Earnings Call Transcript - IBCP Q1 2021

Brad Kessel, President and CEO

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. I am Brad Kessel, President and Chief Executive Officer; and joining me is Gavin Mohr, Executive Vice President and Chief Financial Officer; Joel Rahn, Executive Vice President, Commercial Banking.

Gavin Mohr, CFO

Thanks, Brad and good morning, everyone. I'm starting at Page 16 of our presentation. Net interest income increased $0.1 million from the year ago period. Our tax equivalent net interest margin was 3.05% during the first quarter of 2021, which is down 58 basis points from the year ago period, and down 7 basis points from the fourth quarter of 2020.

Brad Kessel, President and CEO

Thanks, Gavin. Let's turn to Slide 26 in the deck, which displays a high-level view of our key strategic initiatives. One of the most significant is our digital transformation initiatives, much of which we completed during the second quarter of 2021 or will be completed with the second quarter of 2021. As I reported this time last year, we signed a core data processing agreement with our new partner, Fiserv, and will be converting to their DNA platform. The benefits of this change include moving to a modern core platform with flexible application processing interfaces, also known 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, which is 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 in 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 across all channels—which we call the omnichannel—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. I believe they will be pleased. At this point, we would now like to open up the call for questions.

Operator, Operator

We'll now begin the question-and-answer session. First question comes from Brendan Nosal, Piper Sandler. Please go ahead.

Brendan Nosal, Analyst

Hey, good morning, Brad. Good morning, Gavin. How are you guys?

Brad Kessel, President and CEO

Good morning, Brendan. Doing well, thank you.

Gavin Mohr, CFO

Good. Thanks, Brendan.

Brendan Nosal, Analyst

Good. Just wanted to start off here kind of a more top-level question. There have been a number of deals announced in your markets over the past week or two. Just kind of curious, I know it's early, but do you have any quick thoughts on how those might shape up the competitive dynamics in your market? And where, if anywhere, can you see yourself adding talents to your team if the opportunity presents itself as a result of these deals?

Brad Kessel, President and CEO

Well, yes, the M&A in the Michigan markets is a recurring theme. Of course, this past Monday with Flagstar and New York Community Bank partnering, and earlier in the year, the Huntington and TCF deals occurred; this isn't unique to Independent Bank. But for the remaining banks in the marketplace, that disruption does create opportunity. I think it creates an opportunity to add customers and an opportunity to add talent. Over the years, I think we have shown our ability to take advantage of the disruption in the marketplace, and I believe you'll see us work to do the same thing going forward.

Brendan Nosal, Analyst

All right. Perfect, thanks for the color. And then maybe one more follow-up for me on a bit of a different note here. I look at Slide 17, just the margin changes from last quarter and this quarter; there's that 16 basis points benefit from accelerated amortization of loss on 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? In other words, if we pull it out, the margin is 2.90%?

Gavin Mohr, CFO

That was a one-time quarter-over-quarter adjustment, Brendan. So, we're just showing you that third quarter. You'll see the benefit pick up in the cost of funds, but the quarter-over-quarter impact was a one-time adjustment of 16 basis points last quarter.

Brad Kessel, President and CEO

So what happened is we accelerated that in Q4.

Gavin Mohr, CFO

Yes.

Brad Kessel, President and CEO

So you're seeing it now in Q1, and you won't see it going forward other than we don't have that higher cost on those derivatives prospectively. Does that make sense?

Brendan Nosal, Analyst

Yeah, I think so. It's all right, so there is kind of a permanent help to the cost of funds. But you know, next quarter, if nothing else changes, the NIM would look closer to 2.90%, correct?

Gavin Mohr, CFO

That's fair. Yes, that 16 basis points just as a comparative quarter-over-quarter perspective.

Brendan Nosal, Analyst

All right, fantastic. Thanks for the help there.

Operator, Operator

Thank you. Next question is from Russell Gunther, D.A. Davidson. Please go ahead.

Russell Gunther, Analyst

Hey, good morning, guys.

Brad Kessel, President and CEO

Good morning, Russell.

Gavin Mohr, CFO

Good morning.

Russell Gunther, Analyst

I wanted to follow up on your comments on loan growth; it looks like you reiterated expectations for that kind of 5% to 7% ex-PPP. The prepared remarks suggest that'll come from commercial mortgage and consumer, but just hoping you could elaborate a little bit more on whether you expect that to be fairly even contributions from the three verticals or how you're thinking about that kind of core non-PPP organic growth mix?

Brad Kessel, President and CEO

Yeah. So, again, what we saw for the core was a slight decline, excluding PPP and commercial; we saw a slight decline in mortgage, and we had a little bit of an increase in consumer. I think, generally, we view it as evenly across the board. As a company, we really are working to have the commercial book continue to be the largest book of business for us. As the economy returns to a more stable footing, we'll see more commercial demand. What's been interesting on the mortgage front as a headwind is, of course, the lower rates have accelerated prepayment rates on the existing mortgage book. Previously, what was in our mortgage book as a result of size only were jumbo loans. Over the last few years, the GSEs have raised their conforming loan limit level substantially. Consequently, what we've experienced over the last few quarters are loans that were previously portfolioed now being sold into the secondary market. I think, you know, we'll probably still continue to see some of that, but it will wane as refinancings are reduced. We are seeing a very good demand for residential construction, and we're seeing strong demand for RV and marine financing as well. So, again, back to your original question, I think our goal remains that loan growth should be in the mid-single digits across the board.

Russell Gunther, Analyst

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 in the deck. A big chunk was the excess liquidity that weighed on the quarter. So, could you give us a sense for when you think you might be able to get that to put to work? And when you would anticipate that excess liquidity will stop dragging on the margin?

Gavin Mohr, CFO

Yeah, good question. So we view this as putting it to work in terms of the investment portfolio versus letting it sit overnight in cash. Although not a wide or a very high raw yield, that 1.70% is much better than 10 basis points. We feel like we can put it to work in an appropriate manner; that should either occur when deposits exit or loans pick up to absorb it. We can quickly roll the mix into either outflows or, more preferably, fund the loans. Our deposits just continue to grow, so I just think that's common here, and it gives you an indication of the amount of liquidity that’s out there.

Russell Gunther, Analyst

Thanks, Gavin. I appreciate that. Last question, guys, is on the anticipated P&L impact from the system's conversion. It's been in the works, as you've mentioned, for 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 you're thinking about the impact.

Brad Kessel, President and CEO

That's a great question, and let's discuss the expense side first. Part of the new contract includes an agreement to capture savings immediately, even before the conversion. Going back to a year ago at this time, you would have seen or indeed saw a reduction in our overall data processing expense, and we carried that forward each quarter through last year. You will see that continue into 2021. The second component of cost savings is essentially to be achieved by operating the business more efficiently. Long-standing processes are being replaced with new ones, and while it's difficult to quantify precisely, we believe there are opportunities to capture significant efficiencies just from leveraging the new technology. For instance, account opening today can be done in a fraction of the time and digitally compared to previous methods that involved human processes taking much longer. That is one example; there are many. Prospective material cost savings are likely, but I can't quantify them or share specific figures at this time. On the revenue side, it's also quite difficult to project. One of our core objectives within the company is to make it easier for our associates to serve our clients, and we believe that improving ease of banking for clients will drive more revenue. However, quantifying that is currently too challenging. I hope that provides you with some insight into our perspective.

Russell Gunther, Analyst

Yeah, that's quite a bit. Brad, that's very helpful. And guys, that's it for me. Thank you both for taking my questions.

Gavin Mohr, CFO

You're welcome. Thank you.

Operator, Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Kessel for any closing remarks. Please go ahead.

Brad Kessel, President and CEO

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 proud of the job being done by each member of our team. Despite a very difficult operating environment, our team continues to adapt to the circumstances, leveraging opportunities and going the extra mile for our customers and our communities. Each team member, in their 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.

Operator, Operator

Call is now concluded. Thank you for attending today's presentation. You may now disconnect.