Q2 2021 Independent Bank Corp (Michigan) Earnings Call
Good day and welcome to the Independent Bank Corp, second quarter earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then 1 on a touchtone phone to withdraw your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to President and Chief Executive.
Officer, Brad Kessel. Please go ahead.
Yeah.
Good afternoon, 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 second quarter 2021 results I and Brad Kessel.
And our President and Chief Executive Officer, and joining me is Gavin Moore Executive Vice President and our Chief Financial Officer, and Joel run Executive Vice President.
Charge and commercial banking.
Before we begin today's call I would like to direct you to the important information on page.
2 of our presentation.
Specifically the cautionary note regarding forward looking statements.
If anyone does not already have a copy of the press release issued by US today, you can access it at the company's website independent bank Dot com.
The agenda for today's call will include prepared remarks, followed by a question and answer session and then closing remarks.
Slide 4 provides a good summary of our historical results, we continue to execute on our operating plan that we share.
Share each quarter.
This plan is built around diversified and balanced growth process improvement cost controls and talent management and an enterprise wide risk management framework.
We believe following this plan will yield consistent and improving performance metrics.
Many quarters and many years.
Turning to page 5 we are pleased to report continued strong financial performance for the second quarter of 2021.
The highlights include an increase and net interest income of 3.1%.
<unk> over the second quarter of 2020.
Net gains on mortgage loans of $9.1 million and.
And total mortgage origination volume of $473.7 million.
Net growth and portfolio loans of $33 million for 4.4.
[noise] percent annualized.
Continued strong asset quality metrics, including net loan recoveries during the quarter and.
And the payment of a 21 cent per share dividend on common stock on may 14th 2021.
Independent Bank Corp reported.
Quarter 2021, net income of $12.4 million or <unk> 56 cents per diluted share versus net income of $14.8 million for <unk> 67 per diluted share in the prior year period.
The decline and the second quarter 2021 earnings as compare.
Paired to 2020, primarily reflects a decrease and non interest income and an increase and noninterest expense.
That were partially offset by an increase and net interest income and decreases and the provision for credit losses and income tax expense.
Listed on.
On page 6.
Some of the more significant financial highlights year to date for 2021.
These include increases in net income and diluted earnings per share of 70, 588% and 77, 3% respectively.
Annualized.
Return on average assets.
And return on average equity of 1.6% and 18.06%.
Respectively.
Net gains on mortgage loans of 21.9.
<unk> 9 million and total mortgage loan origination volume of <unk>.
$982.7 million.
Net growth and portfolio loans of $80.9 million or 6% annualized.
Net growth and deposits of $225.1 million for 12, 5% annualized.
Finally, our credit quality continues.
And a real strong with net recoveries year to date very low level of watch credits past dues and nonperforming assets.
For the 6 months ended June 32021, the company reported net income of $34.4 million.
For $1.
<unk> to be <unk> <unk> per diluted share compared to net income of $19.6 million or <unk> 88 per diluted share and the prior year period.
The increase and year to date 2021 earnings as compared to 2020, primarily reflects increases in net interest income and non.
Non interest income and a decrease and the provision for credit losses that were partially offset by increases and noninterest expense and income tax expense.
Significantly impacting comparable quarterly and year to date 2021, and 2020 results was the changes.
And <unk> in the fair value due to price of capitalized mortgage loans servicing rates.
Of a negative $2.4 million or <unk> <unk> per diluted share after taxes and.
On a positive $2.2 million for <unk> <unk> per diluted share after taxes.
<unk> for.
For the 3 and 6 months ended June 32021, respectively.
As compared to a negative $2.9 million or <unk> 10 per diluted share after tax and a negative $8.9 million or <unk> 31 per share.
<unk> per diluted share after tax for the 3 and 6 months ended.
June 32020, respectively.
Our recent investments and new talent, and and new technology and during the first half of 2021 elevated our overall noninterest expense run rate I do believe.
It's reasonable to see us return to the higher end of our guided quarterly range for noninterest expense as we move forward.
Page 7 provides a good snapshot of our loan and deposit metrics for our Michigan markets.
<unk> is turning to page 8 we displayed several key economic statistics.
Statistics for the state of Michigan.
Interestingly, we have moved from the pandemic peak period of our restricted economy to the current period of a constrained economy.
Overall, we are seeing continued improvement and.
Unemployment rate for Michigan now at 5% net.
And yes, we have 300000 less employed workers today in the state as compared to pre Covid.
Labor shortages or have any noticeable impact on many segments of our economy, including an increase in wages and our markets and reduction.
<unk> and business operating hours.
Concurrently supply chain shortages are also constraining many businesses and our markets.
Regionally regional average home sale prices continued decline as inventory levels and many of our markets are at record lows and negatively impacting the overall.
We're all volume of home sales.
On page 9 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 and overall cost of funds like most and our industry. The extensive.
Government stimulus.
Tenuous to result in increased deposit levels for our customers.
Turning to page 10, we have a few highlights relating to independent bank digital transformation.
This major strategic initiative, which started.
2019, with vendor reviews and kicked off in early 2020 with the selection of our new partner moved significantly forward during the second quarter of 2021.
With our successful conversion to a new modern core platform with flexible application processing.
And 2 interfaces also known as API.
This change now allows us faster integration with new technology.
Real time processing capabilities and better access to our data and decision management using bad data.
Initial feedback from our customer base.
This includes much excitement about 1 wallet, our new mobile and online platform for consumer and business clients.
This platform provides customers with the ability to open new accounts and apply for loans on line.
Along with enhanced transfer bill pay and self service.
<unk> abilities.
In addition, 1 wallet plus enables our customers to monitor all their finances, and 1 location and provides budgeting and spending analytical tools.
And on wallet plus has experienced a very strong adoption rate.
As.
As we move forward during the second half of 2021, we will continue this digital transformation journey implementing numerous day.
Day 2 elements.
A whole bank core conversion involves extensive planning and extraordinary effort by many individuals and.
I am very.
Thankful to and proud of our team and undertaking this challenge and positioning us to compete and alter the ultimately grow market share.
On page 11, we provide and update on our $2.9 billion loan portfolio.
Second quarter commercial balances decreased.
By $56.7 million, however, excluding PPP activity.
Our commercial balances increased by $5.6 million for the quarter.
This was also net of several significant on.
For the sector payoffs.
Commercial line use commercial line usage at 36% while up from the previous quarters continues to be soft.
That said the commercial pipeline is very strong and our mortgage pipeline while down from peak levels continues.
As to display strength.
Our mortgage balances increased by $45.1 million and installment balances increased by 41.
$45.1 million and installment balances increased by 41.9.
$9 million.
Prospectively I am optimistic.
About our ability to accelerate the earning asset rotation for.
Lower yielding investments to higher yielding loans.
My optimism stems from the numerous talented additions to our sales team from across our markets. During the first half from 2021.
I do believe we are on track to grow.
Loans net of pp.
At the higher end of our original forecast.
On page 12, we have an update on our loan modifications, which declined to $12.7 million or 5% of total loans at June 32021.
And 1 page 13 is an update on the bank <unk> administration of the Sba's Paycheck protection program.
As of June 32021, we had $172 million and balances outstanding and $5.8 million and net on accreted fees.
We expect most of these.
Fees to be accreted into interest income over the next 6 to 9 months.
On page 14, we display the concentrations or makeup of our entire.
Commercial loan portfolio the portfolio continues to be very granular in nature with the largest concentrations and C&I.
And you're factoring with $139 million or 11% construction at 9% and retail at 6%.
Within the CRE portfolio.
Our largest concentration as retail with $102 million or 8%.
Our credit metrics indicate.
The portfolio continues to hold up well, including those interest those 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.
<unk> of our investments at June 32021, as well as activity during this past quarter.
In terms of capital management, our capital levels continue to be strong with tangible common equity to tangible assets of 8.2% at June 32020.
'twenty 1 we.
And we declared a quarterly cash dividend on our common stock of <unk> 21 per share. This dividend is payable on August 16.
2021 to shareholders of record on August 6th.
On December 18th 2020, the board of directors of the company authorized for 2021 share.
At this point on.
Under the terms for the 2021 share repurchase plan.
The company is authorized to purchase up to $1 million 100 shares or approximately 5% of our outstanding common stock.
The repurchase plan is authorized to last through the end of this year for the first.
Were record months for 2021, the company has repurchased 344005 shares at a weighted average price of $21.18 per share.
At this time I would like to turn the presentation the presentation over to Gavin to share a few comments on our financials credit quality and our outlook.
6 months for balance of 'twenty 'twenty 1.
Thanks, Brad and good afternoon, everyone I'm starting on page 17 of our presentation net interest income increased $9 million from the year ago period.
Our tax equivalent net interest margin was 3.0% to 2% during the second quarter of 2021.
Which is down 34 basis points from the year ago period, and down 3 basis points from the first quarter for 2021.
Some more detailed comments on this topic and a moment average interest earning assets were for 2.2 billion and the second quarter of 2021 compared to 366 billion.
And the year ago quarter.
Outlook and.
For <unk> zero $5 billion and the first quarter for 2021 page 18 contains a more detailed analysis of the linked quarter increase and net interest income and a decline and net interest margin.
Our second quarter 'twenty, 1 net interest margin was adversely impacted by 2 factors growth and security.
<unk> is available available for sale and a decrease and PPP accretion.
We will comment more specifically on our outlook for net interest income and the net interest margin for the remainder of 2021 later in the presentation.
Moving on to page 19, noninterest income totaled 14 net non interest income.
Securities of $14.8 million and the second quarter of 2021, as compared to $24 million and the year ago period, and $26.4 million and the first quarter of 2021 second quarter 'twenty, 1 net gains on mortgage loans totaled $9.1 million compared to $17.6 million and the second.
Income per share of 20, a decrease and these gains was due to decreases and.
Mortgage loans sales volume and and the mortgage loan pipeline as well as lower loan sale profit margins mortgage low applications remained strong although refinancing applications slowed and the second quarter 'twenty, 1 our purchase market volume continued to be strong.
Quarterly impacting noninterest income was a $2 million loss on mortgage loans servicing due to a $2.4 million or <unk> <unk> per diluted share after tax decrease and the fair value due to price and a $1.4 million decrease due to pay downs of capitalized mortgage loan servicing rights and the second quarter.
Net 1.
As detailed on page 20, our noninterest expense totaled $32.5 million and the second quarter of 2021, as compared to $27.3 million and the year ago quarter, and $30 million and the first quarter of 2021 compensation increased $1.5 million compared to the prior year.
Year order and future raises that were effective at the start of the year and increased over time related to the data processing conversion performance based compensation increased $1 million due to an increase and the expected payout levels compared to the second quarter of 'twenty.
The second quarter of 2021 included $1.1 million of converge.
<unk> and related expenses.
We have more comments on our outlook for noninterest expense later in the presentation.
Page 21 provides data on nonperforming loans other real estate.
Nonperforming assets and early stage delinquencies total nonperforming assets were $5.4 million or zero.
1, 2% and little asset at June 32021, nonperforming loans decreased by $2 million or 27, 8%. During the second quarter of 2021 loans 30 to 89 days delinquent decreased to $3.5 million at June 32021, compared to $3.9 million at March.
31.2021.
Hey, just wanted to provide some additional asset quality data, including information on new loan defaults on classified assets and on classified assets I would highlight there were no new commercial loan defaults and the first half of 2021 page.
<unk> 3 and provides information.
On our <unk> portfolio that totaled $41 million at June 32021. This portfolio continues to perform well and 96, 1% of these loans being current at June 32021.
Moving on to page 24, we reported a provision for credit losses credit.
A $1.4 million and the second quarter, 'twenty, 1 compared to an expense of $5.2 million and the year ago quarter, and a provision credit of $500000 and the first quarter of 2021, the allowance for loan losses totaled $45.9 million.
Or 163% and portfolio.
Oil portfolio loans at June 32021, this ratio increases of 175% when excluding PPP loans and the remaining traverse City State Bank acquired loans.
Page 25 is our update for 2021 outlook to see how our actual performance.
And the year compared to the original outlook that we provided in January of 2021, our outlook estimated loan growth and the low single digits loans increased $33 million and the second quarter for 2021, or 4.4% annualized growth and mortgage and installment loans were offset by a decline in commercial loans.
<unk> 30 to $62.3 million decrease and PPP loan balances and the second quarter 'twenty, 1 excluding PPP loans total portfolio loans grew at a 6.2% annualized rate during the first 6 months for 2021.
And was within our forecasted range.
During the.
6 months for 2021 net interest income increased by 1.7% over 2020, which is a bit higher than our forecast. However, the net interest margin for the first 6 months of 2021 was 30 basis points lower than the full year 2020, net interest margin of 334%.
First steeper declines and our forecast higher than anticipated deposit growth and has largely been deployed into lower yielding investment securities and the primary reason for these variances as.
As we were able to deploy more months as we are able to deploy more funds into the loan growth. We would expect the interest margin to stabilize.
Which is for 'twenty, 1 provision for credit losses was a credit of $1.4 million. This is below our forecasted 2021 full year provision range for <unk>, 5% to zero for 3.5% of average total portfolio loans. The primary driver of the decrease and the provision for credit losses were a decrease and the specific.
Specific reserves.
Qualitative reserves and improvement and the unemployment forecast if current credit trends persist, we would anticipate our provision for credit losses will be below our forecasted range for the full year of 2021.
Noninterest income totaled $14.8 million and the second.
Quarter, 'twenty, 1 compared to a forecasted range of 13 million to $16 million and mortgage loan pipeline continues to be strong, although refinance finance activity slowed down and the second quarter 'twenty 1.
Excluding negative MSR value adjustments due to price, we generally would expect noninterest income to fault and the forecasted range.
And for the last half of 2021.
Noninterest expense was $32.5 million and the second quarter outside our 28, 5 to $29.5 million target targeted quarterly range increases in compensation and employee benefits data processing and conversion related expenses were the primary categories that caused.
<unk> expense to exceed the targeted range, we do expect that the additional costs, we've been incurring related to the core data processing system conversion to abate by the fourth quarter of this year.
Our effective income tax rate of 17, 7% and 18, 4% for the second quarter and first.
Non insurance, a 2021 respectively was a bit lower than our forecast. This is due in part to higher than expected levels of tax exempt interest income.
Lastly, the company purchased 344005 shares and an average cost of $21.18.
And the first 6 months for 2021.
That concludes my prepared remarks, I would now like to turn the call back over to Brad.
Thanks, Kevin.
Slide 26 display is a high level view of our key strategic initiatives.
And at this point and the call we'd now like to open it up for questions.
6 months from now taking the question and answer question.
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And 2 at.
This time, we will pause momentarily to assemble our roster.
The first question comes from Brendan Nosal with Piper Sandler. Please go ahead.
Hey, good morning, everybody how are you doing.
Thank you Brendan good.
Okay, maybe just to start off on on loan growth I mean, certainly nice to see growth return after a year, so and softer trends I was just hoping you could kind of walk through what changed and the underlying environment that drove the inflection this quarter.
And drives your expectation for continued growth through the balance of the year.
Good.
Well.
And then what.
Joe Ron.
And as heads up on commercial banking team for.
Stab at debt, you'll want to yeah.
On 2 primary things and I would say for.
<unk>.
And is the yes.
Yes.
The pace of the economy, certainly we're seeing a lot of demand our customers are doing well.
Biggest issue for manufacturers and a lot of companies are supply chain issues that really is restraining growth for some some degree so what we're seeing from organic growth and ask them.
And then Brad.
<unk> mentioned, our investment in and.
And talent.
Have strategically.
Added.
Many new commercial bankers.
And the first half of this year 9 to be exact.
And we're seeing opportunities.
<unk> come through through those talent additions, so it's really twofold.
Continuing improvement opening up on the economy.
And then.
Obtaining greater market share with and expanded commercial for us.
Alright fantastic.
And that's certainly helpful and then maybe.
For for me, just turning to kind of the reserve level.
I guess, even with this quarter's negative provision you still have quite a robust level of reserves and X P. P P and so.
And so can you just help us think about how much COVID-19 related reserves, you still hold today and what a normalized.
And 1 that'd be allowance might look like for you folks now that you're on the seasonal.
Yes Brendan.
So approximately $14 million is still COVID-19 related in terms of the.
The allowance today.
So for so.
To answer your question there.
As we look at the.
The subjective.
Factors and how they are related to COVID-19.
Going to depend on.
As we progress.
We're cautious about.
Releasing those too quickly given some of the.
Level data, that's coming out is there any variance.
But also what youre going to see as we we've.
We've seen loan growth and we think that there's probably going to be a meeting point, where we will we will see the COVID-19 continue to release and.
And we anticipate it will be absorbed with loan.
Understood.
Helpful way of thinking about it alright, thank you for taking my questions.
And next question comes from Goldman Berm on Covid.
Please go ahead.
Hey, good afternoon, guys hope everybody's doing well today.
For your first question just want.
Just wanted to circle back on the expense outlook.
So obviously this quarter came in above the guided range as the commentary that you expect to get back into that guided range and the third quarter or is it by the end of the fourth quarter.
Well I think we've had a lot of change team and and.
And yet.
Our team has a pretty detailed understanding of where.
The increase has been year to day and.
So high level I think we should move to the high end of that range.
Here in the third.
For now.
And then be consistent with that and the fourth quarter.
The wild card a little bit there is.
And I mentioned the whole bank conversion, we have actually we have temporary staff and sort of.
Kept people on and.
And there's over time and so on.
All related to the.
The digital transformation effort and.
Im a little.
We do not want to we'd rather add a little higher expense run rate and do that right and take good care of our customer.
Customer base as opposed to get a little.
Pull the trigger early and sort of.
And.
Not have.
The hours being worked either temporary employees or over time so.
I think it's reasonable to expect us to get back in there and the third quarter, but.
It may move into the fourth quarter.
Yes.
Got it okay. That's helpful. Thank you.
And then.
The.
The buyback your approach with the buyback just given capital levels and where the stocks trading.
And clearly had some some capacity last year, so should we expect.
And kind of a similar amount of buyback here in the back half for the year as we saw on the first half.
Yeah, I think thats very reasonable.
The pace.
Of course, we've shared in the past.
Our activity there is a function of.
And modeling of what we see future earnings fee with the current stock prices.
<unk>.
Earn back period being within a tolerable range.
And so.
So yes.
All those things sort of stay where they've done I think we'll continue on the current path.
Okay, Great and then just 1 last question on.
Obviously, there's been 3 larger transactions that have occurred.
And Ah.
Across your footprint and the.
Yes.
And 3.6 months or so can.
Can you talk a little bit about our opportunities here to capitalize on market disruption.
Do you see opportunities and a way of.
The human capital side of hiring lenders are teams of lenders and then also on the customer acquisition side do you see opportunities to win over customers that.
He may have and are calling on but never had the opportunity to actually bank. Thanks.
Yeah.
Yes, and yes.
I think there is an opportunity.
In.
Adding to the team, which we have done and I think Joel outlined.
What we've done on the commercial side, we've also added.
And other areas on the sales side, we've also.
And it and some support roles because of course.
Of course, you've got to be able to get that new new business.
Through the through our processing areas and.
And in a timely manner and so.
We are very active and that effort and.
The story of our company is being very well received and the marketplace independent.
Pendant.
On a deposit base is now the largest.
What will be the largest bank headquartered in the state of Michigan and.
<unk>.
So we've got size and.
We've got a terrific platform, we've talked about the technology and.
Investments we've made.
It's still a people business.
And we're very excited about continuing to capitalize on all the market disruption.
Excellent I appreciate the color. Thank you very much.
Thanks, Tim.
And so a reminder, if you have a question.
Please press Star then 1 can be joined into the queue.
Our next question is from Russell Gunther with D. A Davidson. Please go ahead.
Hey, good afternoon guys.
Just had a couple of follow up. Thank you I just a couple of follow up for the first on the loan growth side. So I appreciate all the.
Good color, you've given on the trends for the quarter and the back half just focusing on the core C&I ex PPP could you talk about those trends intra quarter and how the back half for the year is shaping up for that lending vertical.
Hi, This is Joel.
Very very strong.
On the card.
And so our pipeline.
<unk> is strong and has been in and.
And.
A number of years and.
And and that's.
And Thats goes back and my comments earlier were seeing.
Demand from our customers as the economy continues to open up.
Long time, but really more importantly is the impact of our expanded commercial team.
And this out.
And the marketplace and health.
And to find opportunities so.
We think debt, we will see solid loan growth and the second half of the year.
And we got.
That's a little bit in the second quarter with somewhat.
Extraordinary payoffs.
But yeah, we're very confident based on our pipeline debt.
We will show good growth and the commercial portfolio and second half of 'twenty 1.
Okay, Great I appreciate the comments there and then just.
Ma'am.
1 more for me a follow up on the expense conversation so.
And I hear you in terms of getting back down to the high end of the range for the back half for the year and put the Wildcards are there that kind of 29 and a half quarterly run rate, but how should we think about that going forward is that a base off of which.
And you expect to grow and the normal course of business or as some of those temporary hires and over time goes away and there.
And there can be some.
Benefit to to a potentially lower run rate going forward.
Yeah, you know.
Question I think.
<unk>.
With.
And our core conversion change we knew.
And we have.
Been benefiting for.
And just.
The lower.
Core contract for some time now.
But what was very difficult to.
2.
For cash and I think it's still difficult as you know.
With the all the automation and the.
And removal of much of what papers still move within the company, it's very difficult to tell.
What what the additional savings will be performing.
Prospectively I think.
And as we move through the second half for the year, we're gonna have a much better feel for that so.
And thank the key point is.
We think we believe too.
And the high performing community Bank.
And today's operating environment.
You need to continue to.
Hum.
Yes.
A good efficiency ratio and be smart about how you're spending your money and come in.
Watching every card so.
We're going to continue to work that and try to push that downside and not necessarily.
We're not necessarily accepting.
And of that current 29, and a half million dollar level, we're going to continue to try and push that down but.
And at the same time.
Hey, you got to spend money to make money. So there's that part of it too.
Understood Okay, great well, that's it for me guys. Thanks.
And for taking my questions.
Thanks Russell.
Okay.
And I don't believe there's any more questions. So 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 on each.
Member of our team.
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 and your interest and independent Bank Corp, and for joining us on today's call and wish.
Each of.
You have a great day that concludes todays call.