Independent Bank Corporation
Q2 2021 Earnings Call Transcript

Published: 1 Aug 2021

[Operator:]

Good day and welcome to the Independent Bank Corporation Second Quarter Earnings Conference Call. 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.

[Brad Kessel:]

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 am Brad Kessel, President and Chief Executive Officer. And joining me is Gavin Mohr, Executive Vice President and our Chief Financial Officer and Joel Rahn, Executive Vice President, in charge of Commercial Banking.

[Gavin Mohr:]

Thanks, Brad and good afternoon everyone. I am starting at Page 17 of our presentation. Net interest income increased $0.9 million from the year ago period. Our tax equivalent net interest margin was 3.02% 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 of 2021. I will have some more detailed comments on this topic in a moment. Average interest-earning assets were $4.22 billion in the second quarter of 2021 compared to $3.66 billion in the year ago quarter and $4.05 billion in the first quarter of 2021. Page 18 contains a more detailed analysis of the linked quarter increase in net interest income and a decline in net interest margin. Our second quarter ‘21 net interest margin was adversely impacted by 2 factors

[Brad Kessel:]

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.

[Operator:]

The first question comes from Brendan Nosal with Piper Sandler. Please go ahead.

[Brendan Nosal:]

Hey, good morning everybody. How are you doing?

[Brad Kessel:]

Hi, good, Brendan.

[Gavin Mohr:]

Good.

[Brendan Nosal:]

Good. Maybe just to start off on loan growth, I mean certainly nice to see growth return after a year or so of softer trends. I was just hoping you could kind of walk through what changed in the underlying environment that drove the inflection this quarter and drives your expectation for continued growth through the balance of the year?

[Brad Kessel:]

Well, I’m going to let Joel Rahn, who heads up our commercial banking take first stab at that. Joe, why don’t you.

[Joel Rahn:]

Yes, two primary things that I would say. First, Brendan, is the – just 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 to some degree. So we’re seeing some organic growth in that sense. And then Brad mentioned our investment in talent. We have strategically added many new commercial bankers in the first half this year, 9 to be exact. And we’re seeing opportunities come through those talent additions. So it’s really twofold, continuing improvement opening up with the economy and then obtaining greater market share with an expanded commercial force.

[Brendan Nosal:]

Alright. Fantastic. That’s certainly helpful. And then maybe one more 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 ex-PPP. So can you just help us think about how much COVID-related reserves you still hold today? And what a normalized level of the allowance might look like for you folks now that you’re under CECL?

[Gavin Mohr:]

Yes, Brendan, so approximately $14 million is still COVID related in terms of the allowance today. So to answer your question there, as we look at the subjective factors and how they are related to COVID, it’s going to depend on – as we progress, we’re cautious about releasing those two quickly, given some of the data that’s coming out regarding variance. But also, what you’re going to see is we’ve seen loan growth, and we think that there is probably going to be a meeting point where we will see the COVID continue to release and we anticipate it will be absorbed with loan growth.

[Brendan Nosal:]

Understood. That’s a helpful way of thinking about it. Alright, thank you for taking my questions.

[Operator:]

The next question comes from Damon DelMonte with KBW. Please go ahead.

[Damon DelMonte:]

Hey, good afternoon guys. First question, just wanted to circle back on the expense outlook. So obviously, this quarter came in above the guided range. Is the commentary that you expect to get back into that guided range in the third quarter or is it by the end of the fourth quarter?

[Brad Kessel:]

Well, I think we’ve had a lot of change, Damon. And I’ve got – our team has a pretty detailed understanding of where the increase has been year-to-date. And so high level, I think we should move to the high end of that range here in the third quarter now and then be consistent with that in the fourth quarter. The wildcard 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 there is over time and so on, all related to the digital transformation effort. And I’m a little – we do not want to – we’d rather have a little higher expense run rate and do that right and take good care of our customer base as opposed to get a little – pull the trigger early and sort of not have the hours being worked either temporary employees or over time. So I think it’s reasonable to expect us to get back there in the third quarter, but it may move into the fourth quarter.

[Damon DelMonte:]

Got it. Okay. That’s helpful. Thank you. And then the buyback, your approach to the buyback is, given capital levels and where the stock is trading, you clearly had some capacity last year. So should we expect kind of a similar amount of buyback here in the back half of the year as we saw in the first half?

[Brad Kessel:]

Yes. I think that’s very reasonable, the pace. Of course, we’ve shared in the past, our activity there is a function of some modeling of what we see future earnings being with the current stock prices, the earn-back period being within adorable range. And so yes, if all those things sort of stay where they have been, I think we will continue on the current path.

[Damon DelMonte:]

Okay, great. And then just one last question, obviously, there has been three larger transactions that have occurred with – across your footprint in the last 3 to 6 months or so. Can you talk a little bit about opportunities to capitalize on market disruption? Do you see opportunities in the way of the human capital side of hiring lenders or teams of lenders? And then also on the customer acquisition side, do you see opportunities to win over customers that you may have been calling on but never had the opportunity to actually bank? Thanks.

[Brad Kessel:]

Yes and yes. I think there is opportunity in adding to the team, which we have done. I think Joel outlined what we’ve done on the commercial side. We’ve also added in other areas. On the sales side, we’ve also added in some support roles because, of course, you’ve got to be able to get that new business through the – through our processing areas in a timely manner. So we are very active in that effort. And the story of our company is being very well received in the marketplace. Independent on a deposit base is now the largest – will be the largest bank headquartered in the state of Michigan. And so we’ve got size and we’ve got a terrific platform. We’ve talked about the technology investments we’ve made. It’s still a people business. And we’re very excited about continuing to capitalize on all the market disruption.

[Damon DelMonte:]

Excellent. Appreciate the color. Thank you very much.

[Brad Kessel:]

Thanks, Damon.

[Operator:]

Our next question is from Russell Gunther with D.A. Davidson. Please go ahead.

[Russell Gunther:]

Hi, good afternoon guys.

[Brad Kessel:]

Good afternoon.

[Russell Gunther:]

Just had a couple of follow-ups, right, thank you. I just had a couple of follow-ups. The first on the loan growth side, so I appreciate all the 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 of the year is shaping up for that lending vertical?

[Joel Rahn:]

This is Joel, Russell. Very, very strong. So our pipeline is the strongest it’s been in a number of years. And that goes back to my comments earlier. We’re seeing the demand from our customers as the economy continues to open up. But really more importantly, it’s the impact of our expanded commercial team that’s out in the marketplace helping to find opportunities. So we think that we will see solid loan growth in the second half of the year. It got masked a little bit in the second quarter with some extraordinary payoffs. But yes, we’re very confident based on our pipeline that, that will show good growth in the commercial portfolio in the second half of ‘21.

[Russell Gunther:]

Okay, great. I appreciate the comments there. And then just one more for me, a follow-up on the expense conversation, so I hear you in terms of getting back down to the high end of the range for the back half of the year and what the wild cards are there, that kind of $29.5 million quarterly run rate. But how should we think about that going forward? Is that a base off of which you expect to grow in the normal course of business or as some of those temporary hires and overtime goes away there can be some benefit to a potentially lower run rate going forward?

[Brad Kessel:]

Yes, great question. I think the – with our core conversion change, we knew and we have been benefiting from just the lower core contract for some time now. But what was very difficult to forecast, and I think it’s still difficult is with all the automation and the removal of much of what paper still move within the company, it’s very difficult to tell what the additional savings will be prospectively. I think, as we move through the second half of the year, we’re going to have a much better feel for that. So I think the key point is we think – we believe to be a high-performing community bank in today’s operating environment, you need to continue to have a good efficiency ratio and be smart about how you’re spending your money and watching every cost. So we’re going to continue to work that and try to push that down. So I’m not necessarily – we’re not necessarily accepting of that current $29.5 million level. We’re going to continue to try to push that down. But at the same time, hey, you got to spend money to make money. So there is that part of it, too.

[Russell Gunther:]

Understood. Okay, great. Well, that’s it for me guys. Thanks for taking my questions.

[Brad Kessel:]

Thanks, Russell.

[Brad Kessel:]

Okay. I don’t believe there is 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 by each member of our team. Each team member in his or her own way continues to do their part towards 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. We wish each of you a great day. That concludes today’s call.