This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning and welcome to the Independent Bank Corporation third quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. 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.
spk07: 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'm Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Moore, EVP and Chief Financial Officer, and Joel Rahn, 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, independentbank.com. 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, one in Ottawa County and the second in Macomb County. Deposit gathering continues to be robust, both via existing customers as well as through the addition of new customers. In addition, mortgage gains continue 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 2.4% of the portfolio, and a very low level of past use in non-earning assets. While there are many 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 Corporation reported third quarter 2021 net income of $16 million, or 73 cents per diluted share, versus net income of 19.6 million, or 89 cents per diluted share in the prior year period. The highlights included annualized return on assets and average equity of 1.4% and 15.9% respectively, an increase in net interest income of 5.7% over the third quarter of 2020, net gains on mortgage loans of $8.4 million, and total mortgage loan origination volume of $453.8 million. Net growth in portfolio loans of $69.4 million, or 9.8% annualized. Continuing strong asset quality metrics as evidenced by $1.5 million in net loan recoveries during the quarter, as well as a low level of non-performing loans and non-performing assets. And finally, the payment of a 21 cent per share dividend on common stock on August 16th of 2021. For the nine months ended September 30, 2021, the company reported net income of $50.4 million, or $2.30 per diluted share, compared to net income of $39.2 million, or $1.76 per diluted share in a prior year period. Highlights for the first nine months of 2021 include increases in net income and diluted earnings per share of 28.6% and 30.7% respectively. Annualized return on average assets and average equity of 1.53% and 17.32% respectively. Net gains on mortgage loans of $30.3 million and total mortgage loan origination volume of $1.44 billion. Net growth in portfolio loans of $150.3 million or 7.4% 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 display several key economic statistics for the state of Michigan. Overall, we are seeing continued improvement in the unemployment rate for Michigan, now at 4.6%, slightly below the national average of 4.8%. However, we have 180,000 fewer workers employed today as compared to pre-COVID. 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. In addition, supply chain shortages are also constraining many businesses in our markets. Regional average home sale prices continue to climb 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. We're 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 independent bank's digital transformation. Following our second quarter whole bank conversion, we are seeing good utilization and growth rates of our OneWallet and TreasuryOne platforms. At this time, I would like to turn the presentation over to Joel Ryan, to share a few comments on our loan portfolio. Joel?
spk03: Thanks, Brad. On page 11, we provide an update of our $2.9 billion loan portfolio. For the third quarter, commercial balances decreased by 21.7 million. However, excluding PPP 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 percent 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, while 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 PPP at the higher end of our original forecast. On page 12, we have an update of our loan modifications which declined to 6 million or 0.2% of total loans. at September 30th, 2021. Moving to page 13, we provide an update on the bank's administration of the SBA's Paycheck Protection Program. As of September 30th, 2021, we had 90.2 million in balances outstanding and 3.2 million in net unaccreted fees. We expect most of these fees to be accreted in the interest income in the next three to six months. Moving to page 14, we display the concentrations of our $1.2 billion commercial loan portfolio. You'll note that 63 percent of the portfolio is comprised of a variety of CNI categories, the largest of which is manufacturing at 132 million or 10.8 percent. The largest concentrations, or excuse me, the remaining 37 percent of the portfolio is comprised of commercial real estate with the largest concentration being retail at 108 million or 8.8%, and office, the majority of which is medical, at 74 million or 6%. Our portfolio is very granular in nature. Our credit metrics indicate this portfolio has held up very well through the pandemic. And at this time, I'd like to turn the presentation over to Gavin to share a few comments on our investments, capital, financials, credit quality, and outlook for 2021.
spk02: Thanks, Joel, and good morning, everyone. I'm starting at page 17 of our presentation. Net interest income increased $2.4 million from the year-ago period. Our tax equivalent net interest margin was 3.18% during the third quarter of 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 $3.89 billion in the year-ago quarter and $4.22 billion in the second quarter of 2021. Page 18 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. Increase in yield on securities available for sale of one basis point, increase in PPP accretion of 15 basis points, and a decline in funding costs of one basis point. We will comment more specifically on our outlook for net interest income and the net interest margin for the remainder of 21 later in the presentation. Moving on to page 19, non-interest income totaled $19.7 million in the third quarter of 2021 as compared to $27 million in the year-ago quarter and $14.8 million in the second quarter of 2021. Third quarter, 21 net gains on mortgage loans totaled $8.4 million compared to $20.2 million in the third quarter of 20. 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 remained solid, although refinancing applications slowed in the third quarter of 21. Our purchase market volume continues to be strong, positively impacting non-interest income with a $1.3 million gain on mortgage loan servicing due to a A $.6 million or two cents per diluted share after tax increase in the fair value due to price and a $1.4 million decrease due to pay downs of capitalized mortgage loan servicing rights in the third quarter of 21. As detailed on page 20, our non-interest 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 quarter due to raises that were effective at the start of the year, the hiring of new lenders, and increased overtime related to the data processing conversion. Performance-based compensation decreased $2.1 million due to a higher approval catch-up in the third quarter of 2020. The third quarter of 2021 included $0.3 million of conversion-related expenses. We have more comments on our outlook for non-interest expenses later in the presentation. Page 21 provides data on non-performing loans, other real estate, non-performing assets, and early-stage Total non-performing assets were $5.8 million, or 13.13% of total assets at September 30th, 2021. Loans 30 to 89 days delinquent decreased to $3.4 million at September 30th, 2021, compared to $3.5 million headed June 30th, 2021. 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 TDR portfolio that totaled $37.9 million at September 30th, 2021. This portfolio continues to perform well, 96.3% of these loans being current at September 30th, 2021. Moving on to page 24, we recorded a provision for credit losses, credit of $0.7 million in the third quarter of 21 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 for 1.62% of portfolio loans at September 30th, 2021. This ratio increases to 1.68% when excluding the PPP loans and the remaining Traverse City State Bank acquired loans. Page 25 is our update for our 2021 outlook to see how our actual performance during the year compared to the original outlook that we provided in January of 2021. Our outlook estimated loan growth in the low single digits. Loans increased $69.4 million in the third quarter of 2021, or 9.8% annualized. Growth in mortgage and installment loans were offset by a decline in commercial loans due to a $81.7 million decrease in PPP loan balances in the third quarter of 21. Excluding PPP loans, total portfolio loans grew at 10.8% annualized rate during the first nine months of 2021. above our forecasted range. During the first nine months of 2021, net interest income increased by 4.1% 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 33.34%, which is 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 21 provision for credit losses was a credit of $0.7 million. This is below our forecasted 2021 four-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 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. Non-interest income totaled $19.7 million third quarter of 21 compared to our forecasted range of $13 million 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 non-interest income to fall within the forecasted range in the fourth quarter of 2021. Non-interest expense was $34.5 million in the third quarter. outside our $28.5, $29.5 million targeted quarterly range. Increases in compensation and employee benefits, data processing, and conversion-related expenses were the primary categories that caused non-interest expense to exceed the target range. We do expect that the additional costs we have been incurring related to core data processing system conversion will continue to contract through the year end. Our effective income tax rate of 18.8 and 18.5% for the third quarter and first nine months of 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 659,350 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.
spk07: Thanks, Gavin. 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.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. 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 Nozel with Piper Sandler. Please go ahead.
spk04: Hey, good morning, guys. How are you?
spk07: Very good, Brendan.
spk04: Good. Maybe just to start off on the expense space, you know, clearly running a little bit higher than had been thought year to date, but kind of with that comes stronger revenues. Just trying to, you know, think out ahead as, you know, some of these mounting pressures for the bank space overall in terms of waning PPP, normalizing mortgage, and, you know, eventually the end of reserve releases kind of move into the bottom line. How much
spk02: Expense flexi 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 high currently for the third quarter and As we look at the longer-term running 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 piece is up. We've brought on – we've expanded our team in different areas. Strategically and in so that you know that takes an investment if I look you know in more of the detail branding Our data processing is is up We had some accrual catch-up this quarter that will Run off but ultimately is 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 in volume, so transaction volume. So the nice part about that is the offset on the income side. And then I would point out, too, we saw an increase in the cost for unfunded commitments in the quarter, about $370,000. And that's due to increasing the level of 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 anticipate we'll see that weighing. That being said, as you're aware, hiring in this market, it can be a challenge. So that may be dependent just as we fill positions through the normal course of turnover. So Brad, do you want to talk any more about
spk07: Yeah, Gavin, I think that's hopefully helpful for Brendan and just a little more clarity on the recruiting front. Year to date, we have added to just our commercial team, we are up a head count of 15. ten of which are sales side and another five are support. We feel very good about who's joined our team and we think that that's 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 in Otto County, Holland, Michigan, and the second office over on the east side of the state in Macomb County. And so we think that'll 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, you know, we're just in the earlier stages of forecasting for 2022, Brendan, but I think early on, you know, the longer term non-interest expense number needs to be probably $33 million and trending closer to the $32 million mark, all things being equal. So hopefully that gives you a little clarity there.
spk04: Yeah, that's fantastic, Keller. So thank you both for 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 with just exacerbated 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?
spk02: This is Gavin. I'll go first, and then Brad can share too. So the margin, I feel really good today about where it came. So net of PPP around 3%. That was up three basis points from the prior quarter. So we've seen a little bit of lift in the securities portfolio. So we've seen rates back up a little bit. So I think that favors us if we continue to have to deploy cash there, Brennan. But ultimately, we're going to get a nice pickup if we can just continue to rotate or attempt to rotate uh the the liquidity into loans so um yeah i think we're we're in a pretty good place uh today and i think the margin uh expected to be pretty stable through the year end yeah very good i i agree and i hey we're going to continue to you know look and put pressure on maybe another basis point or
spk07: or two on the cost side, but there's not a lot of room to move where it's at today.
spk04: Yep, understood. All right, thank you for taking my questions.
spk01: The next question is from Damond Del Monte with KBW. Please go ahead.
spk05: Hi, this is Matt Rank, pinch hitting for Damon. How are you guys today?
spk07: Morning, Matt. Good, Matt. Good, thanks.
spk05: My first question, just with regards to the buyback, you have a little less than 500,000 shares left in the authorization. Just wanted to get your thoughts going forward on that.
spk07: Well, we, at the start of the year, our board had approved 1,000,001 roughly in total shares. that for the year we thought we'd be buying about half of that. Through three quarters, we're well beyond that pace. It's a function of, of course, capital levels, current share price trading level, and alternative uses. But I think you know, you could probably expect us to continue to do what we've been doing unless something else shakes out, so.
spk05: Okay, great. And then just one follow-up question. On the reserve, do you have a target reserve level X PPP? And how much of the reserve is still related to COVID factors?
spk07: So, great question. And so, no, I don't have a targeted ACL necessarily. I do think that, you know, we've still got quite a bit in there for COVID and the COVID-related high-risk industries, forbearances, and subjective. And so when I check my notes here, today, and of course this past quarter, we had quite a bit of loan growth too. So the subjective portion of our reserve today is down to 23 basis points. We're at 25 basis points at the end of the second quarter. So the combined incremental for COVID and subjective reserves today is 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's still some dollars in there, and hopefully, Matt, that gives you a little color.
spk05: Okay, yeah, that was great. Thanks for taking my question.
spk01: Again, if you have a question, please press star then one. The next question is from Manuel Navas with D.A. Davidson. Please go ahead.
spk06: Hey, good morning. I'm on for Russell Gunther. I just want to Ask a little bit more about the LPOs and how they're already helping loan growth. Can you add any color there? And kind of what are expectations about possible further LPOs in the future?
spk07: So, Manuel, great question. You know, we've been adding to the team, now really going back first quarter, early second quarter and this is actually, since I've got Joel Rana on the line, I'm gonna let Joel talk a little bit about the success they had there. 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 to 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. Joel, do you want to comment a little bit about the team and the success and how much they've contributed to some of the production year to date?
spk03: Yeah, sure. And I agree, Brad, with the overview that you just provided in terms of kind of the strategy with the two new loan production offices that we want to ultimately turn those into full-service locations, kind of bootstrapping our way, starting with the commercial and residential mortgage sides. And I would just add that it's all 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 in physically, and what really opened the door was just our ability to bring on some very top talent in both of those geographies. In terms of new production, without getting into too much detail, yes, we've seen our new additions contribute very quickly, which is always very nice. You've got to temper that and realize that we're making an investment here for the long term. and certainly that's helped to contribute to 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 that we got collectively from the two new LPOs, which was fantastic.
spk06: That's great. How many of the new ads that you laid out a little bit earlier have gone to these two offices specifically?
spk03: The vast majority of the revenue producers. So Brad talked about 10. There were eight of those that were attributable to the two new loan production offices.
spk06: Okay, thank you. Just shifting a little bit. With the pipeline that's doing pretty well, what kind of rates do you have in it, like loan yield expectations?
spk03: You want me to take that, Brad and Gavin? I'll take a stab at it, and then you guys can fill in. But, you know, we're fighting. There's certainly pressure. There's no question that all institutions are looking for good earning assets. So I don't want to misrepresent and say there's not intense pressure, but we're fighting for yield. And I think so far we've done a nice job of that, our commercial team. So I think that our expectation with the pipeline is very similar to what we've been doing here recently in the past few quarters.
spk07: Very good, Joel.
spk06: That's helpful. I appreciate that. Last question on buyback. Are there any price sensitivities or TCE levels and also with the great growth you're getting that would kind of slow your pace at all?
spk07: Slowing the pace relative to needing it for growth and or capital levels. You know, we in our deck and from quarter to quarter, we sort of outline a targeted TCE range of eight and a half to nine and a half. And Gavin, we're actually below that today. 802. So, yeah, I also feel like the balance sheet is inflated to some degree, you know, the excess liquidity in the system. Again, as we've talked about in the past, it's where we're trading at. But I think it's fair to say our quarterly activity is a pretty good indicator. of what you can expect going forward.
spk06: That's helpful. Thank you, guys.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Brad Kessel for any closing remarks.
spk07: 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 I continue to be so proud of the job being done by each member of our team. Each team member in 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.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer