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Edited Transcript of IBCP earnings conference call or presentation 29-Jan-19 4:00pm GMT

Q4 2018 Independent Bank Corp Earnings Call

IONIA Feb 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Independent Bank Corp earnings conference call or presentation Tuesday, January 29, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Robert N. Shuster

Independent Bank Corporation - Executive VP, CFO & Corporate Secretary

* William Bradford Kessel

Independent Bank Corporation - President, CEO & Director

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Conference Call Participants

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* Brendan Jeffrey Nosal

Sandler O'Neill + Partners, L.P., Research Division - Director

* Damon Paul DelMonte

Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director

* John Lawrence Rodis

FIG Partners, LLC, Research Division - Senior VP & Research Analyst

* Kevin Kennedy Reevey

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Independent Bank Corporation Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Brad Kessel, President and CEO. Please go ahead, sir.

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [2]

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Good morning. Thank you for joining Independent Bank Corporation's conference call and webcast to discuss the company's 2018 fourth quarter and full year results. I am Brad Kessel, President and Chief Executive Officer, and joining me is Rob Shuster, Executive Vice President and Chief Financial Officer.

Before we begin today's call, it is my responsibility to direct you to important information on Page 2 regarding the cautionary note for forward-looking statements. If anyone does not already have a copy of the press release issued by Independent today, you can access it at the company's website, www.independentbank.com.

The agenda for today's call will include prepared remarks, followed by a question-and-answer session and then closing remarks.

To follow along, I will begin with Slide 5 of our presentation.

I am very pleased with our company's fourth quarter and full year 2018 results. We continue to execute on our operating plan, delivering strong growth in core earnings, growth in our core funding and growth in loans while maintaining excellent asset quality and effectively managing our capital.

We are reporting fourth quarter 2018 net income of $9.9 million or $0.41 per diluted share versus net income of $1.7 million or $0.08 per diluted share in the prior year period.

This quarter's results include a decrease in the fair value due to price of our capitalized mortgage loan servicing rights of $2.4 million or $0.08 per diluted share. The increase in fourth quarter earnings as compared to 2017 reflects a $7.4 million increase in net interest income and a $7.3 million decrease in income tax expense, that were partially offset by a $2.5 million decrease in noninterest income, a $200,000 increase in the provision for loan losses and a $3.7 million increase in our noninterest expense.

For the fourth quarter of 2018, our return on average assets and return on average equity were 1.2% and 11.4%, respectively.

When excluding the after-tax impact of the negative fair value change due to price, these ratios improved to 1.4% for ROA and 13.6% for ROE, respectively.

During the fourth quarter, we grew portfolio loans by $19.9 million or 3% annualized. This represents the 19th consecutive quarter of loan growth.

This 3% loan growth is net of $41.5 million of mortgage loans we transferred to loans held for sale. This transaction aligns well with our ongoing efforts to manage our interest rate risk and liquidity profile as well as to maintain a diversified loan mix, not to mention taking advantage of lower market interest rates at the end of 2018.

On the funding side, during the fourth quarter, total deposits were up $115 million, or 16.3% annualized. Excluding broker deposits, the growth rate was 7.9% annualized.

Some of our recent deposit gathering success has been a function of the automation of our DDA Suite product. Previously, these funds moved off balance sheet into interest-bearing money market funds with a third party.

Today for these same customers, we can offer competitive rates along with FDIC insurance and maintain the funds on balance sheet.

As it relates to capital, the company paid a $0.15 per share dividend on November 15, 2018.

Also during the fourth quarter of 2018, the company repurchased 587,969 shares of our stock at an average price of $21.57 per share.

Turning to Slide 6 in our presentation. For the year ended December 31, 2018, the company reported net income of $39.8 million, or $1.68 per diluted share. This compares to net income of $20.5 million or $0.95 per diluted share in 2017. This represents an increase of $19.4 million or 95% in net income, and $0.73 or 77% increase in diluted earnings per share.

Our return on average assets and return on average equity for the year ended December 31, 2018, improved to 1.27% and 12.38%, respectively.

The favorable impact of the Traverse City State Bank acquisition, combined with strong loan origination activity, led to meaningful loan growth and increased net interest income.

Net income and diluted earnings per share have increased significantly in 2018, as we have gained greater operating leverage and efficiency as well as benefiting from a reduced corporate income tax rate.

We are optimistic about our future and recently announced a 20% increase in our quarterly common stock cash dividend to $0.18 per share to be paid on February 15, 2019.

Slide 7 of our presentation provides a good view of our footprint.

Turning to Slide 8. Michigan business conditions continue to be favorable with low unemployment, good job growth, affordable housing and continued good demand for commercial real estate.

In December of 2018, Michigan unemployment rate at 4% is lower than 1 year ago, or 4.7%, and 0.1% above the U.S. unemployment rate of 3.9%.

Regionally, Grand Rapids unemployment is at 2.5%, Lansing is at 3.1% and Detroit, Livonia and Dearborn is at 4.2%.

Michigan's workforce is 4.463 million workers strong, and overall employment is up slightly from 1 year ago.

In regards to housing, the Michigan real estate market can be characterized as affordable with a continued shortage of inventory.

The average sales price of a home in Michigan is $184,000, and Michigan's year-over-year average sales price is up 8.6%.

The continuation of the positive economic trends can be seen in our regional portfolios shown on Page 9. Our 2 strongest growth regions are the Grand Rapids region, up $98 million in loan balances, in south, our Southeast Michigan region up $90 million in loan balances.

Our Traverse City team has produced solid growth, 5% annualized, since the acquisition. We've also seen very good year-over-year deposit growth in most of our regions.

The next couple of slides cover our balance sheet.

Turning to Page 10, we provide a couple of charts reflecting the attractive composition of our deposit base as well as the continued growth in this portfolio in 6 of the last 8 quarters, while working to effectively manage our overall cost of funds.

Independent has $2.9 billion in total deposits, of which, 75% are nonmaturity deposit accounts.

When comparing fourth quarter 2018 to the same quarter 1 year ago, we increased total deposits by $130 million, or 5.8%. This excludes brokered deposits and $254 million of non-brokered deposits acquired in the TCSB merger.

Our total cost of deposits is up 12 basis points on a linked quarter basis, and is up 35 basis points when comparing to the same quarter 1 year ago.

Our cumulative deposit cost beta for the period of Quarter 1 2017 to Quarter 4 2018 is 28.3%, and our cumulative deposit cost beta over the last 4 quarters is 34.3%.

Similar charts are also reflected on Page 11, but in this case, we are displaying the balanced mix of our loan portfolios. We continue to target a diversified loan mix with the largest portfolio being our commercial book of business.

At December 31, our loan mix included 43% commercial, 39% mortgage, 15% installment and 3% held for sale.

Total loans outstanding now aggregate to $2.67 billion. The commercial portfolio, our largest book of business, grew by $32.4 million or 11.6% annualized during the quarter.

Consumer installment loans were up slightly for the quarter and portfolio mortgage loans declined by $13.6 million as a result of the reclassification of $41.5 million of portfolio mortgage loans to held for sale.

In terms of capital management. Our capital levels continue to be strong with tangible common equity moving from 9.51% at December 31, 2018 to 9.17% at December 31, 2018. This is well within our targeted TCE range of 8.5% to 9.5%.

On January 21, the Board of Directors increased the cash dividend by 20% and declaring a quarterly cash dividend and common stock of $0.18 per share, payable on February 15, 2019.

Our Board of Directors approved a 2019 share repurchase plan for up to 5% of outstanding common shares.

Through the 25 -- through January 25, under this new plan, 43,768 shares had been repurchased at an average price of $21.67 per share.

At this time, I would like to turn the presentation over to Rob Shuster to share a few comments on our financials, credit quality, a review of our final 2018 results versus our original outlook, and then management's initial outlook for 2019.

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [3]

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Thanks, Brad, and good morning, everyone.

I am starting at Page 13 of our presentation. Brad discussed the increase on our net interest income during his remarks, so I will focus on our net interest margin.

Our tax equivalent net interest margin was 3.93% during the fourth quarter of 2018, which is up 28 basis points from the year-ago period and up 2 basis points from the third quarter of 2018. I'll have some more detailed comments on this topic in a moment.

Average interest-earning assets were $3.12 billion in the fourth quarter of '18 compared to $2.57 billion in the year-ago quarter, and $3.04 billion in the third quarter of 2018. The significant year-over-year increase reflects both the Traverse City State Bank merger and organic loan growth.

Page 14 contains a more detailed analysis of the linked quarter increase in net interest income. There's a lot of data on this slide, but to summarize a few key points, the linked quarter net interest margin, again, increased by 2 basis points. This was primarily due to a $346,000 increase in net recoveries of interest on previously charged off or nonaccrual loans.

Fourth quarter 2018 discount accretion of $423,000 on the TCSB acquired loan portfolio was down $185,000 from the $608,000 we recorded in 3Q '18. This discount accretion increased the net interest margin by 5.4 basis points and 7.9 basis points in 4Q '18 and 3Q '18 respectively.

We'll comment more specifically on our outlook for net interest income for 2019 later in the presentation.

Page 15 compares our quarterly average cost of funds, which is annualized interest expense divided by average earning assets to the monthly average effective federal funds rate during the quarter and the spot federal funds rate during the quarter. You can see the relatively low cumulative beta of 8.6% for the first 81 basis points of movement in the effective federal funds rate from Q3 '15 to Q2 '17. And the increase in the cumulative beta, 30.7%, for the next 127 basis points of movement in the effective federal funds rate from Q2 '17 to Q4 '18.

Moving onto Page 16. Noninterest income totaled $9 million in the fourth quarter of '18 as compared to $11.4 million in the year-ago quarter and $11.8 million in the third quarter of 2018.

Our mortgage banking operations, net gains on mortgage loans and mortgage loan servicing, caused most of the quarterly comparative year-over-year and linked quarter variability in noninterest income.

We have a table in the text of our earnings release that breaks out mortgage loan servicing into its component parts, net revenue, fair value change due to price and fair value change due to paydowns.

The fair value change due to price, which we view as not being a part of core results, as Brad mentioned, was a negative $2.4 million or $0.078 per diluted share after-tax in the fourth quarter of '18, compared to a positive $356,000 or $0.011 per diluted share in the fourth quarter of 2017.

Net gains on mortgage loans declined on both a year-over-year and linked quarter basis.

Unique to the fourth quarter of 2018 is a $248,000 loss that we recorded on a pending sale of $41.5 million of portfolio mortgage loans.

This sale is expected to settle by January 31, 2019.

In addition, we have generally seen competitive pricing pressure throughout 2018 when compared to 2017, which has reduced profitability margins.

The year-over-year increases in interchange income and interchange expense were primarily due to the implementation of ASU 2014-09 as described in the text of our earnings release.

As detailed on Page 17, our noninterest expenses totaled $26.8 million in the fourth quarter of 2018 as compared to $23.1 million in the year-ago quarter and $26.7 million in the third quarter of 2018.

This year-over-year quarterly increase was primarily in compensation and benefits, occupancy, data processing, furniture fixtures and equipment, communications, interchange expense, as I mentioned earlier, advertising and the amortization of intangible assets.

Much of the increases reflect the impact of the TCSB merger.

In addition, healthcare costs increased by nearly $450,000 on a quarterly year-over-year basis due to an increase in actual and estimated incurred but not reported claims.

We have a self-insured health insurance plan with an individual stop-loss limit. And unfortunately, we have had elevated claims in 2018 as compared to recent years.

Investment securities available for sale decreased by $9 million during the fourth quarter of 2018.

Page 18 provides an overview of our investments at December 31, 2018. Approximately 29% of the portfolio is variable rate, and much of the fixed rate portion of the portfolio is in maturities or average lives of 5 years or less. The estimated average duration of the portfolio is about 2.97 years with a weighted average tax equivalent yield of 3.11%, which is up 10 basis points from September 30.

Page 19 provides data on nonperforming loans, other real estate, nonperforming assets and early-stage delinquencies.

Total nonperforming assets were $10.3 million or 0.31% of total assets at December 31, 2018. This was slightly lower than the September 30, 2018 level.

At December 31, 2018, 30- to 89-day commercial loan delinquencies were just 0.03% and mortgage and consumer loan delinquencies were 0.29%.

Moving onto Page 20. We recorded a provision for loan losses of $591,000 in the fourth quarter 2018 compared to an expense of $393,000 in the year-ago quarter.

We had modest loan net charge-offs of $104,000 in 4Q '18.

The allowance for loan losses totaled $24.9 million or 0.96% of portfolio loans and 1.06% of originated loans at December 31, 2018.

Page 21 provides some additional asset quality data, including information on new loan defaults and on classified assets.

New loan defaults were $3.8 million in 4Q '18.

Page 22 provides information on our TDR portfolio that totaled $56 million at December 31, 2018, a decline of $3.3 million during the fourth quarter.

This portfolio continues to perform very well with nearly 95% of these loans performing, and 93.2% of these loans being current at December 31, 2018.

Page 23 is our final update for 2018 where we compare our actual performance during the year to the original outlook that we provided back in January, 2018.

Overall, we believe that our actual performance during 2018 was better than our original outlook. The various components of our 2018 performance are outlined on this slide.

Finally, Page 24 is our initial outlook for 2019. We are projecting portfolio loan growth of approximately 8% to 9% for 2019. The moderation from 2018 actual portfolio loan growth is primarily in the mortgage loan category due principally to a higher percentage of loans projected to be originated for sale.

We are expecting non-brokered deposit balances to grow 3% to 4% in 2019. Any funding gap in earning asset growth is expected to be largely filled with brokered deposits.

We expect 2019 net interest income to grow 10% to 11%, reflecting a full year with the TCSB merger in the aforementioned portfolio loan growth.

Our forecast assumes one 25 basis point increase in the target federal funds rate in June 2019, and a relatively stable net interest margin throughout the year. Therefore, the projected increase in net interest income is principally due to earning asset growth.

Credit is extremely difficult to project. However, we do expect asset quality metrics to generally be stable in 2019.

A provision level at about 20 basis points of average portfolio loans would not be unreasonable for 2019 modeling purposes.

Although, mortgage banking related revenues could create quarterly volatility, and the first quarter of every year is typically our slowest for noninterest income, we would generally expect a range of $11 million to $12 million per quarter in actual noninterest income in 2019.

We are projecting noninterest expense of $27 million to $27.5 million per quarter in 2019. When factoring out merger-related expenses and gain on the sale of other real estate, the projected 2019 level of noninterest expenses is about 2% higher than 2018.

Finally, we expect an effective income tax rate of about 20% in 2019.

That concludes my prepared remarks, and I would now like to turn the call back over to Brad.

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [4]

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Thanks, Rob.

2018 was a very successful year for us as we had very good growth, both organically and in adding Traverse City State Bank associates and customer base. This growth enabled us to improve our operating leverage.

We met or exceeded our company targets.

Our updated return on asset and return on equity targets are 1.3% or better on ROA and 13.0% or better, respectively, on ROE, respectively.

We continue to pride ourselves on investing in our communities and providing exceptional customer service. Along those lines, this past year we were very pleased to be named one of the best in-state banks by Forbes Magazine, coming in as the best bank headquartered in Michigan.

In wrapping up our prepared remarks, we have listed our strategic initiatives on Slide 25 of the presentation.

We have 4 focused -- 4 areas of focus. The first area is growth, principally through organic means, leveraging our sales associates as well as attracting new sales associates to our team.

Our organic growth can be supplemented with selective and opportunistic bank acquisitions and branch acquisitions.

Our second area of focus is in process improvement and cost controls. We have identified an initial dozen technology/digital banking projects that will advance our digital offering, reduce costs and assist us in better leveraging technology so as to make it easier to bank with us and easier for our associates to service our customers.

Our third area of focus is in talent management. Over the last several years, we have made a number of changes to recruit, retain and develop the best team in the marketplace. We will continue to advance this area of focus.

Finally, effective risk management is critical to delivering sustained high performance for our shareholders.

At this point, we would now like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Brendan Nosal of Sandler O'Neill and Partners.

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Brendan Jeffrey Nosal, Sandler O'Neill + Partners, L.P., Research Division - Director [2]

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Just starting off here on the net interest margin outlook. If you back out the accretion income, it looks like the core margin was around 3.88% for the quarter. I know that your outlook for the coming year assumes one more midyear rate hike. But could you just walk through your expectations for the core NIM as we move through 2019, if the Fed doesn't hike rates any further?

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [3]

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If the Fed doesn't hike rates any further, it's roughly about a $300,000 in change, impact, reduction in the margin. So that's what that midyear 25 basis point change in our forecast results in terms of dollars. So it wouldn't have a material impact on either the margin or on net interest income.

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Brendan Jeffrey Nosal, Sandler O'Neill + Partners, L.P., Research Division - Director [4]

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Got it, okay. That's helpful. And then moving over to the outlook for gain on sale revenues. It seems like that the outlook is for -- in-line year versus 2018, which assumes some pickup in margins. Can you just walk through your expectations for gain on sale margins to improve? Is it just excess capacity coming out of the industry or are you seeing something else?

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [5]

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I would say we're seeing a little bit more rational pricing here as we've moved into 2019. So I'm, I guess, guardedly optimistic that margins are going to be, even though, it's going to be primarily a purchase market and we don't expect a significant refinance volume, I'm guardedly optimistic that margins are going to be a bit better. It was -- I would say, '18 was a bit of a transitional year. And so you saw a little bit more, I think, pricing competition. But we feel that '19 is going to be a little bit better than where we were in '18.

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Brendan Jeffrey Nosal, Sandler O'Neill + Partners, L.P., Research Division - Director [6]

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Got it, okay. And then last one for me and then I'll step back. Yesterday, there was obviously a sizable MOE announcement in the State of Michigan yesterday. Any early thoughts on what opportunities could arise for you guys out of such a large combination in your markets, if any?

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [7]

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Sure, Brendan.

Well today, Chemical Bank would be one of our largest competitors if you were to try -- draw a 1 mile radius around our branch locations, our 68 locations. We actually cross paths with them about 25 -- in 25 markets. And so they're a significant competitor. And what we've experienced in prior significant mergers in our markets, going back the last couple years, it does create quite a bit of disruption and opportunities for the other banks in the marketplace, including ourselves, both from a customer acquisition side as well as potential talent acquisition side. So I think there is an opportunity and time will tell to see how it all plays out.

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Operator [8]

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The next question comes from Kevin Reevey of D.A. Davidson.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [9]

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First question. I was wondering if you could give us some more color on how your various deposit growth initiatives are coming along. I know you've got treasury management services as a focus. You talked a little bit early about digital in your retail and checking, I was looking for a little more color here.

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [10]

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Sure, Kevin. So I'm very pleased with the job that our team has done this past year in growing the core deposit base. We've had very nice growth. It's been a team effort. That -- this side of the balance sheet is not a new focus. It's been a year-after-year focus for us. And in fact, you will see in our annual proxy statement, we'll list our annual corporate goals for the company and deposit growth has and will continue to be a category for our company and the goal -- company goals.

You know, it's always been a focus of getting the checking account, whether it be at the consumer level or the commercial level. And if I look at the -- on the commercial side first, we've had some very excellent new relationships brought into the bank this past year. And very -- I'm very pleased to see that, with that, we've been successful in bringing in their core checking accounts.

And then alongside with that, we've done a nice job then going out and working with the owner on his or her personal checking and the employee base and capturing success there. In fact, recently one of our offices here in West Michigan for -- a new commercial customer was successful in opening up about 30 new health savings accounts.

And so it's that type of just teamwork and basic blocking and tackling, along with, we've been very successful on the -- in the mortgage origination front and seeking to capture the personal checking account in that situation whenever possible. And I'm very pleased with the penetration level that we've had there.

So -- and then finally, our treasury management team, and as I outlined in our prepared remarks, has continued to knock on doors of the public funds sector and large commercial sector and has had a lot of success, particularly with this reciprocal DDA account, where, previously we were sweeping these funds off balance sheet into a third-party account. And now we're able to sweep those, actually, but keep them on balance sheet for -- and pay a very competitive interest rate, albeit, still lower than what we would have to pay in -- at a wholesale level. And then at the same time, provide some FDIC insurance along with it. So those are a handful of what's worked well for us. And, Rob, I don't know if I left anything out there.

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [11]

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No, I think that covers it.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [12]

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And then earlier, you talked about the low unemployment rates, particularly in Grand Rapids and Lansing and while that's good, it can always be a double-edged sword. Are your business customers feeling any negative repercussions as a result of such a low unemployment rate in those 2 markets?

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [13]

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That's a great question. And I think that -- a couple of thoughts. One is, a lot of business growth today can, in fact, take place with investment in technology. And so, it's fewer workers are needed, and so they're able to grow their businesses with technology.

The other thing is, I've been impressed with the resiliency and the innovativeness in terms of, okay, we will hire workers and we're going to train you. So they're just adding programs or investing in employees and they're getting it done.

So while it probably has somewhat held back some growth, I think, the markets are dealing with it and moving forward.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [14]

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And then lastly, since we're on the subject of hiring, you talked about in your prepared remarks, hiring sales associates to help drive your business growth. What's the competitive market like for sales associates? And what are you guys doing to attract as well as retain talent in that area?

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [15]

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Great question. And so over the last several years, we've been very successful in adding new talent to our team. And when I go back to 2016, where we really bulked up on our mortgage origination efforts and added over 15 -- oh, I am sorry, 50 associates on the mortgage side. And then this past year, we've been successful in adding on the commercial side. And I think it starts with -- on the recruiting side, it's an ongoing effort. It's not -- you pick it up and put it down, pick it up, put it down. It just needs to be ongoing. And we work real hard in our culture at Independent Bank to create a favorable work culture, and a culture of accountability, and a culture of being focused on the customer, a culture of teamwork. And as you bring people in from the outside to that culture and then they share what they're seeing and actually how positive it is, that word gets out in the marketplace. So that's been a large part of it. I'd say also, with the low unemployment, we've had to increase wages at the hourly level in 2018.

We also, for the first time, instituted an annual incentive bonus for our hourly employees. So that was looked upon favorably.

And so -- and then finally there's -- you've some terrific technology that, over the last year and in this coming year, that we have put in place to make the experience for our -- first of all, the recruiting experience, a very efficient process. But then also the onboarding process to make that a very positive experience for new hires. And so all those efforts, combined, I think, are helping us to be successful in the talent wars.

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Operator [16]

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And next, we have a question from Damon DelMonte of KBW.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [17]

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Just a quick follow-up on the loan growth. Could you just talk a little bit more about the drivers of your expected loan growth in the commercial channels? And geographically, where it's in the footprint, you think, you have the best opportunity for growth?

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [18]

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Yes, sure. I'll take first shot at that. And, you know, as you've seen quarter-over-quarter and here now we're 19 consecutive quarters of loan growth, it's been pretty balanced. I'd say, this past year, we were real strong in mortgage portfolio growth, although, we've seen that sort of taper back here. And somewhat intentionally here, the tail end of the year.

But we think the -- we've got very solid pipelines today in the commercial side. I like where the pipeline stands today versus at the end of the third quarter, and also where it stands today versus 1 year ago at this time.

So we think that Southeast Michigan will continue to be a strong market for us as will the West Michigan market. And we think -- we're also hearing very positive things, albeit, as we get into the December-January timeframe, the indirect originations for us somewhat slowed down as does the mortgage side. So we'll see a little softness here over year-end. But that should pick up near the end of the first quarter and we should get some momentum into the second quarter. So, Rob, anything to add there?

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [19]

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No, I think you covered it. I think that growth is going to be broad-based and the reason, as I mentioned in my comments, we actually grew 13% plus in '18 and the reason for the outlook being more in the 8% to 9% range is largely because of the mortgage side and the originations and a higher percentage of them being held for sale.

The rest of it, with commercial and consumer, I think it's just going to be sort of more of what we've been doing, although I think on the commercial side, as Brad said, we look at the pipelines and feel like that we're well set up to have a good year in 2019. But on the consumer side, we continue to have a very strong offering in the RV, marine, power sport arena, and we think that market will be solid again in 2019.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [20]

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Appreciate the color on that. And then I guess just a broader based question. What are your thoughts on M&A at this point now that you have a deal completed and pretty much integrated? Do you guys have an appetite to do more transactions?

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [21]

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I would say our primary focus is on organic growth. I think the M&A side of things is somewhat opportunistic. You have to have a buyer and a seller and you have to have some alignment of pricing expectations and you have to have alignment of culture and strategy, et cetera.

So we never build our models and our forecasts assuming there is going to be that type of opportunity. I mean having said that, I think we would be open to looking at different things. But I think our primary focus is to continue to gain operating leverage through growth in earning assets. It's sort of a simple formula but we think it's very effective when you combine that with share repurchases and a strong dividend that it does create, we think, solid returns for the shareholders.

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Operator [22]

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And the next question comes from John Rodis of FIG Partners.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [23]

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Rob, just on the -- I think, on the -- Rob, or Brad, I think you said on the share buyback, I think you said you bought 44,000 shares so far in January. How should we sort of think about buyback activity going forward, given the stock has rebounded some? Is it more opportunistic going forward? Or do you expect to be more active?

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [24]

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I think it's probably more opportunistic, I think, as we go -- I mean we have a model we run that works off of a tangible book dilution earnback timeframe and probably the most sensitive input to that is projected earnings in the future. And so we just feel like, hey, if there is opportunities out there at certain prices and you could see kind of where we bought at with what we've done to date. I'm not saying that's a complete reflection of the kind of levels, but we certainly view at those levels that it meets our economic criteria and it's certainly accretive to earnings per share growth. So I think we'll just maybe not have quite the velocity we had in the fourth quarter and it'll be more somewhat dependent on what happens in the marketplace. Brad, I don't know if you wanted to add anything there?

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [25]

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I agree.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [26]

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No, that make sense, Rob. And then one other question, Rob, just on the balance sheet, the securities portfolio, should we still expect some continued runoff there like we saw in the fourth quarter?

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [27]

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Yes, there's about $9 million of runoff. We're kind of -- we feel, just for liquidity purposes, we have to retain investments at a certain level. So there may be a bit of runoff, but I don't think it will be significant. I think we will try to maintain a level at $400 million or so and again, that's more out of liquidity management than anything else.

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Operator [28]

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And this concludes our question-and-answer session. I would like to turn the conference back over to Brad Kessel for any closing remarks.

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [29]

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We would like to thank each of you for your interest in Independent Bank Corporation and for joining us on today's call. We wish everybody a great day.

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Operator [30]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.