Q4 2020 Independent Bank Corp (Michigan) Earnings Call
Good day and welcome to the Independent Bank Corp, fourth quarter 2020 earnings Conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Brad Kessel, President and CEO. Please go ahead.
Good morning, and welcome to today's call. Thank.
Thank you for joining us for independent Bank Corporation's conference call and webcast to discuss the company's fourth quarter and full year 2020 results.
And Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Moore.
EVP and Chief Financial Officer, and Joel Brown Executive Vice President commercial Bank.
Before we begin today's call I would like to direct you to the important information on page two of our presentation specifically the cautionary note regarding forward looking statements.
If anyone does not already have a copy of the press release issued by independent today, you can access it.
At the company's website and at Bank Dot Com.
Yeah.
The agenda for today's call will include prepared remarks, followed by a question and answer session and then closing remarks.
Page four of our presentation with some of the actions that we've taken since the start of the COVID-19 pandemic.
To protect our employees clients and vendor partners and the communities we serve.
Today, our front line associates.
Continue to do an outstanding job serving our customers.
As to the approximately 40% of our total staff, who continue to work remotely.
We continue to execute on our operating plan that we share each quarter. This plan is built around diversified and balanced growth.
Assets improvement and cost controls and talent management, and an enterprise wide risk management framework.
We believe following this plan will yield consistent and improving performance metrics over many quarters and many years.
As we continue to navigate the many challenges brought on by the COVID-19 pandemic.
We are pleased to report very strong financial performance and the fourth quarter and full year of 2020.
I am so proud of the job our associates did and persevering this past year, despite the extraordinary circumstances and challenges all while staying focused on our purpose.
And that is assisting individuals and businesses to be independent.
The highlights for our fourth quarter 2020 as shown on slide six and include the following.
Independent Bank Corp reported fourth quarter, 2020, net income of $17 million or 77 cents per diluted share.
Versus net income of $13 $9 million or <unk> 61 per diluted share and the prior year period.
This represents increases and net income and diluted earnings per share of 22, 4% and 26, 2% respectively compared to 2019.
Our return on average assets and return on average equity were 161% and 17, 8% respectively.
Compared to 1.56% and 15, 9% from 2019.
Our mortgage banking team generated net gains and mortgage loans of $15 9 million.
Up 149% over 2019.
And total mortgage origination volume of $503 million for the fourth quarter.
We were also pleased to see continued net growth and deposits of $39 $6 million or one 1% on a linked quarter basis.
Asset quality continues to be strong as evidenced by net loan recoveries during the quarter.
Low level of nonperforming loans and nonperforming assets.
We announced the payment of a 20 cent per share cash dividend on common stock and.
On November 16th 2020.
And most importantly, we continue to effectively operate our business continuity plan to safely serve our customers and protect our employees.
Page seven of our presentation provides a good snapshot of our historical financial performance and.
And our efforts to produce consistent and improving operating performance year after year.
For the year ended December 31, 2020, the company reported net income of $56.2 million or $2 53 per diluted share.
Third and net income of $46.4 million or $2 per diluted share in 2019.
The increase and the 'twenty 'twenty fourth quarter and full year earnings as compared to 2019, primarily reflects increases and non interest income that were partially offset by a decrease in interest income and an increase and noninterest expense and income tax expense.
These full year results represent increases and net income and diluted earnings per share of 29% and 26.3% respectively compared to 2019.
Our return on average assets and return on average equity were 143% and 15, 7% respectively.
Impaired to 135, and 13.6 and 2019.
Additionally, we were able to continue our annual trend of improving our efficiency ratio. This past year moving to 59, 2%.
For all of 2020, and 16 versus 64.9% from 2019.
Driving these results with strong net gains on mortgage loans of $62 $6 million up 213% over 2019, and total mortgage origination volume for the year of one $8 million.
Also for the year, we had deposit net growth of 600 million or 19, 8%.
Finally, I am pleased to report our tangible common equity per share increased by 16% to $16 33.
From $14 and eight.
Prior year and.
P. J provides a good snapshot of our loan and deposit metrics for our Michigan markets.
And page nine we displayed several key economic statistics.
Statistics, reflecting the literal shutdown of the Michigan economy during the second quarter of 'twenty and 'twenty. However, since then we have seen noticeable improvement and statewide employment.
And the COVID-19 Budd.
The Michigan Department of and Health and Human services has been closely monitoring and three metrics for stabilization or declines over the past several months, Michigan continues to see and improvements in these metrics, which has allowed for additional relaxing of protocols and reopening of activities.
As a result state government.
And is opening up restaurants and bars.
And the first of February.
Progress continues with the Covid net that COVID-19 vaccine rollout health care workers people over age 65, and other essential workers are currently eligible to receive the vaccine.
On page 10, we provide a couple of charts, reflecting the composition of our deposit base as well as the continued growth and this portfolio, while working to effectively manage our overall cost of funds and <unk>.
Page 11, we drive provide and update on our $2 $8 billion loan portfolio from the <unk>.
Fourth quarter commercial balances declined.
By $109 $4 million mortgage balances declined by $8 1 million.
Ian.
And installment balances declined by $4 $3 million.
Despite the decline and commercial balances for the quarter, we are experiencing an increase and our commercial pipeline with the underlying economy is showing strength, including the manufacturing sector.
Additionally, the mortgage pipeline has continued to stay strong through the first three weeks into the new year.
For the full year 'twenty and 'twenty, we did finished with net loan growth of.
Of $8 $5 million over the prior year and.
On page 12, we have and update.
And our loan modifications, which declined to 21 $4 million.
Seven 8% of total loans at December 31, 2021.
December 31 and 2020.
On page 13, we are disappointed the update and the bank's administration of the Sba's Paycheck protection program.
And as of December 31, 2020, we had $170 million and balances outstanding and $3 2 million and unacquainted fees. We expect most of these fees to be accreted into interest income over the next six months.
Additionally.
Wally since round two or.
Phase two of the program was opened up we have received 760 applications.
For a little over $100 million to date.
Currently we estimate phase II volumes to range between 40% to 50% of what was originated and phase one by our team.
On page 14, we are displaying the concentrations or makeup of our entire commercial loan portfolio.
Portfolio is very granular in nature.
The largest concentrations and C&I be manufacturing at 11% construction at 8% and retail at seven 5%.
Within the commercial real estate portfolio, our largest concentration is retail at 7.8.
And 8%.
Our credit metrics indicate.
This portfolio continues to hold up very well, including loans and those industry sectors, whose business has been more negatively impacted by the COVID-19 pandemic. This includes.
The hospitality and food service industries.
Page 15 provides an overview of our investments at December 31, and 2020 as well as activity during the quarter.
In terms of capital management, our capital levels continue to be strong with tangible common equity to tangible assets of eight 6% at December 31 and 2020.
We paid a quarterly cash dividend of <unk> 20 per share and November 16th and recently declared a <unk> 21, <unk> cash dividend on January 25th 2021 payable on February 16.
This represents a 5% increase over 2019 and is the seventh consecutive year, we increased our cash dividend.
And December 18.
<unk> 2020, our board of directors authorized.
A 'twenty and 'twenty one share repurchase plan under the terms of the 'twenty 'twenty one we share repurchase plan. The company is authorized to purchase up to $1 1 million shares or approximately 5% of.
And the outstanding common stock.
Sure.
Purchase plan is authorized to last through the end of December 31, and 2021.
At this time I would like to turn the presentation over to Gavin and to share a few comments on our financials and credit quality seasonal.
The scorecard for 2020, and our outlook for 'twenty 'twenty one.
Thanks, Brad and good morning, everyone and I am starting and page 17 of our presentation net interest income increased $3 million from the year ago period, our tax equivalent net interest margin was $3 one 2% during the fourth quarter of 2020, which was down 58 basis points from the year ago period and <unk>.
And 19 basis points from the third quarter of 2020.
We'll have more some more detailed comments on this topic and a moment.
Average interest, earning assets were $3 $98 billion and the third quarter of 2020 compared to $3 $32 billion and the year ago quarter, and $3 $89 billion of third quarter of 2020.
Page 18 contains a more detailed analysis of the linked quarter decrease and net interest income and the decline and the net interest margin.
Over fourth quarter, our fourth quarter 'twenty net interest margin was adversely impacted by three factors increase and interest expense related to the it could be acceleration of amortization of loss uncertainty designated derivative instruments.
Celebrated premium amortization on securities and.
And a decline and earning asset yield.
We will comment more and more specifically on our outlook and net interest income and the net interest margin for 2021 later in the presentation moving on to page 19, noninterest income totaled $22 $4 million and the fourth quarter of 2020 as compared to $15 $6 million.
And the year ago quarter, and 2000 and $7 million and the third quarter of 2020, a corp store years are exceptionally strong mortgage banking revenues fourth quarter 'twenty net gains on mortgage loans increased to $15 $9 million compared to $6 $4 million and fourth COVID-19, the increase and these gains was due to an increase.
And mortgage loan sales volume and.
And in the mortgage loan pipeline as well as stronger loan sale profit margins mortgage loan application volume was strong and fourth quarter 'twenty and continues to be strong and started the first quarter and 2021, because we have both a solid purchase market and refinance volumes continue to be strong due to the lower interest rates.
Partially offsetting these strong gains was $384000 loss on mortgage loan servicing and due to an $892000 or <unk> <unk> per diluted share after tax decrease and the fair value due to price and a $1 $3 million decreased due to paydowns of capitalized mortgage loan servicing rights.
And the fourth quarter 'twenty.
As detailed on page 20, our noninterest expense totaled $32 $7 million and the fourth quarter of 2020, as compared to $29 $3 million and the year ago quarter, and $33 $6 million and the third quarter of 2020 performance based compensation expense decreased $2 8 million.
Over third quarter, 'twenty, primarily due to a decrease and the accrual for the annual management incentive compensation plan and the third quarter of 2020 included $1 $5 million up and conversion related expenses.
We will have more comments on the outlook for noninterest expense later in the presentation page 21 provides data on nonperforming loans other real estate nonperforming assets and early stage delinquencies.
Nonperforming assets $8 $6 million or two 1% of total assets at December 31, 2020, nonperforming loans decreased by $2 $3 million or 23% during the fourth quarter.
Loans 30 to 89 days delinquent increased to $13 $2 million compared to $5.8 million and the third quarter 'twenty two commercial loans totaling $7 6 million makeup make.
Wake up this increase since December 31, one of these loans has paid off and the other has become current.
Page 22 provides some additional asset quality data, including information on new loan defaults and on classified assets page 23 provides information on our <unk> portfolio that totaled $48 million at December 31, 2020. This portfolio continues to perform well with 94, 2% of these loans booked.
<unk> and 87, 3% of these loans being current at December 31, 2020.
Moving on to page 24, we recorded a provision for loan losses credit of $421000 and the fourth quarter 'twenty compared to a credit of $221000 and the year ago quarter, and a provision expense of $1 million and the third quarter of 2020.
The single most significant factor driving the higher year to date provision for loan losses, and 2020 wasn't $11 $2 million.
128, 3% increase and the qualitative or subjective portion of the allowance for loan losses. This increase principally reflects the unique challenges and economic uncertainty, resulting from the COVID-19 pandemic and the potential impact on the loan portfolio the.
The allowance for loan losses totaled $35 $4 million or one 3% of portfolio portfolio loans at December 31, 2020, this ratio increases to 143% when excluding the PPP loans and the remaining traverse City State Bank acquired loans.
The adoption of seats always delayed following the updated guidance included in the second COVID-19 relief Bill passed in December of 2020, we expect to adopt Cecil as of January one 2021 as allowed under the cares Act extension.
Page 25 provides an analysis of our allowance for loan losses under the incurred loss methodology and the seasonal methodology at December 31, 2020, we.
We estimate the increase to the allowance for loan losses to be and the range of $10 5 million to $12 $5 million when <unk> was adopted.
The increase and the range over previously disclosed range is due to certain discounted cash flow model enhancements.
Using the midpoint of our range are calculated as if Cecil allowance at December 31, 2020 was approximately $46 $9 million or $1, 72% total loans.
Page 26 is our final update for 2020 outlook to see how our actual performance during the year compared to the original outlook that we provided back in January of 2020.
Our outlook estimated loan loan growth at approximately 7% as you can appreciate many of the factors that shaped our original outlook have changed dramatically given the economic upheaval from the COVID-19 pandemic.
Loans decreased.
$121 $8 million and the first quarter, but increased $8 7 million or 3% from the prior year and this growth is primarily due to PPP loans, the economic impact of the COVID-19 pandemic created challenges and our lending environment that were unforeseen at the beginning of the year net.
Net interest income grew by $1 million or <unk>, 84% compared to a forecast of 5% for full year 2020, the original forecast assumed stable rates throughout the year the rate environment for for full year 2020 has been very different than the original forecast actual short term rates declined 101 five per.
And long term rates declined by approximately 1% and net interest margin contracted by 46 basis points on an annualized basis the growth and net interest income was generated by an increase and interest earning assets of $483 8 million and fee income accretion related to the paycheck protection program as a.
All of the cares Act extension.
Sorry.
Extension and we did not adopt <unk> and 2020 is forecasted for full year 2020 provision was $12 5 million or 43% of the annualized average total loans. This is outside the forecasted range.
One 5% to 2% of average total loans. This provision includes an increase and the qualitative reserve of $11 2 million due to the shock from the COVID-19 pandemic.
Noninterest income increased 69, 2% and 2020 compared to the forecast of three 3% to 4% higher than forecasted mortgage production combined with higher margins and sale of mortgages was a catalyst to our to our outperformance noninterest expense increased nine 6% for full year 2020.
And well above our forecasted range increase and 2020 compared to 2019.
And was driven primarily by an increase in performance based compensation expenses related to the data conversion and our effective income tax rate was 19, 8% for full year 2020, which was generally in line with our forecast.
After pausing the share repurchase activity on March 16, 2020. The plan was reactivated effective October 32020, the company purchased 30027 shares at an average cost of $14 90.
And the fourth quarter of 2020 total shares purchased in 2020 was 708956 shares and an average cost of $20 seven.
Turning to page 27, and this will summarize our initial outlook for 2021.
The first section is loan growth, we anticipate loan growth and the low single digit range and are targeting a full year growth rate of 1% to 2%.
Excluding PPP loans, our target growth rate.
Third growth rate range is 5% to 7%, we expect to see growth across all three of our loan portfolios.
This outlook assumes and improving Michigan economy.
Net net interest income, where we were forecasting a slight increase of 5% over full year 2020.
We expect the net interest margin to trend lower compared to full year 2020 by 10 to 15.
Basis points, primarily due to declining yields on earning assets. This forecast assumes no change and target federal funds rate and 2021 with long term rates up slightly by year and we expect.
To adopt Cecil as a $1 21, and the initial seasonal adjustment is expected to be approximately 10 five to $12 $5 million. This adjustment is subject to certain financial review procedures that will be completed and the first quarter of 2021, our full year 2021 provision expense for the allowance for credit losses of approximately.
<unk>.
Two 5% to three 5% of average portfolio loans would not be unreasonable.
Related to non interest income, we estimate a quarterly range of 13 million to $16 million, we expect mortgage loan origination volumes to decline by approximately 30% from 2021 combined with declining margins on loans sold.
Our outlook for noninterest expense as a quarterly range of $28 5 million to $29 5 million with the total for the year, 4% to 6% below 2020, actuals, we expect total compensation employee benefits to be lower in 'twenty, one compared to 2020, due primarily to the reduction and incentive compensation.
<unk>.
Our outlook for income taxes remains the same in 'twenty and 'twenty one as it was in 2020 and an effective rate of approximately 20% assuming the statutory federal corporate income tax rate does not change during 2021.
Lastly, we believe that the share repurchases.
Purchases will be at the midpoint.
Of our authorization of approximately 5% of outstanding shares.
That concludes my prepared remarks, I would like now to turn the call back over to Brad.
2020.
Has been an extraordinary period of time for all of us.
And as I mentioned at the beginning of my remarks, our team continues to execute on the initiatives reflected on slide 28 of our presentation.
One of the most significant initiatives is our digital transformation, which began early in 2020 with our announced change and core processing partners and the planned move to a real time core banking platform.
Through 2020, and now and the 2021.
Achieved numerous key milestones on this journey.
Later in 2021, we are excited to provide to our customer base, a unified and enhanced digital and mobile banking experience.
A strong digital offering is essential to compete in today's fast changing digital world.
And if we learned anything from 2020 it is the importance of TPP and today's world.
And that is people perseverance and purpose.
At this point, we would like to open up the call for questions.
And I will now begin the question and answer session cash.
Ask a question you May press Star then one on your Touchtone phone.
And we're using a speakerphone please pick up your handset before pressing Nicky.
To withdraw your question. Please press Star then two.
Our first question today will come from Brendan Nosal with Piper Sandler.
Hey, good morning, Brad and Kevin how are you folks.
Good Brian and good morning, good morning.
Just wanted to start off on the margin for this quarter and and just try and figure out what the appropriate.
Weighted thinking about the underlying core level.
So if I remove the $1 6 million of onetime interest expense that you guys took this quarter as well as the impact of PPP from both the numerator and denominator of the margin I kind of get to a core underlying level of 306 is that a reasonable way to think about kind of the true margin ex noise.
Yes, I would agree with that running.
Okay, Great and then just a follow up on that.
Given that starting point and the outlook for for 2021, So I guess youre looking for 10% to 15 bps of compression from.
The $3 34 level, so I guess that gets us to $3 20 or $3 25.
And which is a good bit from that 306 core level.
And just kind of walk through the puts and takes and how you get from where the underlying margin and.
And did the year to kind of how you're seeing it play out for 2021.
Yes sure.
A couple of things and of the year, specifically for full quarter for sure we saw acceleration and the premium amortization on the investment portfolio.
So one issue there.
That's above what we're going to see on average for next year, so that slowdown should add some yield to the to the to the portfolio and then secondly.
As we see loan growth come on next year at a higher yield it should.
And this should increase.
The increase to be able to increase and the.
And the first quarter or so.
Got it debt.
And that's definitely helpful.
And then just one final one from me.
NII outlook.
10% growth that's all from the reported base of $123 6 million correct.
Can you repeat that I'm sorry.
Yes sure.
And look for NII growth that half of a percent and thats off of the reported base of $123 6 million correct.
That's correct.
Great. Thanks for taking my questions.
Thank you.
Our next question comes from John Rowan with Janney.
Good morning, guys.
And John Good morning, John.
I Hope you guys are doing well.
Just I guess as a follow up to the last question on your net interest income guidance. The plus 5% does that include any impact of the next round of PPP.
Yes, it does.
We did we do have some revenue and.
2021 regarding the second round.
So.
I think in your prepared remarks, you said you thought round two could be 40% to 50% to brown <unk> and is it.
Are you sort of assuming debt and.
And taking the fees off of that and to your guidance.
Yes.
Okay and.
Okay and then.
Brad maybe just sort of big picture what are you hearing from from your clients from your borrowers today about how do they feel about the economy and so forth.
Well.
That's a great question and I'll.
CBS and initial response, but we have Joel one.
With us today, and your heads up our commercial banking area and.
Yes.
I would say generally vary.
Optimistic.
About <unk>.
2021, as we get past the first quarter and.
As the vaccine gets rolled out through the entire.
Populations within our markets.
Obviously.
There are.
Certain sectors of our economy.
Net.
And have been more negatively impacted than others.
But coming out of.
A board meeting earlier this week and.
Getting feedback from.
Just that group, which is representative of a number of different industries and within the state.
There was.
And also that optimism for second half of 'twenty and 'twenty, one Jordan and.
I think number it up well.
And that are struggling or the hospitality related because they haven't been able to function and your full capacity if at all.
Core manufacturing and construction activity.
Remains pretty balanced.
And we can do.
Okay. Thanks, guys. Thank you for the color.
Our next question comes from Joe Pratt with bedding and Scattergood.
Good morning.
Good morning, Joe and Joe.
Morning, guys a question on the impact of the total adoption.
$10 5 million to 12 million will that flow through the income statement or that'll be all retained earnings and then.
Think you hinted that.
Allowance might be $47 million or so one 7% of loans do you see that as where it will likely settle in over the longer term and if not what do you think a good number to use and a longer term is from allowance of loans.
Yeah, so the from.
Regarding the adjustment the seasonal that will run through retained earnings.
And then the debt calculation of where we're at is inclusive of piece of the one seven is inclusive of PPP. So.
Ex PPP and over one eight to one point maybe 185.
I think our forecast.
No our forecast says.
Longer term as given the economy improves some of that qualitative reserve.
We'll probably ease up although we do anticipate more maybe a more normalized charge off environment. So having said all of that.
We believe that is.
A.
A appropriate level to begin.
Yes, I think Thats fair game and.
And the other thing again, the one time adjustments those are pre tax yes. Thanks, Brian.
Okay.
And then the buyback.
Do you expect to be kind of programmatic and do a certain amount each quarter or more opportunistic and and what gives you confidence debt.
You know a two and a half is the right number versus say trying to use it all.
Well.
Great question first of all and I would say.
We would probably see ourselves as being more consistent with the buyback is as opposed to maybe opportunistic.
Really.
Over time quarter after quarter.
Within understanding of delivering on and on our forecasts.
Cognizant of.
Capital levels cognizant of cash yet.
Holding company.
Cognizant of.
Growth rates as well as.
Other.
No.
Growth opportunities, so I think again.
We're going to probably be more consistent with the share repurchase as opposed to.
Opportunistic.
Thanks.
And if you have any further questions. Please press star and then one could join our tail.
Our next question will come from Russell Gunther with D. A Davidson.
Hey, guys. This is Ryan on for Russell Gunther.
And just had a quick question on the expense guide for 'twenty and 'twenty one.
In addition to the reduction in incentive comp and and the new year are there any other meaningful levers to drive that expense ratio down.
Oh.
Ryan this spread and.
Guarantee yet quick answer to that or I can.
In terms of are you, saying outside of.
The compensation piece Bryan maybe ask the question again.
Yeah sure. So I was just wondering outside of that compensation piece are there any other planned reductions in expense that will drive down to that lower range that you had guided to.
Yes, so the big one obviously is going to be the expense.
Comp comp the comp expense correct, Yes, and then obviously were.
Ongoing evaluating.
The expense structure.
And if we're talking noninterest simply.
Do anticipate there'll be some savings in interest expense.
Relative to the day designation to share much that earlier.
And no bad Q on Q and in the yes.
No.
So in 'twenty and 'twenty.
<unk> $19 million.
Recorded and performance based compensation.
And.
Probably.
Half of that related to our annual incentive plan and then the balance was for various other programs I would say a good chunk of it relative to our mortgage banking unit and.
And giving some milestones there so.
I think we feel like.
Net category.
We've got a lot of.
Variability based on how the overall company is doing.
And after that.
We're going to as we have been year after year.
Honing in on each each category.
Closed.
Eight locations and.
2020.
And achieve some material cost saves.
Our branch.
Optimization team. If you will is continuing to look at.
And at other opportunities.
And.
And that really tough one Ryan to nail down right. Now is we have spent almost two years.
And this effort to change.
Core partners and.
Core processing platforms and.
And there were material contractual savings, which we're realizing at this point, but the back room.
Efficiencies, which we know will be there are very difficult to quantify right now and if anything were.
To get the conversion.
Don and manner that is.
And at least negative impact to our customers.
We have been running with a higher.
Cost structure intentionally and so I think there there are some areas.
And for improvement there.
Difficult.
And <unk>.
Quantify for you today.
Got it thank you very much.
And our next question is a follow up from John Rowan with Janney.
Hey, Brad just one follow up just the.
The recently announced acquisition between TC up and Huntington just.
Your thoughts potential opportunities for you guys within your Michigan footprint.
Well John.
John Thanks for the question and.
And I'd say.
And material events.
Obviously within our markets.
Between the two.
Financial income.
Meet with them and almost every one of our markets.
And obviously.
Well, they announced here and the last week the closure of almost 200 locations.
So.
Debt.
And just.
Will be opportunities.
For talent acquisition, and there will be opportunities for.
So customer acquisition.
I would point to our track record we've had this disruption going on.
And our marketplace as the industry continues to consolidate for a number of years and.
As we've shared with you and others.
And I think <unk> been very successful and adding talent and customers.
To our to our company.
Yes, I think it could be a real opportunity. So thanks guys.
Thanks.
This concludes our question and answer session and I'd like to turn the call back over to Brad Kessel for any closing remarks.
I would like to thank each of you for your interest and independent Bank Corp, and for joining us on today's call and we wish everybody a great and safe day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.