Q1 2021 Independent Bank Corp (Michigan) Earnings Call
Good morning, and welcome.
And I D. C. P first quarter 2021 earnings conference call, all participants will be amongst all of them on.
And it systems, putting signal conference Bachelors microscopy, and Sparky followed by zero.
After the presentation and the opportunity to ask questions.
Please note that this bank is being recorded and all.
And like the partner conference over to Brad Kessel.
And at the CEO. Please go ahead.
Good morning, and welcome to today's call. Thank you for joining us for independent Bank Corporation's conference call and webcast to discuss the company's first quarter 2021 results.
And Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Moore, Executive Vice President and Chief Financial Officer and.
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 yesterday, you can access it and the company's website independent Bank dotcom.
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 we have taken since the start of COVID-19 pandemic to protect our employees clients and the partners and the communities we serve.
Today, our frontline associates continue to do an outstanding job, serving our customers and still be approximately 38% of our total staff who continue to work remotely.
Yeah.
We continue to execute on our operating plan that we share each quarter.
This plan is built around diversified and balanced growth process improvement and <unk>.
Cost controls 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.
And we continue to navigate the many challenges brought on by the COVID-19 pandemic.
We are pleased to report continued strong financial performance for the first quarter 2021.
I am so proud of a job on our associates did and persevering and this past year.
Despite the extraordinary circumstances and challenges.
They stayed focused on our purpose assisting customers.
Individuals and businesses to be independent.
The highlights for our first quarter of 2021 are shown on slide six include the following.
Independent Bank Corp reported first quarter, 2021, net income of $22 million or $1 per diluted share.
Net income of $4 eight.
And $8 million or 21 cents per diluted share and the prior year period.
The increase and 2021 and first quarter earnings as compared to 2020, primarily reflects increases in net interest income noninterest.
Non interest income as well as a decrease and the provision for credit losses that were partially offset by an increase and noninterest expense.
This represents increases in net income and diluted earnings per share of 358% and 376% respectively compared to 2020.
Our return on average assets and return on average equity were $2, one zero percent and $23 five 1% respectively.
Our mortgage banking team generated net gains on mortgage loans of $12 8 million.
A 45, 1% over 2020.
And a company record for mortgage loan origination volume of $509 million for the quarter.
We were also pleased to see continued net growth and deposits of $221 2 million or six 1% on a linked quarter basis.
Asset quality continues to be strong as evidenced by loan net recoveries during the quarter.
And no new commercial defaults during the quarter.
A low level of nonperforming loans and nonperforming assets.
On January one 2021, we adopted Cecil recording and $11 $7 million increase and our allowance for credit losses.
We announced the payment.
A 21 cent per share dividend on our common stock.
On February 16 2021.
This represents a 5% increase over 2020 and is the seventh consecutive year, we have increased our cash dividend.
Most importantly, we continued to effectively operate our business continuity plan to safely serve our customers and protect our employees.
Page eight of the presentation provides a good snap snapshot of our loan and deposit metrics for Michigan markets.
Turning to page eight we displayed several key economic statistics for the state of Michigan.
Overall, we are seeing continued improvement and the unemployment rate from Michigan now at five 2%.
However, we still are still over 279000 employed workers below the total number number of employed workers pre COVID-19.
Regional average home sale prices continued to climb.
Inventory levels and many of our markets are at record levels and negatively impacting the overall volume of home sales.
On the COVID-19 from and Michigan Department of Health and Human services continues to closely monitor vaccination rates.
Positivity cases hospitalization rates and the deaths as a result of the virus.
And the vaccination from through April 23rd over $3 7 million and first doses and $2 3 million second doses have been administered and their state.
Daily Positivity case rate continues to be at a concerning level and.
Net access of 50 per 100000.
Michigan public health officials have begun identifying corona virus outbreaks at schools, including preschool, K 12, and higher and institutions.
The third wave of the Corona virus cases has spurred a rapid increase in the number of people being treated with.
And with COVID-19, and Michigan's hospitals.
The cumulative deaths attributed to COVID-19 and Michigan now exceed 17100.
Our state government and has held off on reactivating many of the previous restrictions.
However, gathering limits and remove more office work expectations are still in place.
Despite this third wave of the virus I am optimistic and hopeful for a return and normal and they're not too distant future.
On page nine we provide a couple of charts, reflecting the composition of our deposit base as well as the continued growth in this portfolio, while working to effectively manage our overall cost of funds.
Like most and our industry.
Stenson government stimulus continues to result in increased deposit levels for our customers.
Okay.
On page 10, we provide and update on our $2 $9 billion loan portfolio for.
For the first quarter commercial balances increased by $58 $8 million mortgage balances declined by $15 9 million and installment balances increased by $7 $7 million.
Excluding PPP activity, our commercial balances.
Lately declined by $5.6 million for the quarter.
Commercial line usage levels continued to be soft at quarter, and we were at 27.6% utilization rate, which is at a historic low for our company.
That said the commercial pipeline is growing and our mortgage pipeline well down from peak levels continues to displace strength and demand.
On page nine are on page 11, we have and update on our loan modifications, which declined to just $15 8 million or six 2% of total loans at quarter end.
And page 12 is an update of the bank's administration of the Sba's Triple P program.
And so March 31, 2021, we had $234 2 million and balances outstanding.
And $6 8 million and unacquainted fees, we expect most of these fees to be accreted into interest income over the next nine months.
On page 13, we display the concentrations or makeup of our entire commercial loan portfolio.
Total core portfolio is very granular in nature with the largest concentrations and C&I.
And in manufacturing with $146 million or 11, 2%.
Construction, and 8% and retail at seven 5%.
Within the CRE portfolio, the largest concentration as retail with $98 million or seven 6%.
Our credit metrics indicate this portfolio continues to hold up well, including <unk>.
Those include.
Including loans and those industry sectors, whose business has been more negatively impacted by the COVID-19 pandemic. This includes the hospitality and.
And food service industries.
Page 14 provides an overview of our investments at March 31, 2021, as well as activity during this past quarter.
In terms of capital management, our capital levels continue to be strong with tangible common equity.
Tangible assets of 8.08% at March 31, 2021.
As previously noted we declared a cash dividend quarterly cash dividend and our town and stack of 21 cents per share.
This dividend is payable on may.
And may 14th 2021 to shareholders of record on May five 2021.
And December.
18, 2020, and the board of directors of the company authorized for 2021 share repurchase plan.
Under the terms of the 2021 share repurchase plan. The company is authorized to purchase up to one 1 million shares or approximately 5% of our outstanding common stock.
Richard purchase plan is authorized to last through the end of this calendar year.
Thus far and 2021, we have repurchased 180006 hundred 67.
Shares at a weighted average price of $19 93 per share.
At this time I would like to turn the presentation over to Gavin to share a few comments on our financials credit quality and our outlook from 2021.
Thanks, Brad and good morning, everyone and starting on page 16 of our presentation net.
Net interest income increased.
And $1 million from the year ago period, our tax equivalent net interest margin was 3.05% during the fourth quarter of 2021, which is down 58 basis points from the year ago period, and down seven basis points from the fourth quarter of 2020 I'll have some more detailed comments on this topic and a moment.
Average, earning assets.
Interest from excuse me average interest, earning assets were $4.05 billion and the fourth quarter and 2021 compared to 335 billion.
And the year ago quarter, and $3 $98 billion and the fourth quarter of 2020.
Page 17 and contains more detailed analysis on the linked quarter decrease and net interest income and debt.
And the net interest margin.
Our fourth quarter 21, net interest margin was adversely impacted by three factors decrease and PPP accretion growth and liquid assets and a decline and earning asset yield.
Yes.
We will comment more specifically on our outlook for net interest income and net interest margin for the remainder of 2021 later in the presentation.
Moving on to page 18, noninterest income totaled $26 $4 million and the first quarter of 2021 as compared to $11 million in the year ago quarter, and $22 $4 million and the fourth quarter and 2020.
Of course, the story here is our exceptionally strong mortgage banking revenues first quarter 'twenty, one net net gains on mortgage loans increased $12 $8 million compared to $8 $8 million and the first quarter of 'twenty increased and these gains was due to an increase and mortgage loan sales volume and in the mortgage loan pipeline as well as stronger.
Loans sale profit margins.
Mortgage loan application volume was strong and the first quarter 'twenty, one and east continues to be robust and started the second quarter and 2021, but we are seeing a decline in refinance application volume as a result of the increase and rates are purchase market volume remained strong and driven into our strong noninterest income was a $2.
$5 million gain on mortgage loans servicing due to a $4 6 million or 17 cents per diluted share after tax increase and the fair value due to price and a $1 $4 million decrease due to paydowns and the capitalized mortgage loans servicing rights.
As detailed on page 19, our noninterest expense totaled $30 million and the first quarter of 2021, as compared to $28 $7 million and the year ago quarter, and $32 $7 million and the fourth quarter of 2020 performance based compensation expense decreased $1 $2 million over the fourth quarter.
The 'twenty, primarily due to a decrease and the accrual for the annual management incentive compensation plan. The first quarter of 2021 included $2 million of conversion related expenses.
We will have more comments on the outlook for non interest expense later in the presentation.
Page 20 provides data on nonperforming loans other real estate nonperforming assets and early stage delinquencies total nonperforming assets were $7 4 million or $17, one and 7% on total assets at March 31 and 2020.
Forming loans decreased by $1 $2 million or 14% during the first quarter of 'twenty one.
Loans 30 to 89 days delinquent decreased to $3 9 million compared to $13 $2 million and the fourth quarter of 'twenty two.
And two commercial loans totaling $7 6 million that either paid off or became current are primarily responsible for the decrease.
Page 21 provides some additional asset quality data, including information on new loan defaults and on.
Classified assets.
I would highlight there were known and commercial loan defaults and the first quarter of 'twenty one.
Page 22 provides information on our <unk> portfolio that totaled $42 million at March 31, and 2021. This portfolio continued to perform well with 94% of these loans performing and 93 three percentage of these loans being current at March 31 and 2020.
Moving on to page 23, we recorded a provision for credit loss credit of $500000 and the first quarter of 'twenty, one compared to an expense of $6 $7 million and the year ago quarter, and a provision credit of $400000 and the fourth quarter of 2020.
The allowance for loan losses total for credit losses totaled $46 $8 million on a 168% of portfolio loans at March 31, and 2021, our ratio increases to 183% when excluding the PPP loans and remaining traverse City State Bank acquired loans.
And <unk>.
Page 24 provider information for adoption and C. So we elected to adopt <unk> on January one 2021, the day, one adjustment to the allowance for credit losses was $11 7 million.
Which fell within our previously disclosed range of $10 5 million to $12 $5 million.
Day, one adjustment increased the allowance for credit losses to $47 $1 million.
The increase and the reserve for unfunded lending commitments.
It was $1 $5 million, which fell within our previously disclosed range of <unk> 5 million to $1 $5 million. The after tax impact of the seasonal adoption to retained earnings was a decrease of $10 $3 million.
Page 24 is our update for 2021 outlook and <unk>.
Our actual performance during the year compared to the original outlook that we provided in January 2021.
Our outlook estimated loan growth and low single digits loans increased $55 million and the first quarter or $1, 85%. This growth was primarily due to the origination of DPP round, two loans totaling $148 2 million.
Loan balances net of Pp P loans decreased $13 $8 million during Q1 of 'twenty one.
Net interest income grew by $1 3 million or three 1% compared to the first quarter and 'twenty, which was below our forecast of <unk>, 5% from the full year 2021.
The growth and net interest income.
Income.
During the first quarter 'twenty, one compared to the prior year quarter.
Was generated by an increase and interest earning assets of $697 million and fee income accretion related to the paycheck protection program.
The impact of <unk> adoption on January one 2021 was and increased Blue islands for credit losses of $11 $7 million, which was within our range of $10 5 million to $12 $5 million.
Q1, 'twenty one provision for credit losses was a credit of $5 million. This is due on our forecasted 2021 full year provision range of two 5% to three 5% of average total portfolio loans.
Primary drivers of the decrease in provision for credit losses, or a decrease and the balance of loans at risk a decrease and commercial watch credits.
And an improvement and the employment forecasts and decrease the retail pool Pud reserve.
The current credit turns per day.
It is likely our provision for credit losses will be below our forecasted range for the full year of 2021.
Noninterest income totaled 26.
<unk> 4 million and the first quarter 'twenty, one compared to our forecasted range of 13 million to 16 and higher than forecast and mortgage production with higher margin on sales and mortgages combined with higher than forecasted net gain on mortgage loans servicing drove our outperformance.
Noninterest expense was 30 was $30 million and the first quarter outside of our 28 and a half to $29 5 million target targeted quarterly range and increasing the accrual for incentive based compensation due to a higher than anticipated payout levels. The primary driver of the increase and expense.
Our effective income tax rate was 18, 8% for the first quarter 'twenty, one which was generally in line with our forecast Lastly, the company purchased 180006 hundred 67 shares at an average cost of $19 and 93 and.
And the first quarter of 2021.
That concludes my prepared remarks, I would like to now turn the call back over to Brad.
Thanks, Kevin, let's turn to <unk>.
Slide.
26, and the debt and which displays a high level view of our key strategic initiatives.
And.
One of the most significant is our digital transformation initiatives.
Each of which we completed during the second quarter here of 2021.
Or will be completed with the second quarter here of 2021.
As I reported this time last year, we signed a core data processing agreement with a new partner Pfizer.
And we will be converting to the DNA platform.
The benefits of this change include moving to a modern core platform with flexible application processing and interfaces.
<unk> and as Apis.
This will allow faster integration with new technology.
Real time processing capabilities and better access to our data and decision management using our data.
This investment includes the introduction of one wallet.
That's our new mobile and online platform for consumer and business clients.
This platform allows our customers to open new accounts and apply for loans online along with enhanced transfer bill pay and self service capabilities.
In addition, one wallet plus enables our clients to monitor all their finances, and one location as well as provides budgeting and spending analytical tools.
This change will also serve as the foundation to create a unified customer experience. So we're all channels.
Okay, AVR, new channel from the mobile channel the electronic banking channel, our branch channel and back office support, which we call the hub.
Our team has been working hard for over 16 months and we're excited to roll out this new technology to our clients.
Think they will be pleased.
At this point, we would now like to open up the call for questions.
And I'll begin the question and answers.
That's a good question my personal and I'm wondering you touched on the phone.
And the speaker phone please pickup your handset before pressing the king.
Withdraw your question. Please press Star then two.
And as time will pause momentarily to assemble relapse rate.
Washington, and from Brendan Nosal with Piper Sandler. Please go ahead.
Hey, Good morning, Brad you want and Kevin how are you guys.
Good morning, Brian and doing well. Thank you thanks, Brian.
And.
Just wanted to start off here and kind of a more top level question there've been a number of deals announced in your markets over the past week or two.
And a curious I know, it's early but any quick thoughts on kind of how those might shape up the competitive dynamics and your market and then we're anywhere can you see yourself, adding talented team if the opportunity presents itself as a result from these deals.
Well.
Yeah. So.
Net.
The M&A and the Michigan markets.
As a reoccurring theme and of course.
And this past Monday, with Flagstar, and New York Community Bank partnering.
And then earlier and the year of course.
Huntington and.
Tcf.
Not unique to independent but.
The remaining <unk>.
And the marketplace.
And that disruption does create opportunity.
I think it creates opportunity to.
To.
And to add customers.
280 to add talent and.
Over the years I think we have shown our ability to.
Take advantages of COVID-19.
And you did disruption and our marketplace and.
And I think Tim.
Youll see us work to do the same thing going forward.
Alright, perfect. Thanks for the color and then maybe one more follow up from me on a bit of a different note here I look at slide 17, just the margin changes from from last quarter and this quarter.
There's debt 16 basis point benefit from <unk>.
Accelerated amortization on loss of derivatives is that a recurring piece of the margin that will kind of stick around or is that more of a transitory or one time benefit and other words and pull it out and get the margin is 290.
And that was that's a one time quarter over quarter brand and so we're just showing you that.
Third quarter, So we'll pick it up and the cost of funds is where yields you'll see the benefit but the quarter over quarter impact is the one time adjustment of 16 basis points last quarter. So what happened is we ask.
Celebrated that and Q4, yes share not seen it now in Q1.
And you won't see it yet.
And forward other than we don't have that higher cost and.
Those derivatives perspective does that makes sense.
Yeah, I think so right. So there is a kind of a permanent help to the cost of funds, but next quarter. If nothing else changes the name would look closer to 290 <unk> correct.
That's fair, yes that 16 basis points, just as comparator quarter over quarter.
Alright fantastic thanks for the help there.
Thank you.
Again, if you have a question. Please press Star then one.
Next question from Russell Gunther of D. A Davidson. Please go ahead.
Hey, good morning, guys.
Good morning, good morning.
I wanted to follow up on your comments on on loan growth it looks like reiterated expectations for that kind of 5% to 7% ex PPP.
And.
Prepared remarks, and Jeff that'll come from commercial mortgage and consumer, but just hoping you could elaborate a little bit more on on whether you expect that to be fairly even contribution from the three verticals are or how youre thinking about that kind of core non PPP organic growth and mix.
Yeah. So.
Again, what we see.
And <unk> for the quarter was.
On a slight decline.
Excluding PPP and commercial we saw slight decline in mortgage and we had a little bit of an increase and consumer.
I think generally.
We view it is across the board evenly.
As a company we really are.
Working to have the commercial book continue to be the largest book of business for us.
And I think as the economy returns to.
Stable more stable footing.
And we'll see more commercial demand.
And what's been interesting on the mortgage front.
And a headwind.
Is of course, the lower rates has accelerated.
Prepayment rates on the existing mortgage book and on.
What previously was in.
Our mortgage book as a result of size only.
We're for jumbo loans and over the last few years.
The gse's have of course materially raise their conforming loan limit level. So what we've experienced over the last few quarters as loans that were previously portfolio are now being.
Sold into the secondary market I think.
We'll probably still continue to see some of that but it will wane as refis.
And are reduced.
We are seeing very good demand for.
Residential construction.
And very good demand for.
On the RV and marine.
Areas.
Our financing.
No.
Again.
Back to your original high level I think we're our goal and we still think it.
Loan growth should be and mid single digits and.
And across the board.
I appreciate all the color there.
Next question.
Relates a bit.
I appreciate your comments on the margin and the glide path that you provide and.
And the deck, a big chunk was the.
Excess liquidity that weighed on the quarter and so could.
Could you give us a sense for when you think you might be able to get that to put.
And to work and so that piece of it that excess liquidity drag.
When you would anticipate that to stop weighing on the margin.
Yeah. Good good question.
And so we view this as.
And we're putting it to work and.
And in terms of the investment portfolio, we're exploiting and set overnight and cash so although although.
Not not a wide and our Oreo.
Hi, Raul yield.
That 170 is much better than 10 basis points. So.
We do we feel like and putting it to work and appropriate manner tests that should that should deposits either exit or loans pick up to absorb it and we can we can quickly rolled on mix.
And into either on the outflows or more.
Multifamily fund debt fund the loans, but.
Our deposits continue to grow.
And so.
I think that's a that's a common here and it gives you an indication and the amount of liquidity and that's out there.
Thanks, Kevin and I appreciate that.
Last question guys is on the anticipated P&L impact from the systems conversion and so.
Something that's been in the works as you mentioned 16 months.
Exciting to see it unveiled do you have any bigger picture projections around what this could mean for.
Revenue growth or expense declines just how youre thinking about the impact.
So that's a great question and.
Let's go to the expense side first so on the expense side.
Part of the.
New contract was an agreement to capture.
Contractual savings.
Immediately even before conversion and so really going back to <unk>.
A year ago.
At this time, you would've seen did see a reduction and our overall.
Data processing expense and we've carried that forward each quarter through two last year and annual you'll see that here and to.
2021.
The second component cost saves and this was the one essentially.
We garnered by just.
Really doing.
The business operating more efficiently and it's.
Processes are that were in place for a long long time are no longer.
And there and and.
And we have new processes in place.
And it's very difficult at this point, we've got an idea we haven't necessarily.
Share that publicly but we think there are opportunities to capture significant efficiencies just through.
Leveraging the new technology and.
The account opening as an example, and account opening new account opening process.
We can do today and a fraction of the time and digitally what previously.
Involved.
Al.
Human beings and taking a lot more time and.
And that's just one way one example, our account maintenance and resort.
And so on so so there.
Prospectively, we will be material cost savings and I can't quantify it on Monday, and a position to share that today on the revenue side.
So very difficult.
We do believe that one of our core one of our core objectives within the company.
And actually two one is to make it easier for our associates to service our clients and the second.
Is to make it easier for our clients to bank with us and that make it easier to bank with US, We think will drive more revenue and but it's very difficult to do.
To quantify so well so I know youre looking for X percent and the revenue side and X percent on the cost side, but at this point, it's just very difficult to.
Two.
Put down on a spreadsheet, but I hope I hope that gives you some insight into how we're looking at it.
Yes, quite a bit Brad it's very helpful and guys. That's it for me. Thank you both for taking my questions.
Welcome and thank you.
And I Hope you have a question. Please press Star then one.
This concludes our question and answer session I would like to turn the conference back over to me.
Mr Castle for any closing remarks.
Please go ahead.
In closing I would like to thank our board of directors and our senior management for their support and leadership.
I also want to thank all of our associates I continue to be so proud of the job being done by each member of our team despite.
Despite a very difficult operating environment. Our team continues to adapt to the circumstances leverage the opportunities. We go the extra mile for our customers and our communities.
Each team member and his or her own way continues to do their part toward our common goal of guiding our customers to be independent.
Finally, I would like to thank each of you for your interest and independent Bank Corp, and for joining us on today's call.
Have a great day.
Oh and concluded.
Thank you for attending today's presentation you may now disconnect.
Okay.