rights or the three months after December Thirty One hundred twenty nineteen an increase in the fair value of our capitalized mortgage loan servicing rights due to price increase not interest income took approximately $600,000 or $0.02 per diluted share after tax.

This compares to a 2.4 million dollar decrease in Fair Value due to price or $0.08 per diluted share after tax for the 3 months ended December 13th, 2018. Also positively impacting the fourth quarter 2019 was a reduction of not interest expense of approximately $400,000 month for one penny per diluted share after tax related to the company's use of it's FDIC small Bank assessment credit. The company does not have any assessment credit remaining to offset 20/20 expense for the fourth quarter of 2019 are returned on average assets and return on average Equity or 1.56% and 15.92% respectively these ratios decrease to 1.47% and 14.97% respectively wage.

excluding the

After tax impact of the MSR change and the assessment credit.

For 2019 the company reported net income of 46.4 million dollars or $2 per diluted share compared to net income of 39.6 million dollars or $1.68 per diluted share in the prior-year. This represents an increase of 6.6 million dollars or 16.6% in net income and a 32% or 19% increase in diluted earnings per share are returning average assets and return an average equity for the year ending December Thirty One 2019 improved to 1.35% and 13.63% Respectively.

We are optimistic about our future and recently announced an 11% increase in our quarterly common stock cash dividend to twenty cents per share to be Thursday, February 14th 2020.

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Annualized dividend rate is equal to a 40% payout on a 2019 earnings and a dividend yield of approximately 3.6%

Slide seven of our presentation provides a good view of our footprint you will note that we are opening a new Loan Production Office in Toledo, Ohio in q1, 12:20. We were very pleased to be able to attract an experienced and high-caliber residential mortgage lending team in this market.

Turning to slide eight Michigan business conditions continue to be generally favorable with low unemployment some job growth affordable housing and continued good 2004 commercial real estate.

Original portfolios are shown on page. Nine are two strongest growth regions are the west or Grand Rapids region up $69 billion in loan balance balance has bought a used Michigan region up forty million in loan balances.

Production of a reciprocal cash sweep product has continued to generate significant deposit growth for our franchise of some of the regional declines and deposits reflect the migration of larger deposit customers into the reciprocal deposits.

The next couple of slides cover our balance sheet turning a page ten. We provide a couple of charts reflecting the attractive composition of our deposit base as well as the continued wage in this portfolio while working to effectively manage our overall cost of funds independent has three point zero four billion in total deposits of wage 2.4 $3 billion or about 80% are non maturity deposit accounts.

When comparing fourth quarter 2019 to the same quarter one year ago. We increased total deposits by 204.3 million or 7.7% This excludes brokered deposits.

Total cost of funds decrease ten basis points on a linked quarter basis and is Up 3 basis points when comparing to the same quarter one year ago our success and growing mm. Well managing. The overall cost has been primarily through growth in our commercial deposits and the sale of the insured cash sweep product to Public Funding entities.

Details of our loan portfolio are found on page eleven. We continue to Target a diversified loan mix with the largest portfolio being a our commercial book of business June and December 31st, December 3119. Arlo mix included 42% commercial 39% mortgage 16% installment and 3% for sale.

Total mortgage originations for the quarter worth 302.5 million dollars reflecting a $27 decrease from the third call. She is very strong 329.5 million and up from the fourth quarter one year ago of 190.3 million.

Portfolio mortgage loans increased by Twenty Eight Point nine million dollars for the quarter and we were up fifty six million dollars or 5.4% a year for that category.

The commercial portfolio declined by 22.3 million dollars during the quarter but was up twenty two point two million dollars or 2% for all of 2019 a decline and balances during the fourth quarter was primarily due to $16 in payoffs and our pay Downs of watch credits.

Or the year, we booked a new commitments of $326 with new outstandings a $265 million dollars.

You're in our pipeline pipeline was stable.

Consumer installment loans declined by four million dollars during the quarter due primarily to seasonal factors as these loans are sourced primarily through our indirect lending line of business office. Which targets Michigan Marine Powersports in RV dealers for the year our consumer installment portfolio increased by sixty four point three million dollars or 16%

Loans outstanding now aggregating to two point eight billion dollars including sixty nine point eight million dollars of loans held-for-sale excluding loans held for sale our loan portfolio group two point six million dollars in the fourth quarter bringing total loan growth for 2019 to one hundred forty two point five million dollars or 5.5% excluding portfolio loan sales and securitizations of seventy six point four million dollars total loan growth for all of 2019 would have been two hundred eighteen point nine million dollars or 8.5%

In terms of Capital Management earning assets are up 6% year-to-date reflecting all organic growth our Capital levels continue to be strong with tax, and Equity tangible assets of 8.96% and December $31 2019, which represents an increase of twenty by twenty five basis points for September 30th, 2019. This level is near the midpoint of our targeted tce range of 8 and 1/2 to 9 and a half percent.

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Quarterly cash dividend of $0.18 per share a November 15th 2019. There were no share repurchases during the fourth quarter and total 2019 during 2015. The company completed the repurchase of 1204688 shares at a weighted average purchase price of $21.82 per share. In addition. We recently announced a 2020 share repurchase plan for up to 1120000 shares or approximately 5% of our current outstanding shares.

At this time, I'd like to turn the presentation over to Steve to share a few comments on our financials credit quality Cecil in our outlook for 20 28. Thanks, Brad and good morning everyone. I'm starting on page thirteen of our presentation fourth quarter 2019 net interest income declined by approximately $160,000 down 4.5% compared to the third quarter of 2019 due primarily to decline in our net interest. Margin. The decline in margin was partially offset by a 35.7 a million dollar increase in average running assets are tax equivalent net interest margin was 3.7% during the fourth quarter of 2019, which is down six basis points from the third quarter of 2019 and down twenty-three basis points from the year-ago quarter.

average

Restraining assets worth 3.3 $2 billion dollars in the fourth quarter of 2019 compared to three point nine billion dollars in the third quarter of 2019 and 3.1 $2,000 in the year-ago quarter.

On page fourteen we see a more detailed analysis of the linked quarter decline in that interest income. There's a lot of data on the slide, but to summarize a couple of key points the linked quarter tap on loans declined 14 basis points and the tax equivalent yield on investments declined 11 basis points leading to a decrease in our yield on average earning assets of 16 basis points to 4.44% is primarily reflects lower Market interest rates particularly short-term rates partially offsetting. The decline in yields are average cost of phone number decreased by ten basis points 2.74% in the fourth quarter. We will comment more specifically on our outlook for the net interest margin and net interest income for twenty twenty thousand in the presentation.

moving on the page

Teen non-interest income totaled 15.6 million dollars in the fourth quarter of 2019 as compared to $9 in the year-ago quarter and 12.3 million dollars in the third quarter of 2019.

The increase was driven primarily by Mortgage Banking related activity namely changes in net gain on mortgage loans and mortgage loan servicing income cause most of the quarterly comparative year-over-year variability in non-interest income fourth quarter, 2019. Net gains on mortgage loans increased the 6.4 million dollars compared to two million dollars in the fourth quarter of 2018 increased these games was due to increases in mortgage loan sales volume the mortgage loan Pipeline and our profit margin mortgage loan application volume is very strong fourth-quarter. We do expect to see a normal seasonal slowdown in the first quarter of 2020.

Red already discussed the changes in the fair value due to price capitalized mortgage loan servicing rights are capitalized mortgage loan servicing rights asset of nineteen point two million dollars at December 30th, 2019 representative value of just 74 basis points on our two point five eight billion dollars of mortgage loan servicing.

as detailed on page sixteen are not interest expense total 29.3 million dollars in the fourth quarter of 2019 as compared to twenty six point eight million in the year-ago quarter and 27 point eight million dollars in the third quarter of 2019 actual fourth quarter nine inches expenses were above the high end of our projected range of $27 to $27 a half million dollars due primarily to an increase in performance-based compensation driven by the company's financial performance in the fourth quarter will have more comments in our outlook for nine inches expenses wage the presentation

Investment Securities available for sale increased seventy eight point seven million dollars during the fourth quarter of 2019 page 17 provides an overview of our investments at December 31st, June nineteen, approximately 28% of the portfolio is variable rate and much of the fixed-rate portion of the portfolio is in maturities of average lives of five years or less than estimated average duration of the portfolio is about 2.64 years with a weighted average tax cut of 2.84% which is down sixteen basis points from September 30th, 2019.

Page eighteen provides data on non-performing loans other real estate non-performing assets and early-stage delinquencies total non-performing assets were eleven point four million dollars or .32% of total assets at December Thirty One 2019. Non-performing loans increased by two point nine million dollars during the fourth quarter of 2019 driven primarily by the Residential Mortgage Loan portfolio at December Thirty One 2019. 3289 Hyundai 89 Hyundai commercial loan delinquencies were down 2% and mortgage and consumer loan delinquencies 4.45%

Moving on to page nineteen. We recorded a credit provision for loan losses of $221,000 and an expense of $591,000 in the fourth quarters of 2019 and 2018 respectively in addition. We recorded net loan recoveries of $221,000 and Loan net charge-offs of $104,000 in the fourth quarters of 2019 and 2018 respectively the allowance for loan loss total 26.1 million dollars or 96% of portfolio off loans at December Thirty One Two thousand nineteen page twenty provide some additional asset quality data including information on new loan defaults and unclassified a new loan defaults were only seven point nine million dollars during 2019.

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Provides information on RTD our portfolio that total fifty point seven million dollars at December Thirty $1.29 an increase of a half million dollars during the fourth quarter off this portfolio continues to perform very well with ninety 3.8% of these loans performing in ninety 2.2% of these loans being current at December Thirty One twenty nineteen month.

Page twenty-two provides a detailed timeline for implementation of the Cecil accounting standard. We will discuss our current seasonal estimate shortly in the twenty20 initial Outlook slide on page twenty-four

Page twenty-three is our final update for a 2019 Outlook to see how our actual performance during the year compared to the original Outlook that we provided back in January of 2019 off our initial loan growth Outlook estimated loan growth in the eight to nine percent range. We achieve actual annualized loan growth of 4% in five and half percent for the fourth quarter off a full year of 2019 respectively. If your call from Brad's earlier comments, we sold and or securitized seventy six point four million dollars in portfolio mortgage loans during June 2019, the portfolio mortgage loan sales and securitizations were done for asset-liability management purposes, including balancing the mix of our overall loan portfolio without transactions loan growth would have been eight and half percent.

original

Forecasted growth rate of 10 to 11% for 2019 net interest income was based on a forecast and included a single 25 basis-point Federal fund rate increase in June of last month instead the Federal Reserve cut their target rate by 75 basis points in 2019 in our queue to update we brought our expected range down to 8 to 9 % wage under those changing conditions that fourth quarter 2019 and full year 2019 actual net interest income increased 1% and 8.2% from comparable respect periods in 2018.

S a loan loss provision we expected generally stable asset quality metrics during 2019. So our Outlook suggested that twenty basis points of average total portfolio loans would not be unreasonable for the year during 2019. Our actual provision was $824,000. Well under the expected twenty basis points as we experienced net loan recoveries for the years and ask the quality remain healthy and stable will provide the 2020 Outlook under Cecil and a few moments.

moving on

On interest income our actual total for 2019 was 47.7 million dollars, which was at the high end of our initial Outlook. This was driven primarily by net gains on mortgage loans month. It's worth noting that included in our non-interest income for 2019 or six point four million dollars of reductions to the fair value of our capitalized mortgage servicing rights due to price.

with respect to nine inches expense we end at 2019 at a hundred eleven point seven million dollars in total which was above the high end of our 2019 Outlook of just under $109 while we remain very focused on managing expenses are strong performance for the year increased our performance-based compensation expense relative to the initial forecasts finally are effective tax and effective income tax rate was in line with our 2019 album

Bring the page twenty-four. This is summarized our initial outlook for 2020.

First section is loan growth. We anticipate loan growth in the mid single-digit range and are targeting of full year growth rate of approximately 78% We expect to see growth across all of our loan portfolios and expect most of the growth to occur during the last three quarters of the year due to a seasonally slower first quarter this Outlook assumes that stable, Michigan economy for 2028.

Next is net in.

Just income where we are targeting a full year twenty-twenty increase of approximately 1% to 2% over 2019. This is driven by a net interest margin and is generally stable fourth quarter net interest margin of 3.7% but is lower than the full year 2019 em, this Outlook assumes no changes in the Target federal funds rate June 2020 as well as a slight increase in the long term rates relative to year-end 2019 levels.

For provision. Our Outlook is based on the new seasonal standard is a very difficult area to forecast as provision levels under Cecil will be particularly sensitive to loan growth and mix took directed economic conditions watch credit levels and Loan default volumes as we continue to refine our seasonal modeling and related assumptions. Yes, the estimated range of oranges adjustment was changed from when we first disclosed an estimate in the second quarter 2019 S 10-Q . We now estimate our initial Cecil adjustment effective $120 a month to be approximately seven to eight million dollars. This estimate is still subject to certain final review procedures that will be completed in the first quarter of 2020.

after the initial

We believe that a full year twenty-twenty provision for loan losses in the range of fifteen to twenty basis points of average total portfolio loans would not be unreasonable.

Related to non-interest income we estimated quarterly range of 11 to 13 and 1/2 million dollars. We expect mortgage loans origination volumes to decline by approximately 15% do to lower refinance activity. We also expect that we will not experience a comparable level of fair value writedowns on are capitalized mortgage servicing asset due to price in 2012.

Our outlook for nine interest expense is a quarterly range of approximately 27. 5 to 28 and 1/2 million dollars. We expect compensation and employee benefits to be slightly lower in 2020 compared to 2019 do to lower incentive compensation expense.

I look for income taxes Remains the Same in 2020 as it was for 2019 at an effective rate of approximately 20% assuming the statutory Federal corporate income tax rate does not change during twenty-twenty. And lastly we believe that share repurchases will be just above the midpoint of our authorization of approximately 5% of outstanding shares that concludes my report for today and I'll turn the call back over to Brad.

HD

2019 was another very successful year for us as we had solid organic growth in both loans and deposits this growth enabled us to improve our operating leverage. We exceeded our company's targets of 1.3% return on assets and 13% return on Equity. We pride ourselves and investing in our communities and provide exceptional customer service during 2019. We submitted over one point seven billion dollars in financing in our markets. We invested nearly $750,000 sponsorships and donations and our Associates volunteered nearly twenty thousand hours of time.

Our customer base is growing as is our brand during 2019. We were recognized by Forbes for the second consecutive years having the highest customer satisfaction for banks in Michigan as we move forward into twenty-twenty. Our plan is a continuation of those initiatives. We have shared in the past. They are shown on slide 25 off of Our Deck We Believe successful execution on these initiatives will continue to drive strong returns as a community bank at the center of all our strategies is staying focused on serving our customers and investing in our markets and in our people our vision for the future is clear twenty-twenty actually at Independent Bank. We took in our customers want to be independent with personalized convenient and safe Financial Solutions from someone. They can trust paying a financial partner Confucius.

Overwhelming when there are so many.

Choices. Yeah, we understand. Our customers time is valuable banking just shouldn't be that hard. Here's how we simplify the experience first. We collaborate with each customer defining their needs and wants for the future next. We customize a plan that meets their goals. Then we Empower each of them to be independent.

At this point in time. We'd like to open up the call for questions. Well now begin the question-and-answer session to ask you a question. You can press * then 1 on your touchtone phone using a speaker phone. Please pick up your handset before pressing the keys. If at anytime your question has been addressed and you would like to withdraw your question, please press * then two.

Our first question comes from Brendan with Piper Sandler.

Hey, good morning, guys. How are you? Good Brandon. How are you? Good. Thanks. Just want to start off on the the net margin here. I appreciate the the guide for being flat with the fourth quarter of the year just kind of curious as to the the puts and takes that would allow you to hold the margin of flat. I mean, I'd imagine if the FED does not cut rates further that certainly, you know, one of the things that can help out, but I'm curious what else underlies that expectation.

Well, this is Brad. I guess uh, you know, first off, you know for the fourth quarter and a 3.7 as we look into twenty-twenty. We've got some pretty respectable loan growth expectations there and off but I think we're maybe some of the lever for the bank is still the opportunity on the cost of fun side and off over the years. We have structured the funding side with a lot of detailed segmentation of our customer base and really odd looking at the customers usage of the bank Services the balances that they carry and so on so I think prospectively one month.

It is on.

On the funding side there after you know, we're going to continue to push on the production side, but not at the sacrifice of credit quality Steven off you have anything to have here, you know, the pricing structure on the asset side are going to remain important to us and we're not going to give the credit quality wage going to change what our Target is structure price range is I mean on the asset side.

All right, great. That's that's helpful. And then if we can see another one in their moving on to the revision, you know the outlook for 15 to 20 basis points. That's obviously a a big step up from this year of 2019 you had, you know, nice and that recoveries. I'm just curious. You know, how much of that higher provisioning level is driven by Cecil like I guess kind of what would you think it would be, you know absent the life of accounting guidance?

Absence diesel would be basically flat if you if you look at where H O L is going into this transition into Cecil. We're at 96 basis points of of loans Cecil with the adjustment will get us up. Let's call it approximately 1 and a quarter percent of loans, so that provision guidance going forward allows for additional loan growth at and around that knew Cecil expected a trip well raid as well as allowing for some level of charge-offs.

Okay.

So basically just kind of allows for you to hold the Reserve at the the the new post Cecil level. That is correct. We don't we don't anticipate 2020 having near the same level of recoveries this we've seen in the last couple of years. So we're allowing for both in that number. We have had three consecutive years of that recovery should be nice to understand that. Yeah, that would be good.

All right, fantastic. Well, thank you taking the questions and Rob congratulations and best of luck. Thank you.

Our next question comes from Russell Gunther with d a Davidson.

Hey, good morning guys. Good morning. Thanks so much for all the detail on the loan growth Outlook at 78% Yeah, I hear that song expectation is for contribution across your your lending verticals just be curious. If there is, you know, a thought that that would be pretty evenly spread if I one particular vertical might have better strength than another and then from a geographic perspective, you know submarkets within the Michigan footprint that might be or continue to be bigger drivers of growth.

Right, right.

Yeah, so Russell that that's a good question again. I think we believe that we are positioned to Thursday. It's the balanced growth in all three one of the the intentions of our company in committing resources to the multiple categories is you just don't know. Well one may be stronger at one time than and then another portfolio may be hitting a little stronger and we saw evidence that you're in Q4 with with with the mortgage, uh, original Nations being very very strong. But I I hope that it be coming out of all three months. I think, you know on the commercial front when I look at the the number of origination staff that we have starting wage.

Versus where we started the year ago year ago.

We're up. We've been I think solidly uh moved forward in terms of adding talent to our team and then they're obviously continues to be disruption in our Marketplace. So I think it's it's the addition of staff and the disruption in the marketplace that creates the opportunity for us on the commercial side month on the mortgage side. I'm pleased to report in you know, knock on wood here. We've had very little turnover in this team now for an extended period of time and it actually while we're you know down a little bit in the pipeline here at year-end versus the third quarter, you know, we are we're better than a higher than we were a year ago at this time. And and so I I think we're approaching 20 20 even though dead.

The you know the Mortgage Bankers.

Jason believes that overall mortgage values should be down principally because of lower refinances. I'm still very optimistic on the on the mortgage site. And then as we walk over to the consumer side that really comes out of our Branch Network and you know, I I I'm so pleased with the the development of that team the stability pact that team and they continue to I think grow in their efforts to originate consumer installment loans, and then of course the indirect which has been the horse for us off for multiple years. It's the same small group of team that are out knocking on on our dealers and and getting sort of first look at the best paper and and I you know, I I applauded them this morning and an all-employee called as as I said, you know what our records meant for they're meant to be broken and this team continues to break their birth.

Production, uh by him year after year. So that's sort of how we're looking.

You had uh growth in 2020 and Steve. I don't forget any either. Nope. Nothing dead there at all.

I appreciate that guy's and the detailed response last question would be and and in consideration of the guidance. You laid out on the non interest expense side, you know, how did all this together and and think about a core efficiency ratio for 20 20 and and how that fits into your kind of near and long-term targets for for that guy post office. So as far as the non interest expense side in in our growth of just under 1% for the year, we anticipate based on the budget off a lower incentive compensation expense for next year. However, we do also have Merit increases that went into effect towards the end of of the year in the beginning of 2020. And so the two of those will rather, you know offset each other to keep those expenses about flat at under just 1% increase

If you look at the efficiency.

Horatio

That is something that we intend to keep focusing on expenses. We intend to keep downward pressure on those expenses. And so that being said our life and our Target is to keep those going down towards our long-range Target of 60% in the next few years as far as specific strategies. It's really going to be across the board whether it be large contracts Management's of headcount that type of thing.

I don't know Brad if you have other questions, yeah, I I think that covers I think once I'm Steve is, you know in our deck at slide 16. We have a nice trendline that showed year-over-year continued Improvement in the efficiency ratio that said we still feel like it's higher than we would like it off and you know, there's a continued emphasis on you know on on dropping and I think accounting Finance area recently bought a chair that probably 101% drop there is about a one point seven million dollar reduction in cost is what's needed so long that that's our that's our goal is to keep whittling away at that and you know, I think in sorry to tag team back and forth between Brad myself if you look at that wage.

That downward Trinity efficient.

To ratio our Associates here. The staff here is is done a fabulous job of doing much more with less and we anticipate that we will continue to do that the staff here. I'm not really responsible for the challenge of of continuing to bring that ratio down.

Very good. Thank you both for your thoughts. That's it for me.

Our next question comes from Kevin Swanson with Husky group. I guess good morning. Just a follow-up provisioning question, you know with Cecil provisioning relatively flat. It sounds like you know, it sounds like there's no real credit concerns on the horizon, but just interested on your on your perspective if there's any areas you see heating or areas are kind of shying away from

so

You know, I I am very pleased with our companies, you know where we're at today with overall asset quality, you know home during nineteen. We did have through the third quarter some elevation in the watch credits. I think we we were up at 7.2% off block and and and then here at fourth quarter we were able to bring that down. I think 6.7% in I would just say that, you know as we look through our our top 50 relationships. It is our team meets on a quarterly basis looking at the entire portfolio page. There are not any one segment that necessarily stands out. We don't have tremendous concentrations to begin with that. That's intentional.

so

I I feel very very pleased with where we're at at year end. We had a slight uptick in the retail past dues and I think it was it was one lone as a month and one where there was a a problem with the incoming ACH not on our end but on the on the sending Banks and and and so that that came current wage rate after a year end. So I I feel really good. I think the challenge has been we we referenced this a little bit earlier over the last month X number of years. We've had this very strong stream of recoveries in both the commercial portfolio and Retail portfolio. And hey, I I think we're still going to have some recoveries. I think they'll be lumpy but they we just we're not expecting them to be necessarily at the same level.

As far as you know credit Trends are concerned. We don't see anything in any particular area or geography that leads us to think that there's any kind of systemic or or or wide-spread issue going on and you know any of the items we talked about our have just been one off kind of situational item. So in our book we don't we don't see any danger there at this point.

Great. Thanks. And then adding the production office in Toledo. Is that kind of the most likely form of a footprint expansion and and maybe just kind of comment on m&a into the thought process there?

Yeah, you know so historically

and prospectively our growth in the market is just going to be talent-driven, you know several years back. We open a number PLS including our entrance into Ohio the Akron market in Columbus Market in out here with this latest one in in in Toledo. And so it was off following up on the positive image and that the company has in the marketplace off with our our mortgage particular in this case The Mortgage Banking side, you know, we're looking at you know, where can we find Talent, you know, these off recruiting efforts don't happen overnight there over a period of time what I like about this, you know, obviously it sort of connects the dots a little bit with yep.

other to Ohio local

Gets a little closer back to the the the core deposit franchise here in Michigan and I am hopeful that at some point we can offer converting some of these lpos into full service locations at a certain point.

Great. Thanks. And then maybe just one final one. You know, I appreciate the the updated guidance for 2020. Maybe if we're on the call, you know a year from now you guys have a better-than-expected year in a certain areas. You think would stand out leading the better results or there's certain areas that you're you know particularly excited about.

I think that that's a great question and I I think birth 20/20 is going to have things that we expect to happen and things that we don't expect and as I tell our team ultimately it's about how we respond to those unexpected challenges. And so I think we have a solid game plan for for 2020. We've also put together a refresh of our five year forecasts as we mentioned earlier in the call. I think Thursday, we believe the efficiency ratio is is an area that we need to continue to work on. So, I'm hopeful that we can continue to chip away on the expense side job.

Optimistic that we can continue to have uh, you know, the exceptional credit levels and and then maybe resulting lower provision levels, but I mean, it's just been so so benign, you know, you're from for multiple years, it's hard to say, so, I don't know if that doesn't tip my hand too much or maybe two months, but I'm not at any of that as far as twenty-twenty. Okay. Thank you straight guys. Thanks. Thanks for taking my questions. Appreciate it.

Our next question comes from Scott was spinning and Scattered good.

Hey, good morning, guys. Good morning. Good morning. Scotty. Congratulations Rob. Thank you Scott. So just kind of tying a couple of pieces your guidance here together with 7% loan growth, you know and kind of mid single-digit deposit growth. I'm just curious. You know, how long does that imply that you know, overall balance sheet growth is going to be a little bit slower than than the loan portfolio is like you Siri mixing, um, you know out of security off the walls being kind of a part of that forecast. Yeah. I I think that's that's fair to say that we'll see some reduction on a security South. We're we're actually up quite a bit at at year end so that that's that's fair to say.

Yeah.

And I get used to follow up on that you have any sort of target range, you know, whether it be in dollar figures or is the percent of assets of you know, trying to where you'd like the security spoke to B and um off your kind of how low you'd be comfortable with from a comfortable perspective. We generally look at kind of that tend to 12 range as as being where we want to be at the lowest so 10 a.m. 10% to 12% of Securities to total assets, correct? Yeah, you know, there's there's a lot of there's a lot of

You know metrics that that we watch and monitor there in terms of liquidity and I think that's a lot of what we're talking about here and but we consistently over the last few years and say Hey, you know we get to about ten or twelve that that's about our comfort level.

Now that's that's very helpful. And most of my other questions have been answered. But I guess just one file, you know as it pertains to Capital management and off potential m&a opportunities and you just give a refresher on kind of what your Geographic you know, Target area would be for m&a as well. As you know, maybe like size Target.

Sure, you know, uh, and we talked about em, and I think you know, it's sort of put a little further down the capital usage priority list again, we organic growth would be the the first priority but you know with an acquisition would assist us and getting improved scale of course. And so when we think about Target metrics I'd say markets first would be our home Market here in Michigan in a c ROM generally filling in within the the holes of the existing footprint and I I'd say there's a preference probably for some of the stronger growth Market wage.

albeit your

That then also comes through often times and more competitive pricing. But so that's sort of the on a market standpoint and then you know, I think there's a there's a size where maybe because an acquisition involves a lot of resources and time that maybe has to be a certain size and I take we felt like the Traverse City acquisition that we closed on a 2018 at a little $300 million that that was a that was a nice size for us. I say, you know sort of that size and we could go larger, you know, you know, it could be up to that 7:50, maybe a little bit more but that that's probably the The Sweet Spot now having said that I hey there's always exceptions, but that's sort of the target range.

No, that's that's very helpful. And then just you know, as we've seen kind of, you know across the industry. They're starting to become a trend of more and more of em OE type transactions. Um, you know, I guess just the high-level, what are your thoughts on, you know, a potential opportunity of that nature and they're just just kind of any high-level, you know views on that.

well

I think that.

M o he's can make a lot of sense.

And you know, there's a lot of considerations and it Financial metrics wage need to be either in and so that would be a start and there's just, you know some combinations when you drill down on the financials, they don't make sense. But if it does make sense, then it's about maybe culture and and how are the culture is going to point and I I I agree I we have seen in recent history.

somewhere

The cultures where the metrics made sense and the cultures didn't mesh and there was a lot of unexpected change. We vote the scene Emily's where Metro made sense the cultures meshed and they look really good. So from our standpoint, you know, we would consider that both in the same context that are bored and they do this on a regular basis the entire Upstream Downstream Emily hauss review opportunity review silt that sort of high-level on Mo Eastside Steve or Rob out if you guys have any had their no

Excellent. Thank you guys for taking the time and not supported. Thanks, Scott. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Brad castle for any closing remarks.

We would 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.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.