Q4 2019 Earnings Call

Based on our strong Capital position and healthy commercial loan and Residential Mortgage Loan pipelines and Prospects. We believe that the solid financial performance achieved during 2019 as position for further success in the quarters and years ahead.

The quarter and years operating performance includes growth in net interest income solid normalized net interest margin levels continued loan growth continuing loan know the pricing discipline and sound underwriting and gains and not interest income.

Or the increase in Mortgage Banking activity income in the quarter and throughout the year illustrates the success of our dedicated team and the continuing strategic initiatives that were created to enhance market share off almost an increase in the percentage of originated Residential Mortgage Loans being sold in a higher level of refinance activity resulting from from decreased Residential Mortgage loan interest rates.

No.

Based on the continued strength of our current Residential Mortgage Loan Pipeline and projections We Believe Mortgage Banking activity income will be solid during 2026 briefly to the Michigan economy Trends remains steady as employment in our primary markets continues to be strong and real estate conditions remain healthy. We will continue to watch these indicators closely for any longer-term slowing or inflection point.

Continuing on we were pleased with the loan growth and level of new commercial term loan origination and during 2019.

Hello portfolio increased 104 million during the year despite Contracting $77 million dollars during the fourth quarter the contraction during the fourth quarter primarily reflected in unusually high level of commercial loan payoffs the payoffs mainly reflected instances in which we remain committed credit quality and margin preservation along with a few situation situation involving larger bar and relationships that refinance the underlying real estate the secondary Market credit participants that offered long-term fixed rate of non-recourse financing options.

That longer off during the year did have tax increases in both commercial loans and Residential Mortgage Loans off commercial loans segments with the exception of multi-family and residential rental segment through during the year the solid growth in commercial loans reflects our lending staffs ongoing focus on identifying new lending opportunities in our markets and meeting the needs of existing customers while growth and Residential Mortgage Loans depicts the success of various various to fidget initiatives that were implemented to increase our Market presence.

Based on our current loan.

Pipelines an additional lending opportunities conveyed by our commercial lenders. We are confident that we can grow the commercial loan and residential loan portfolios and future periods a year in May. Nineteen. We had one hundred five million dollars of commitments and commercial construction and development loans, which we expect to fund over the next twelve Stacy months.

The quality is Sterling is not performing assets declined the two point seven million dollars or less than 1% of total assets at December 31st.

The improved level of non-interest income in the fourth quarter of 2019 compared to the prior-year fourth quarter was largely driven by increased Mortgage Banking income reflecting the success of ongoing strategic initiatives designed to increase market share a higher level of refinancing activity stemming from a decrease in rates and an increased percentage of loans soul.

Need to enhance Mortgage Banking income through increased marketshare including an increased share in the purchase Market remains of priority and we will continue to hire proven mortgage loan Originators Thursday. We are able

They also recorded growth during the quarter in other fee income categories including credit and debit card income service charges that accounts and payroll processing fees.

The exercise of discipline related to overhead costs as we focus on the fish and Delivery Systems in all of our lines of business remains of priority.

Our focus on media meeting organic growth objectives, and it cost conscious manner has not wavered.

As depicted by our ongoing cash dividend program including the announcement of an increased first quarter 2020 regular cash dividend earlier today. We remain focused on providing shareholders with a compact dividend. We are committed to enhancing shareholder value.

Our strong operating performance in 2019 and set the stage nicely to help us meet our growth objectives and further build shareholder value our steady core profitability wage strong Capital levels and healthy loan pipelines position as well for the balance of the year and beyond our banking philosophy, which entails developing not only beneficial relationships and offering market-leading products and services through efficient delivery channels is continued to successfully attract new customers and lodges to retain existing customer.

We're excited about Mercantile future. Look forward to some financial performance and the current year that concludes my comments on Alternate over to Chuck. Thanks. Bye have a good morning and everyone this morning that income of 13.3 million dollars or $0.81 per diluted share for the 1st fourth quarter of 2019 up from 11.6 million or $0.70 per diluted share for the fourth quarter of 2018 and income for the full year 2019 do 2:49 forty nine point five million dollars or $3.01 per diluted share increasing from that income of $42 or $2.53 per diluted share for the full year 2018.

not getting some

Losses on sales and write down as a former Branch facilities decrease reported net income during the fourth quarter of 2019 by 0.3 million dollars or $0.02 per diluted share with interest income related to purchase loan accounting entries increased net income during the fourth quarter of 2019 by zero point two million dollars or $0.01 per diluted share off and net income during the fourth quarter of 2018 by zero point five million dollars or $0.03 per diluted share excluding the impact of these transactions diluted earnings per share increased over 22% during the fourth quarter of 2019 compared to the fourth quarter of 2018.

Oh year, 2019 earnings benefited from vanco life insurance claims and the net impact of gains and losses on sales and write-downs of former Branch facilities increased in reporting of income by two point seven billion dollars or $0.16 per diluted share in addition with full-year benefit of interest income related to purchase loan accounting entries. In fact that income during 2019 by 1.1 million or 7 cents per diluted share and that income through 2018 by three point two million dollars or $0.19 per diluted share.

excluding the

Impacts of these transactions diluted earnings per share increased almost 19% during 2019 compared to 2018.

We remain pleased with our financial condition Ernie's performance and believe we are very well positioned to continue to take advantage of lending and Market opportunities by delivering consistent results for our shareholders money.

Our net interest margin was 3.63% during the fourth quarter compared to 3.71% during the third quarter of 2018 as part of our interest rate risk management program. We routinely include free payment fees on fixed-rate Commercial term loans and periodically purchase discounted agency bonds during periods of increasing interest rates these specific practices among others and help to offset the negative impact of a declining industry environment here in the fourth quarter of 2019. We recorded loan prepayment fees of 1.3 million dollars an accelerated this kind of creation. I called the agency bonds of zero point two million dollars, excluding the impact of these entries along with the elimination of the impact from off balance sheet quiddity. Our core net interest margin was 3.53% during the fourth quarter mile within the guidance provided on a third-quarter conference call.

It's too many.

The interest rate environment we expect our net interest margin to be in a range of 3.50% to 3.55% through the first and second quarters of 2028 and 3.55% to 3.60% during the third and fourth quarters of this year. The expected Improvement reflects a steady yield on asset in a gradual decline in our cost of funds as time deposits that were originated in higher interest rate environment mature in our renewed and or replace that lower interest rates.

We recorded 0.3 million and purchase loan accretion and payments received on Sierra pool loans during the fourth quarter of 2019 and one point four million dollars for all of 2018 compared to zero point, six million dollars and 4.0 billion dollars during the respective time periods in 2018.

With our adoption of Cecil as of January 1st income recorded from purchase accounting activity in future quarters, but generally be nominal in Ur mouth.

The quality of our loan portfolio remains very strong continue the levels of non-performing loans and Loan charge-offs non-performing assets as a percent of total assets equals on the choices points at the end of the fourth quarter gross loan charge-offs total of only zero point 1 million dollars during the fourth quarter and 0.9 million dollars for all of 2018.

You recorded a net loan recovery of zero point two million dollars during the fourth quarter and net loan charge-offs of only zero point two million dollars during all of 2018. We recorded the executive provision expense of zero point seven million dollars during the fourth quarter primarily reflecting several larger commercial loan pay downs and net loan recoveries being recorded during the. We require to provision expensive one point eight million dollars for all of 2019 in large part reflecting that loan growth. We currently expect to record quarterly provision expense and the range of 0.5 million dollars to 1.0 million dollars throughout 2020. Assuming a steady economic environment.

Arlo locks

Total of 23.9 million dollars at the end of 2019 or 0.89% of total originated loans, even the implementation of Sea Shack in January one of this year and subject to the finalization of our analysis and documentation the currently expect to recognize a reduction in our loan loss Reserve off actually one point zero million dollars, which will be recorded directly on our balance sheet.

But not reduction largely reflects a decrease the required reserves for commercial loans given their relatively short duration and an increase of required reserves for Residential Mortgage Loans giving birth will be longer maturities.

With the Cecil requirement to reserve for potential losses during their contractual life of a loan loan duration taking into account maturity dates and estimated prepayments has a significant impact on the model calculations.

Re-recorded non-interest income a 7.3 million dollars or in the fourth quarter of 2018 which included a zero point three million dollar gain on the sale both former Branch facility not suggesting come during the fourth quarter of 2018 was five point four million dollars, which included a onetime 0.9 million dollar accounting adjustment.

excluding

These transactions not interest income increased two point six million dollars or over 57% during the fourth quarter of 2019 over that of the fourth quarter of 2018. Interesting come during all of 2019 total $27 compared to $19 for all of 2018.

Not interest income during 2018 included Banco life insurance claims, totaling 2.6 million and gains on the sale of former Branch facilities total 0.8 million on 9/8 income during 2018 included the previously mentioned one time zero point nine million dollar Account Adjustment.

Excluding these transactions non-interest income increased five point four million dollars or almost 30% during all of 2019 compared to 2018.

During 2019. We recorded increases in virtually off the income producing categories. The increase was most notable in Mortgage Banking activity were income increased by over 106% 2018. However, we also recorded increases of 10% in credit and debit card income 11% and payroll processing and 5% In fact charging come the latter of which in large part is due to expanded treasury Management Inc.

significant increase

The Mortgage Banking activity income primarily reflects a 72% increase in mortgage loan origination volume and an increase in the percentage of mortgage loan origination that were sold out compared to being recorded on our balance sheet with the understanding that accurately predicting Mortgage Banking activity income is difficult due to such factors as interest rate environment for minimum wage and seasonality. We expect not interesting come to be in a range of 5.0 million dollars to five point five five point five million dollars during the first and fourth quarters of a 2020 in a range of 5.5 million dollars to 6 .0 million dollars during the second and third quarters of this year.

We recorded not interest expense at 23.3 million dollars or in fourth quarter of 2019 up, 1.4 million dollars or 6% from the prior-year fourth-quarter 9 a.m. Expense for all of 2019 with 89.3 million dollars an increase the three point 1 million dollars or 4% from all of 2018.

The Higher Love

Expense in the 2019. Primarily resulting from increased salary costs including Merit pay increases higher mortgage loan origination originator commissions and stock-based compensation expense during the fourth quarter of 2019. We recorded a net loss and write down on home of Branch facilities totally in zero point seven million dollars.

We currently expect quarterly not interest expense to be in a range of 22.5 million dollars to 23.5 million dollars 2020 with Georgia tax rate at about 19%

Total deposits that you're in 2019 were $227 higher than a year in 2018 local deposits increased 207 million dollars but brokered disrupt twenty million dollars. My name is brand checking accounts continue to grow increasing thirty-five million dollars for in 2019 in large part reflecting new commercial relationships local time deposits increased $151 billion dollars during 2019 reflected the combination of a special campaign run during the first quarter an increase deposit balances from certain existing individuals businesses and public unit customers.

You're into.

1019 South Islands comprise 15% of total funds compared to 16% as of year-end 2018

He remaining well-capitalized baking organization at year end 2019. Our banks total risk-based Capital ratio was 13.0% and in dollars was approximately $97 higher than the 10% minimum required to be categorized as well capitalized.

55 Baxter in the fourth quarter were limited. However, during all of 2018 we repurchased about 233,000 shares for seven point two million dollars at a weighted average price per share of $30.79 since January of 2015. We have repurchased approximately 1.4 million shares for thirty two point six million dollars at a weighted average price per share of $23.47. We currently have about $16 available in our current buyback plan cause those are my prepared remarks on now turn the call back over to Bob. Thank you Chuck that concludes. My prepared comments will not open the call for the Q&A.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to answer your question, please press * then two at this time. We will pause momentarily to assemble our roster.

The first question comes from Brendan also from Piper Sandler friend and you may begin.

Hey, good morning, Bob. Good morning. How are you guys? Are you just want to start off here on on loan growth for the quarter? I mean, it sounds like you know, a heightened competitive environment, you know resulted in, you know more payoffs and we've typically seen in the fourth quarter. Was there a shift in the competitive environment or to just line up where you know, you just had more volume of of pay off these factors in this quarter, you know, I want to say it was a shift in competitive environment that these are projects that were conducive to the kinds of financing that our our bar hours are Thursday and secondary Market type of financing and so that there's there's always the risk with those kinds of products that go in that direction at some point in time. So I was saying was just more matter of wage. I mean did anything else and he's having to be all bunched together in the fourth quarter as opposed to any any change in the environment. It's not really it's very competitive but not any more competitive than it has been.

And as mentioned in our comments, the other phone of that was the reservation of asset-quality. So one of our watches

Does clients left the bank and went another Direction there as well? And so the combination of those things accumulated in the fourth quarter and produced the results for the next contraction is it did make your question I wouldn't say it's any shift in the competitive environment Brandon.

All right. Fantastic. That's that's good color and then to to follow up on on growth. This is you look at twenty twenty, you know, call it 68% loan growth for the full year still a pretty reasonable expectation, you know, assuming the timing doesn't line up again like like you had this quarter on the payoff side. Yeah, I think severe severe range you bet.

Perfect. I stay on the question. Thank you.

Again, if you have any question, please press * then 1 the next caller is Daman Daman from KBW.

Please go ahead. Hey guys. Good morning. How's it going today? How are you? So quick question. Just wondering you a little more color on the Mortgage Banking outlook on life, you know Chuck. I know you gave your expected quarterly ranges for for non interesting come but just kind of what you guys are seeing. You know, I think this quarter's results were well, at least my model is a Prestige beat in a um, you know, kind of unexpected to be this strong. So could you just kind of talk about what the pipeline looks like and kind of how you're viewing twenty-twenty and I will admit that the pipeline off the the the income that we recorded in the first quarter was better than what we had expected as well. But I think that demonstrates the Fantastic or men on that we've got going in at operation. We're looking at the folks suck the program that we developed the folks that we have been bringing on and continue to bring have just done an excellent job, you know for a good part of the year, maybe not so much support court.

But definitely the good part of the year. We definitely had the benefit of a lower rate environment which certainly helped on the refinance side. We definitely saw a pickup in a

Percentage of origination that were refinances so just a lot of really good momentum are looking at you know, we look at our pipelines on a regular basis and in while it's a relatively lower than what it was for most of 2019 a large part. I think that's more seasonality than anything else. There's just a lot of homes bought and sold in Michigan in January , but we're dead. We continue to be a very upbeat about the outlook for Mortgage Banking as we continue as Bob mentioned continuing to talk with others of joining the team which will give us additional in our sales. I think probably the biggest thing that we look at and trying to project the future is really that refinanced bucket and what that's going to look like in 2020 and in the corner going forward. So in our expectations, we we have scaled back our expectation and refinances certainly as a percent of our total book, but we're still looking for a solid. Yep.

And 20 twenty, you know, it might be difficult to overcome the loss and some of the refinance activity to have results in 2020 beat that of 20019. But I think if you look at the car results, you know backing off some of that refinance activity. I think our car results are going to be larger than what they were in 2019 and I think in large wage that reflects ongoing improvements in our market shares. Yeah, they get to add to that day. But if you're looking at our pipelines it says now and admit January it's dead higher than I can ever remember in the January which is obviously the the slow season for us here in Michigan in terms of real estate mortgage activity. So that's really encouraging to look at Chuck said that people that we've added to the team and they get a full year of their contribution and continue to look and and and add new commission lenders as we find dead.

folks that that really are

Culture and and the way our team operates and and we look forward to having a full year of those folks on board with us as well.

Got it. Okay. Thank you. That's that's really good color. And then if we could just touch on the on the Cecil update that you gave the truck. Did you say that you're kind of you know, your your shake out here from Sheetz home you actually expect loan loss Reserve to decline by a million dollars. Is that right?

Okay, so I mean in simple terms all else equal like your loan loss Reserve this password was 84 basis points. So you're expecting that to to drop down a little bit.

Yep. Okay. All right, great. And then I guess lastly kind of a housekeeping that I think the effective tax rate was a little bit lower this quarter, but you did give us guidance and the 19% range going forward was it just some like kind of clean up your end things that that fell into it this year this morning to clean up primarily reflects the the bully dog that we had earlier in the year. We kind of stuck with the 19% which is kind of our core tax run tax rate run. And then we you know, it's hard to do when you have some of those one-time type items that are non-taxable. So I think you're right. It was more of a clean up primarily reflects the bully. We're certainly not budgeting for any of that this year off and so we'll be back to the core of 19% Got it. Okay, that's great. Did stuff guys very helpful. Thanks.

The next question comes from Kevin Swanson from The Hub D group Kevin. You may begin.

I guess.

Hey, obviously having high levels of capital as a a good problem to have but maybe just talk about you know, your your appetite for the buyback going forward. You know, I know you guys did some this quarter off, you know, the dividend announced and then maybe just maybe an outlook on m&a if that's changed at all things.

No problem, Kevin on the capitol. Yeah, we definitely see the numbers going up which like you say kind of is not necessarily a bad thing. But we look to we would like to bring our leverage ratio down and help those metrics iCarly. But obviously we don't want to do that in a inappropriate fashion certainly by increasing our risk on the loan side a risk appetite on the loan side, you know on the regular capital on the regular cash dividend we continue to to look around 40 maybe 45% of our net income. They'd be returned to Chicago and Pharma cash dividends, you know, we have from time to time done special dividends and that is you know, our our overall level of capital something that we talked to our corporate Court about every quarter worth in you to do that as we go forward so wouldn't take a special dividend off the plate that certainly nothing that we look to imminently and again, we'll just talk to our corporate forward each quarter in in regards to those types of Thursday.

Specifically does the buy back?

You know, we've been kind of looking at a range of 32 to $33 a share is kind of our upper limit when we do the buy backs. That's something obviously if we look at I look at it from time to time not only in relation to what are you know tangible Book value is how our stock is performing but also relation to our overall level of capital as well. So that is something that we took us on a regular basis. They will continue to do so, you know all things being equal where they are. Now if anything we might get a little bit more aggressive and maybe by somewhere 34 something like that. But again, we'll just see how things go as we move along. It's always nice to have Access Capital, you know, it seems like at least with the economist that we tend to follow wage that 2020 and maybe even 2021 will will look a lot like 2019, especially in relation to measurements like GDP and unemployment. Those key metrics dead.

So we don't look at any significant.

It's slow down coming down anytime soon our discussions with our Bowers continue to be relatively positive on an overall basis. So don't think we need any excess capital from off topic standpoint, but obviously always good to have in case something dramatic does take place from that standpoint in regards to Bob speaking most of that by the regarding a capital obviously if we were to entertain some m&a opportunities, you have a little bit of excess Capital to absorb those types of events would be helpful as well to answer your choice. Nothing new on that front as we talked about the past. We remain opportunistic get selective on and position opportunities for us and came across our desk a fairly frequently and and we certainly take a look and make sure we we do our due diligence but there's nothing imminent or anything along those lines off.

with a front for us

Again, if you have a question, please press * then 1 the next question comes from Daniel Cardenas from Raymond James Daniel. You may begin I guess so maybe just a quick follow-up on the m&a question while it sounds like things are maybe you're looking but nothing seems imminent. How about organic life any any plans to expand the novo through either lpos or Branch openings? And if so, what what part of the state would you see yourself kind of expanding the question then on the on the organic front from fast and you know, we've opened our our branch in southeast Michigan am almost three years ago. That'll be three years and in March and the philosophy that we had with that situation is similar to our philosophy today that we looking for Bankers that are good match for our club.

sure and lens is the way we

great. Thanks. That's it for me.

And and the market while important is certainly a secondary in our opinion to the quality and the the philosophy of the the team that were going with and that contains verify Savvy and um, and so this is we were selected with the southeast Michigan opportunity as we do on the the mortgage that the mortgage lending side we're looking for is a good cultural fit as we do we started engage conversations to possibly bring them on board and you know, that's really in our opinion more important than the market necessarily birth. Well, we have a pretty broad Branch footprint our location footprint in Michigan right now. There are some areas of the state where we're not located and and certainly the fill that out would be would be nice, but the people the most important part

Got you make sense. All right, and then maybe just a quick question on credit quality. I mean the metrics are are solid but maybe if you could provide a little bit of color on watch lists Trends off any concerns in in that in the your substandard or doubtful or any of the watchlist portfolio.

no, the

The watch those Trends are continue to be a quite favorable just as they have for for the last few years now, very pleased with what we see there. So early indicators or less problems and we continue to diligently look and stand the portfolio all the time and make sure all endings stabbed remain close to our clients. So understand what's happening with them to be able to be underneath warning indicator for for any potential problems and they vary remain very pleased to see we're not seeing anything of a systemic nature or Trend that will give us cause for concern but not going to suck from looking because we wanted to stay ahead of the curve and maintain that really solid as the quality so but but again right now real quick, please with the trends that we're it appears to be going.

Great, great. All my other questions have been asked and answered. Thanks guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Bob kominski for any closing remarks like Jason and thank you all very much for your interest in our company and join us today. I look forward to speaking with you again in April at the end of the call.

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

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