Q3 2021 Independent Bank Corp (Michigan) Earnings Call
Good morning, and welcome to the Independent Bank Corporation third quarter 2021 earnings Conference call, all participants will be in listen only mode.
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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 Chief Executive Officer. 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 third quarter 2021 results.
I am Brad Kessel, President and Chief Executive Officer, and joining me is Kevin Moore, EVP, and Chief Financial Officer, and Joel run EVP commercial banking.
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 US today, you can access it at 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.
Slide four provides a good summary of our historical results.
I continue to be very pleased with the high level of performance by our team generating strong core results for yet another quarter.
We continue to execute on our strategies of investing in people and technology.
During the third quarter, we saw good growth in net interest income.
Stabilization of our net interest margin and across the board loan growth net of PPP.
Our commercial pipeline is at its highest level in many quarters.
Fueling some of this growth was the opening of two new commercial loan production offices.
Ottawa County, and the second in Macomb County.
Yeah.
Deposit gathering continues to be robust.
By existing customers as well as through the addition of new customers.
In addition, mortgage gains continued to be solid and our card strategies are generating good growth in interchange revenue.
On the asset quality front I could not be more pleased with net recoveries for the quarter commercial watch credits at two 4% of the portfolio.
And a very low level of past dues and non earning assets.
Well there are many uncertainties uncertainties and challenges ahead.
We are excited about the momentum we have in our markets and look forward to continuing these trends through the end of 2021 and into 2022.
Turning to page five independent Bank Corp reported third quarter 2021, net income of $16 million or 73 cents per diluted share.
Versus net income of $19 6 million or <unk> 89 per diluted share in the prior year period.
The highlights included.
Annualized return on assets and average equity of 41, 4% and 15, 9% respectively.
An increase in net interest income of five 7% over the third quarter of 'twenty 'twenty.
Net gains on mortgage loans of $8 $4 million in.
In total mortgage loan origination volume of $453 $8 million.
Net growth in portfolio loans of $69 four.
$4 million or nine 8% annualized.
<unk> strong asset quality metrics as evidenced by $1.5 million and net loan recoveries during the quarter as well as a low level of nonperforming loans and nonperforming assets.
Finally, the payment of a 21 cent per share dividend on common stock on August 16th 2021.
For the nine months ended September 32021, the company reported net income of $54 million or $2.30 per diluted share compared to net income of $39 $2 million or $1.76 per diluted share in the prior year.
Great.
Highlights for the first nine months of 'twenty 'twenty. One include increases in net income and diluted earnings per share of 28, 6% and 37% respectively.
Annualized return on average assets and average equity of 1.53% and $17 three 2% respectively.
Net gains on mortgage loans of $33 million in total mortgage loan origination volume of 1.44 billion.
Net growth in portfolio loans of $153 million or seven 4% annualized and net growth in deposits of $374.7 million or 13, 8% annualized.
Page seven provides a good snapshot of our loan and deposit metrics for our Michigan markets.
Turning to page eight we displayed several key economic statistics for the state of Michigan.
Overall, we are seeing continued improvement in the unemployment rate for Michigan.
4.6% slightly below the national average of four eight.
However, we have 180000 fewer workers employed today as compared to pre COVID-19.
Labor shortages are having a noticeable impact in many segments of our economy, including an increase in wages in our markets and reductions in business operating hours and.
In addition supply chain shortages are also constraining many businesses in our markets.
While average home sale prices continue to decline as inventory levels in many of our markets are at record lows and negatively impacting the overall volume of home sales.
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.
Extensive government stimulus continues to result in an increased deposit levels for many of our customers.
Turning to page 10, we have a few highlights relating to our to the independent bank's digital transformation.
Following our second quarter whole bank conversion, we are seeing good utilization and growth rates of our one wallet and treasury one platforms.
At this time I would like to turn the presentation over to Joanne to share a few comments on our loan portfolio Joel.
Thanks, Brad.
On page 11, we provide an update of our 2.9 billion dollar loan portfolio for.
For the third quarter commercial balances decreased by $21 7 million. However, excluding P. P. P activity, our commercial balances increased by $60 million for the quarter.
We're seeing a gradual increase in commercial working capital line usage, which was 36% in the third quarter, while it's up from prior quarters. This continues to lag the historical average our commercial pipeline is very strong and we expect solid commercial loan growth in the fourth quarter.
Our residential mortgage balances increased by $55 9 million and installment balances increased by $35.3 million.
Our mortgage pipeline well down.
Down from peak levels continues to display strength and we remain optimistic about our ability to accelerate the earning.
Asset rotation from lower yielding investments to higher yielding loans and continue to believe we are on track to grow loans net of P. P. P. At the higher end of our original forecast.
On page 12, we have an update of our loan modification, which declined $6 million or 2% of total loans at September 30th 2021.
Moving to page 13.
We'll provide an update on the bank's administration of the Sba's Paycheck protection program.
As of September 30th 'twenty, 'twenty, one we had $92 million in balances outstanding and $3 2 million in net unaccredited fees.
We expect most of these fees to be accreted into interest income in the next three to six months.
Okay.
Moving to page 14.
We display the concentrations of our $1 2 billion dollar commercial loan portfolio.
You'll note that 63% of the portfolio is comprised of a variety of C&I categories.
The largest of which is manufacturing at 132 million or 10, 8%.
The largest concentrations or excuse me the remaining 37% of the portfolio is comprised of commercial real estate with the largest concentration being retail at $108 million or eight 8% and office.
Majority of which is medical.
At $74 million or 6%.
Our portfolio is very granular in nature, our credit metrics indicate that this portfolio has held up very well through the pandemic.
And at this time I would like to turn the presentation over to Gavin share a few comments on our investments capital financials credit quality and outlook for 2021.
Yeah.
Thanks, Joel and good morning, everyone I am starting at page 17 of our presentation net.
Net interest income increased $2 $4 million from the year ago period.
Tax equivalent net interest margin was 3.18% during the third quarter 2021, which was down 13 basis points from the prior year period, and up 16 basis points from the second quarter of 2021 I'll have some more detailed comments on this topic in a moment.
Average interest, earning assets were $4 $3 billion in the third quarter of 2021 compared to $3 eight 9 billion in.
In the year ago quarter, and $4 to $2 billion in the second quarter of 2021.
P. J T contains a more detailed analysis of the linked quarter increase in net interest income.
And the net interest margin our third quarter 21, net interest margin was positively impacted by three factors increasing yield on securities available for sale of one basis point.
Increase in PPP accretion of 15 basis points and a decline in funding costs, a one basis point.
We will comment more specifically on our outlook for net interest income and the net interest margin for the remainder of 'twenty one.
Later in the presentation.
Page nine moving on to page 19, noninterest income totaled $19 $7 million in the third quarter of 2021 as compared to $27 million in the year ago quarter and $14 eight.
$8 million in the second quarter of 2021.
Third quarter 21, net gains on mortgage loans totaled $8 $4 million compared to $22 million in the third quarter 'twenty. The decrease in these gains was due to decreases in mortgage loan sales volume and in the mortgage loan pipeline as well as lower loan sale profit margins.
Mortgage loan applications remains solid although refinancing applications slowed in the third quarter 'twenty one a purchase market volume continues to be strong positively impacting non-interest income with a $1 $3 million gain on mortgage loan servicing due to us.
6 million dollar or two cents per diluted share after tax increase in the fair value due to price and a $1 $4 million decrease due to paydowns of capitalized mortgage loan servicing rights in the third quarter of 'twenty one.
As detailed on page 20, our noninterest expense totaled $34 $5 million in the third quarter of 2021 as compared to $33 $6 million in the year ago quarter and $32.5 million in the second quarter of 2021 compensation increased $1 $2 million compared to the prior year.
Year quarter beauty ranges that were effective.
At the start of the year, the hiring of new lenders and increased over time related to the data processing conversion.
Performance based compensation decreased $2 $1 million due to a higher accrual catch up in the third quarter of 'twenty.
The third quarter of 2021 included <unk> $3 million of conversion related expenses, we have more comments on our outlook for noninterest expenses later in the presentation.
Page 21 provides data on nonperforming loans other real estate nonperforming assets and early stage delinquencies.
Nonperforming assets were $5 8 million or 13.
0.13% of total assets at September 30 of 2021 loans 30 to 89 days delinquent decreased three $4 million at.
<unk> 2021, compared to $3 $5 million.
At June 32021 page 22 provides some additional asset quality data, including information on new loan defaults and on classified assets I would highlight there were no new commercial loan defaults in the first nine months of 2021.
Page 23 provides information on our GDR portfolio that totaled $37 9 million at September 32021. This portfolio continues to perform well with 96, 3% of these loans being current at September 32021.
Moving on to page 24.
We recorded a provision for credit losses credit of $7 million in the third quarter of 'twenty, one compared to an expense of $1 million in the year ago quarter, and a provision credit of $1 $4 million in the second quarter of 2021, the allowance for loan losses totaled $46 $8 million or one.
60% oil on our loans at September 32021. This really this ratio increases the 168% when excluding the PPP loans and remaining traverse City State Bank acquired loans.
Page 25 is our update for 2021 outlook see how our actual performance during the year compared to the original outlook that we provided in January of 2021.
<unk>.
Our outlook estimated loan growth in the low single digits loans increased $69 $4 million in the third quarter of 2021 or nine 8% annualized.
Growth in mortgage and installment loans were offset by a decline in commercial loans due to a AED one $7 million decrease the PPP loan balances in the third quarter of 'twenty one.
Excluding PPP loans total portfolio loans grew 10, 8% annualized rate during the first nine months of 2021 above our forecast range during.
During the first nine months of 2021 net interest income increased by four 1% over 2020, which is higher than our forecast. However, the net interest margin for the first nine months of 2021 was 25 basis points lower than the full year 2020, net interest margin of 30, 33, 34% which is a.
A steeper decline than our forecast higher than anticipated deposit growth that has largely been deployed into lower yielding investment securities is the primary reason for these variances.
The third quarter 'twenty, one provision for credit losses was a credit of <unk> $7 million. This is below our forecasted 2021, all year provision range of.
25 to 35 basis points of average total portfolio loans. The primary drivers of the decrease in provision for credit losses were a decrease in knee and adjustment to allocations based on subjective factors.
And an increase in recoveries of loans previously charged off.
Current credit trends persist, we would anticipate that our provision for credit losses will be below our forecasted range for the full year of 2021 noninterest income totaled $19 $7 million in third quarter of 'twenty, one compared to our forecasted range of 13.
To $16 million the mortgage loan pipeline continues to be solid although refinance activity slowed down in the third quarter of 2021, excluding negative MSR value adjustments due to price. We generally would expect noninterest income to fall within the forecasted range in the fourth quarter of.
2021.
Noninterest expense was $34 $5 million in the first quarter outside of our 28, $529 5 million targeted quarterly range increases in compensation and employee benefits data processing and conversion related expenses were the primary categories that caused noninterest expense to exceed the target range.
Do expect that the additional costs, we've been incurring related to core data processing system conversion will continue to contract through year end.
Our effective income tax rate of 18, eight and 18, 5% third quarter and first nine months of 2021, respectively. It 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 659350 shares at an average cost of $20 89 in the first nine months of 2021.
That concludes my prepared remarks, and I would now like to turn the call back over to Brad.
Thanks, Kevin.
Slide 26 displays a high level view of our key strategic initiatives.
And at this point in the call we would now like to open it up for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you were using a speaker phone please pick up your handset before pressing the case to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Brendan Nosal with Piper Sandler. Please go ahead.
Hey, good morning, guys how are you.
Very good Brad.
Okay.
Just to start off on the expense base.
Clearly running a little bit higher than it had been thought.
Year to date.
But kind of with that kind of stronger revenues just trying to get ahead.
Some of these mounting pressures to the bank's case overall in terms of Whitney P. P P normalizing mortgage and.
Actually the end of reserve releases.
Kind of moving to the bottom line, how much expense flex that you folks have from this higher level to counter some of those industry wide headwinds.
Yeah. Thanks, Brandon This is Gavin so we are running.
Hi, currently for the third quarter.
As we look at the longer term run rate, we do have some flexibility there and I'll, let Brad talk a little more detail about.
The compensation piece of it but the compensation compensation pieces up we.
We brought on.
We've expanded our team in different areas.
Strategically and so it takes some investment, but if I look at more of the detail Brandon.
Our data processing is up.
We had some accrual catch up this quarter.
That will run off but ultimately as the bank gets bigger that that expense will grow.
And then if I start to look at the interchange expense, we've just seen a real pickup in.
Volume so transaction volume so the nice the nice part about that is the offset on the income side.
And then I would point out too we saw an increase.
And the cost for unfunded commitments in the quarter about 300.
340, or 370000 excuse me.
And that's due to increasing the <unk>.
Level commitments out so I think that's actually a positive as well.
We are running still heavy in overtime as we continue to iron out here.
The conversion.
I think we will see that I anticipate we will see that.
Wayne that being said as Youre aware hiring.
In this market as it can be a challenge so.
That may be dependent as we fill positions.
Through the normal course of turnover so Brad do you want to talk any more about.
Yes.
I think that's hopefully helpful for Brendan.
Just a little more clarity.
On the.
The.
Recruiting front.
Year to date, we have.
Added in our to our just our commercial team we are up.
Our head count of 15.
And <unk>.
10 of which are sales side and another five are support and.
That's.
We feel very good about who's joined our team.
And.
We think that that same.
And a good long term investment for independent bank and our shareholders.
As we look to grow market share.
This past.
Quarter, we opened two new loan production offices, one on the west side of the state and the Auto County, Holland, Michigan. The second office over on the east side of the state and a comb county.
And.
So we we think that will contribute towards our efforts to.
Accelerate the.
Transfer or movement of earning assets from the lower yielding securities into higher yielding commercial loans. So.
Probably.
We're just in the.
Earlier stages of forecasting for 2020 to Brendan.
But I think early on.
You know the longer term.
Noninterest expense number needs to be.
Probably $33 million and trending closer to the $32 million Mark.
All things being equal but.
So hopefully that gives you a little clarity there.
Okay.
Yes, that's fantastic color. Thank.
You booked for the the comments there.
Maybe kind of switching gears here and turning to the margin and if you strip out the noise of PPP kind of that core underlying margin has been pretty stable for two quarters, now, which I think is a win given some of the pressure we've seen elsewhere.
Yesterday, the liquidity and rate based pressures, so just kind of curious.
In the near term do you think you can hold the line on that core margin level, given that deposit costs are down to only 11 basis points or is there, perhaps a bit of near term pressure until we get the benefit hopefully of higher short term rates.
This is Gavin I'll go first and then Brad can can share too. So the margin I feel really good today about about where it came so net of PPP around 3% that.
That was up three basis points from the prior quarter. So we've seen we've seen a little bit of lift in the securities portfolio. So we see rates back up a little bit. So I think that favors us if we continue to have to deploy.
Cash there Brennan.
Brendan but ultimately you know we're going to get a nice pick up if we can just continue to rotate our attempt to rotate.
The liquidity into loans so.
I think we're at a pretty good place today and I think the margin I expect it to be pretty stable through the year end.
Yes.
I agree and I, we're going to continue to.
Look in <unk>.
Put pressure on maybe another basis point or.
Our two on the cost side, but there.
Theres not a lot of room to move where it's at today.
Yes understood alright, Thank you for taking my questions.
The next question is from demand del Monte with K B W. Please go ahead.
Hi, This is Matt rank pinch hitting for David how are you guys today.
Martin Matt Good Matt good thanks.
My first question just with regards to the buyback give a little less than 500000 shares left in the authorization just wanted to get your thoughts.
Going forward on that.
Well.
We are at the start of the year.
Our board had approved.
And one roughly in.
Total shares we had guided.
That for the year, we thought we'd be buying about half of that.
Through three quarters.
Well beyond.
That that pace.
It's a function of course.
Capital levels.
Sure.
Created price trading level.
And alternative users, but I think.
You know you could probably expect us to.
You just do what we've been doing unless something else shakes out so.
Okay, Great and then just one follow up question on the reserve do you have a targeted reserve level ex PPP and how much of the reserve is still related to Covid factors.
Yeah.
Yeah.
So great great question and.
So no I don't have a targeted ACL.
So surly.
I do think that.
We still got.
Quite a bit in there for.
Covid.
And the Covid related.
High risk industries.
Forbearance is.
And and subjective and so.
When I.
Check my my notes here.
Today.
And of course, this past quarter, we had quite a bit of loan growth too. So.
<unk>.
The subjective portion of our reserve today is.
Down to 23 basis points for 25 basis points at the end of the second quarter.
So the combined incremental for Covid and subjective reserves today.
It's a little under $14 million $13 7 million or 29% of the total reserve.
And that's down from.
$14 2 million or 31% as of the second quarter. So.
There is still.
Some dollars in there.
And hopefully Matt that that gives you a little color.
Okay, Yes that was great. Thanks for taking my question.
Again, if you have a question. Please press Star then one.
The next question is from Manuel Nevadas with D. A Davidson. Please go ahead.
Hey, good morning, I'm on for Russell Gunther.
I just wanted to ask a little bit more about the L. P o's and how theyre already helping our loan growth can you add any color there.
Kind of what are your expectations about possible further L. P O as in the future.
So that well.
Great question.
We've been adding to the team now really going back.
First quarter.
<unk>.
Early second quarter and.
This is actually since I've got Joel run on the line I'm going to let Joel talk a little bit above.
The success <unk> had there I'll.
I'll just comment on.
I think we're pretty set on the existing offices that we now have in place and if anything.
At some point I could see moving into full service branch locations.
In these two markets, but we're going to try to get the.
Earning assets and deposit levels up a little bit so we've got some momentum before.
Moving to full serve offices, but.
Joe do you want to comment a little bit about the.
The team and the success and how much they've contributed to.
Some of the production year to date.
Yeah, sure not and I agree Brad with the over.
View that you just provided in terms of kind of our.
The strategy with the <unk>.
The two new loan production offices that we want to you.
Ultimately.
Turn those into full service locations kind of boot strapping, our way starting with the commercial and.
Residential mortgage side.
And I would just add that at all.
You know a very much a talent led sort of an initiative when you're expanding like that.
These were two locations that we had long desired to be and physically.
And.
What really opened the door was just our ability to to.
To bring on some some very top talent.
And in both of those.
Geographies.
In terms of new production.
Without getting into too much detail, yes, we've seen.
Our new additions.
Contribute.
Quickly which is always.
Very nice said, yeah, you got to temper that and realize that it's.
If we're making an investment here for the long term and.
Certainly.
That has helped to contribute to the some of the expense pressure that others were commenting on here just a few moments ago, but we are getting immediate lift and.
In rough numbers I would say in our third quarter.
It was probably $30 million of contribution.
We got from collectively from the two new L. P O S, which was fantastic.
That's great.
How many of the new ads that you laid out a little bit earlier have gone to these two offices specifically.
Hi.
The vast majority of the revenue producers, so Brad talked about Ken.
There were eight of those that were attributable to the two new loan production offices.
Okay. Thank you.
Shifting a little bit.
With the pipeline, that's doing pretty well what kind of rates do you have in it.
Like loan yield expectation.
You want me to take that Brad and Gavin I'll take a stab at it and then you guys can fill in but.
Yeah. It is.
Hum.
We're fighting.
Certainly pressure.
There's no question that all institutions are looking for.
Good earning assets.
Yeah I.
I don't want to misrepresent and say theres not intense pressure.
But we're fighting.
For for yield and I think so far we've done a nice job of that and our commercial team.
So I think that.
Yeah, our expectation, but the pipeline is.
Very similar to what we've been doing here recently in the past few quarters.
Very good Joel.
That's helpful. I appreciate that.
Last question on buyback.
Are there any.
Price sensitivities or TCE levels that.
And also with the great growth Youre getting that would kind of slow your pace at all.
Slowing the pace relative to need it for growth.
Sure.
Our capital levels.
We are.
In our deck and from quarter to quarter, we sort of outlined a targeted TCE range of $8 five to 95.
And Gavin were actually below that today at 802 so.
Yeah, I also feel like the balance sheet is inflated.
To some degree.
The excess liquidity in the system so.
Probably the.
Yes.
Again, as we've talked about in the past, it's where we're trading at and.
But I I I think.
It's fair to say.
Our quarterly.
The activity is.
There's a pretty good indicator.
Of what you can expect going forward.
Okay. That's helpful. Thank you guys.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Brad Kessel for any closing remarks.
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 each of our associates.
Continue to be so proud of the job being done by 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 for your interest in independent Bank Corporation and for joining US on today's call have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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