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Edited Transcript of IBCP earnings conference call or presentation 24-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Independent Bank Corp Earnings Call

IONIA Apr 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Independent Bank Corp earnings conference call or presentation Monday, April 24, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brad Kessel

Independent Bank Corporation - President & CEO

* Rob Shuster

Independent Bank Corporation - EVP & CFO

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Conference Call Participants

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* Matthew Forgotson

Sandler O'Neill - Analyst

* Damon DelMonte

Keefe Bruyette & Woods - Analyst

* John Rodis

FIB Partners - Analyst

* Scott Beury

Boenning & Scattergood - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the first-quarter 2017 earnings conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to President and CEO, Brad Kessel. Please go ahead.

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Brad Kessel, Independent Bank Corporation - President & CEO [2]

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Good morning. Thank you for joining Independent Bank Corporation's conference call and webcast to discuss the Company's 2017 first-quarter 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 the cautionary note regarding forward-looking statements. This is slide 2 in our presentation. 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 4 of our presentation.

Typically, with the first quarter of each year, our earnings can be lower than the other three quarters of our fiscal year as a result of lower loan volumes and higher operating expenses due to seasonality factors. That said I am very pleased to report what I consider to be a strong start to 2017.

Strong loan growth, continued deposit growth and continued improvement in asset quality metrics helped lead to a 46% increase in our net income. Net interest income increased in both a sequential and year-over-year quarterly basis. These results are directly related to the ongoing effort of our entire team to capitalize on the many opportunities in our existing markets and new markets.

This does include our recent investments in new associates to expand our mortgage banking business, which is already paying off with growth in gains on mortgage loans, growth in mortgage -- portfolio mortgage loans and income from mortgage servicing.

As it relates to earnings, for the first quarter of 2017, we are reporting net income of $6 million or $0.28 per diluted share versus net income of $4.1 million or $0.19 per diluted share in the prior-year period. The first quarter's results were driven by net interest income of $21.5 million, up $1.7 million or 8.6% from the year ago quarter and up $1.2 million or 6% from the fourth quarter of 2016.

Noninterest income improved to $10.3 million, up from $7.8 million, primarily as a result of gains on mortgage loans of $2.6 million, up $900,000 or 56% from the year ago quarter and higher mortgage servicing income. In addition, we also saw year-over-year increases in both service charges on deposits and interchange income.

As it relates to our balance sheet, total portfolio loans grew by $62.5 million or 15.8% annualized. At the same time, we also continue to see growth in deposits now at $2.26 billion, up from $2.15 billion one year ago. Our loan-to-deposit ratio at quarter end of 73.83% we believe provides us continued net interest income expansion opportunity.

In addition, we also believe our capital level with tangible common equity to tangible assets at 9.78% provides further upside in growth of our earning asset base. At March 31, 2017, our tangible book value grew to $11.89 per share, up from $11.62 per share at the end of 2016.

Today, Independent Bank is the fourth-largest bank headquartered in Michigan. Our branch network is a combination of rural, suburban and urban markets. The conditions in these markets continue to be generally favorable as measured by the labor, housing and commercial real estate indices. Our balance sheet growth continues to come from more urban and suburban markets. At a high level, I would say the West Michigan market is the strongest followed by the southeast Michigan market.

A common theme in many of our markets is that of a shortage of housing supply. Accordingly, we are witnessing historically record low home listing times, rising residential real estate values, and an increase in new construction. Our new loan production offices in Ann Arbor, Brighton, Troy and Traverse City, Michigan, as well as Columbus and Fairlawn, Ohio, are now up and running. For these markets I would characterize Ann Arbor and Columbus markets as being very strong. In addition, we have new loan production facilities also underway in Dearborn and Grosse Pointe, Michigan.

The favorable economic conditions are seen in our loan origination and deposit gathering results. Page 7 of our presentation contains a good summary of our loans and deposits by region. We have seen year-over-year loan and deposit growth in each of the four Michigan markets.

Total deposits, as seen on page 8, were $2.26 billion at March 31, 2017, an increase of $108.4 million or 5% since March 31, 2016. The increase in deposits, in addition to being spread across our markets, has also been in our retail, commercial and public fund portfolios. The Company's deposit base is substantially all core funding with $1.79 billion or 79% in transaction accounts.

While still very attractive and historically low, during the first quarter of 2017, we did see a slight increase in our cost of deposits moving to 26 basis points from 25 basis points the prior quarter. Additionally, we are seeing some pressure in our markets on the deposit pricing front, particularly in the public fund sector. We are monitoring closely and actively managing so as to retain core while also limiting the effects of rising rates on our deposit base.

As seen on page 9, loans, including loans held for sale, increased to $1.74 billion at March 31, 2017. This represents the 12th consecutive quarter of net loan growth for our Company. During the first quarter, total portfolio loans grew by $62.5 million or 15.8% annualized. The commercial team generated $52.9 million in production during the first quarter of which $29.7 million were new money commitments, while $23.2 million were renewals.

Overall, we continue to have a nice mix of new business by region, new business by segment and improved operating leverage for our commercial banking group. The commercial pipeline continues to be very healthy and supportive of our targeted annual growth rates.

Our mortgage team originated $158.1 million and we sold $79.7 million during the first quarter of 2017. This compares favorably to the first quarter of 2016 when we originated $73.5 million and had sales of $55.7 million. This represents a 115.1% increase in originations and a 43.1% increase in sales.

For all the first quarter, portfolio mortgages increased by $42.4 million or 31.9%. We did portfolio a higher percentage of our total mortgage originations than we budgeted for several reasons. Originally, we anticipated selling two-thirds of our production and one-third going to portfolio. Our actual mix is closer to 50% salable and 50% non-salable.

While we did plan for a shift to more purchased money versus refinances, we are also capturing a larger share of the jumbo mortgage market. This was a goal with the expansion. In addition, we are seeing a higher demand for construction loans and non-warrantable condo loans. All three of these product types we currently place into portfolio.

Our retail banking channels originated $37.5 million for the first quarter of 2017 and grew by $8.6 million or 13.2% annualized. Of this quarter's originations, our indirect power sport financing was the (technical difficulty).

Page 10 provides some information on our capital as well as four quarter rolling averages for return on assets and return on equity. We are targeting tangible common equity to range from 8.5% to 9.5%. Tangible common equity totals 9.78% of tangible assets at March 31, 2017, as compared to 9.6% one year ago. Our plan is to retain capital for organic loan growth and return capital through a consistent dividend payout plan and share repurchase plan.

In January 24 2017, the Board of Directors declared a quarterly cash dividend on our common stock of $0.10 a share. Also in January, the Board of Directors authorized a new share repurchase plan for 2017. Under the terms of the share repurchase plan, the Company has authorized to back up to 5% of our outstanding common stock. This plan is authorized to last through the end of this calendar year.

During the first quarter of 2017, we did not repurchase any shares.

At this time, I would like to turn the presentation over to Rob Shuster to share a few comments on our financials, credit quality and management's outlook for the balance of 2017.

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Rob Shuster, Independent Bank Corporation - EVP & CFO [3]

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Thanks, Brad, and good morning, everyone. I am starting at page 11 of our presentation. Brad discussed the increase in our net interest income during his remarks, so I will focus on our net interest margin.

Our tax equivalent net interest margin is 3.69% during the first quarter of 2017, which is up 8 basis points from the year ago period and up 24 basis points from the fourth quarter of 2016. I will have some more detailed comments on this topic in a moment. Average interest-earning assets were $2.37 billion in the first quarter of 2017, compared to $2.21 billion in the year ago quarter and essentially unchanged since the fourth quarter of 2016.

Page 12 contains a more detailed analysis of the linked quarter increase in net interest income. There is a lot of data on this slide, but to summarize a few key points. Increases in interest recoveries and prepayment fees added $686,000 to interest income as compared to the fourth quarter of 2016. This accounted for 12 basis points of the 25 basis point increase in average yield on interest-earning assets.

The balance of the margin growth was primarily due to the increase in short-term interest rates and an increase in average loan balances. Two less days in the first quarter of 2017 reduced net interest income by $229,000 compared to the fourth quarter of 2016. The average cost of funds were relatively unchanged, just moving up 1 basis point on a linked-quarter basis.

A little more color on new and renewal loan production and yields is as follows. Portfolio loan production, excluding mortgage loans originated for sale, in the first quarter totaled $161 million of which 50.7% had variable or adjustable interest rates and 49.3% had fixed interest rates. The overall yield on this portfolio of new and renewal loan production was approximately 4.24%. We will comment more specifically on our outlook for net interest income for the balance of 2017 later in the presentation.

Moving on to page 13, noninterest income totaled $10.3 million in the first quarter of 2017 as compared to $7.8 million in the year ago quarter and $13.2 million in the fourth quarter of 2016. Our mortgage banking operations caused most of the quarterly comparative year-over-year variability in noninterest income with increases in mortgage loan gains and mortgage loan servicing income.

As noted in our earnings press release, we elected fair value accounting for capitalized mortgage servicing rights on January 1, 2017. I want to make it clear that the beginning of the year fair value adjustment of $542,000 did not run through P&L. Again, that did not run through P&L, but instead adjusted beginning of year equity net of income taxes.

As detailed on page 14, our noninterest expense totaled $23.6 million in the first quarter of 2017 as compared to $22 million in the year ago quarter. This increase was in compensation and benefits. We increased full-time equivalent employees by 64.5 or 8.4%. Of this increase, about 73% related to the expansion of our mortgage banking operations.

Salaries and wages increased $1.6 million due to the aforementioned increase in FTEs and January 1 raises. However, about one-quarter, or $390,000, of the increase in salaries and wages was due to guaranteed compensation for new loan originators as they often left behind substantial pipelines. This expense will abate in the second quarter.

As outlined on slide 15, we now anticipate closing on the sale of Mepco in early May. The delay has been due to a [then] projected timeframe for the buyer to finalize their transaction financing. During the first quarter of 2017, Mepco recorded net income of about $140,000 with $910,000 of net interest income and about $700,000 of noninterest expenses.

Although we expect it to take some time during the course of 2017 to reinvest the cash from this sale, over the course of all of 2017, we expect the transaction to be slightly beneficial to net income.

Investment securities available for sale decreased slightly during the first quarter of 2017. Page 16 provides an overview of our investments at quarter end. Approximately 26% of the portfolio is variable rate and much of the fixed rate portion of the portfolio is in maturities of five years or less. The estimated average duration of the portfolio is about 2.63 years.

Page 17 provides data on nonperforming loans, other real estate, nonperforming assets and early-stage delinquencies. Total nonperforming assets were $14.3 million or 0.55% of total assets at March 31, 2017. Nonperforming loans decreased by $4.4 million during the first quarter of 2017.

In addition, subsequent to year end, we sold a group of commercial other real estate properties that had a book balance of $2.9 million at March 31, 2017. At quarter end, 30- to 89-day commercial loan delinquencies were just 0.04% and mortgage and consumer loan delinquencies were 0.47%.

Moving on to page 18, we recorded a credit provision for loan losses of $0.36 million in the first quarter of 2017 compared to a credit provision of $0.53 million in the year ago quarter. We recorded loan net recoveries of $0.2 million or negative 0.04% annualized of average loans in the first quarter of 2017 compared to net recoveries of about $0.5 million or 0.12% negative annualized of average loans in the first quarter of 2016. The allowance for loan losses totaled $20 million or 1.2% of portfolio loans at March 31, 2017.

Page 19 provides some additional asset quality data, including information on loan defaults and on classified assets. New loan defaults were just $1.2 million in the first quarter of 2017.

Page 20 provides information on our troubled debt restructuring portfolio that totaled $72.9 million at March 31 of 2017, a decline of 6.5% from the end of 2016. This portfolio continues to perform very well with 93% of these loans performing and 91% of these loans being current at March 31 of 2017.

Page 21 is our report card thus far for 2017. We compare our actual performance during the year to the original outlook that we provided in January 2017. Overall, we believe that our actual performance in the first quarter of 2017 was better than our original outlook. We achieved annualized loan growth of nearly 16% in the first quarter of 2017. We expect to maintain or accelerate this loan growth over the next two quarters.

First quarter 2017 net interest income grew 8.6% on a year-over-year quarterly basis compared to our forecasted growth rate of about 3%. Although we expect the growth rate to slow a bit from the first quarter due primarily to the Mepco sale, we would still now anticipate a growth rate more in the mid-single-digits for net interest income given our outlook for loan growth.

We achieved a credit loan loss provision in the first quarter of 2017. This was better than our forecast because of better than anticipated asset quality metrics. We expect generally stable asset quality metrics during the remainder of 2017, which should lead to a relatively low loan loss provision.

First quarter 2017 noninterest income was slightly below our (technical difficulty). We expect noninterest income to move up into our forecasted range over the next two quarters due to an increase in gains on mortgage loans.

First quarter 2017 noninterest expense was above our forecasted range. This was principally due to the mortgage banking expansion, higher than budgeted incentive compensation and the delay in the Mepco sale. We expect noninterest expense to move down gradually from the first-quarter of 2017 level due to the anticipated Mepco sale, some seasonal factors and better operating leverage in our mortgage banking area.

Finally, we expect an effective income tax rate between 31% and 32% going forward in 2017. That concludes my prepared remarks and I would now like to turn the call back over to Brad.

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Brad Kessel, Independent Bank Corporation - President & CEO [4]

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Thanks, Rob. In summary, we are pleased to report a strong start to 2017 with growth in earnings and earnings per share. The improvement is directly related to the successful execution of our strategy to migrate earning assets from lower yielding investments to higher-yielding loans in order to grow net interest income.

Our quarterly return on average assets was 0.95% compared to 0.68% for the same quarter one year ago. And for the last 12 months, return on assets improved to 0.99% from 0.86% one year ago. Our quarterly return on average common shareholders' equity was 9.63% compared to 6.7% for the same quarter one year ago. And for the last 12 months, our return on equity improved to 9.95% from 8.05% one year ago.

As we look ahead, we continue to be focused on driving high-performance with balance sheet growth and strength, quality earnings, per share value and strong profitability levels. We continue to build on the momentum generated the last several years. 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). Matthew Forgotson, Sandler O'Neill & Partners.

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Matthew Forgotson, Sandler O'Neill - Analyst [2]

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Hi, good morning, gentlemen. Was hoping we could start with the margin. So, Rob, thanks for the clarity here. But if you strip out those 12 basis points of interest recoveries and prepayment penalties, you get the stabilized margin right around [357], so that was up call it 12 basis points sequentially. I'm wondering if you could decompose that 12 basis points of lift for us. How much was attributable to rates and how much was attributable to mix?

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Rob Shuster, Independent Bank Corporation - EVP & CFO [3]

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Well, I'm going to estimate because I don't have it right in front of me, but we do run this sort of forecasted model that sort of really accounts for what's affecting the margin due to the movement in short-term interest rates. So I would say it's probably one-third or so due to the rate change and about two-thirds due to mix change.

So, if you looked particularly in the first quarter, we had quite a bit of growth in average loans and so that was a more significant contributing factor than what we anticipated. So, on the short-term rate side, we really had just one full quarter benefit from the 25 basis point move back in December of 2016. In the March 2017 move, we really had very little impact of that, just a half month toward the end of the first quarter.

So, we should see the full benefit of that roll into the second quarter, and again, continued remix of earning assets with loan growth moving forward.

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Matthew Forgotson, Sandler O'Neill - Analyst [4]

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Great. And can you just remind us what the Mepco loans are yielding today and how you are planning to reinvest that cash assuming a May 5 close?

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Rob Shuster, Independent Bank Corporation - EVP & CFO [5]

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Yes, the Mepco loans are yielding just a bit above 12%, so you've got roughly $32 million, so that's quite a high yield to reinvest. But the offset to that is we're going to lose about $700,000 of noninterest expense, so Mepco made about $140,000.

So immediately we would invested in short-term type of instruments. But now, with the accelerated pace of loan growth, we had originally expected it to probably take a quarter or so to get those proceeds reinvested. Now I would expect that that could move up and be done well within one quarter.

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Matthew Forgotson, Sandler O'Neill - Analyst [6]

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Okay.

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Rob Shuster, Independent Bank Corporation - EVP & CFO [7]

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Now you will have a decline in the yield on earning assets because even if they are reinvested, I gave you in my comments the average yield on new loans in the first quarter was about 4.25%, so you are still going -- assuming something around the 4% level, you're still going from 12 to 4, but we're still losing the noninterest expenses. And when you put that altogether, it still should be beneficial to the bottom line as we move forward this --.

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Matthew Forgotson, Sandler O'Neill - Analyst [8]

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Got it. Okay. I guess switching over to fees, really appreciate the color on the $542,000 accrual. But just if you -- I guess taking the servicing line, if you add back that fair value loss, you're looking at $1.1 million or so of stabilized servicing. Now that you are on fair value, is that a decent -- how should we be thinking about the trajectory of this line item from here?

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Rob Shuster, Independent Bank Corporation - EVP & CFO [9]

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Well, the $1.1 million you talk about, that's the revenue from the servicing portfolio, so it's actually $1,089,000. Now in our former type of accounting method, we would amortize that asset, so now rather than amortizing the asset we have a fair value adjustment.

So if rates were to just sort of be unchanged, I would probably expect a negative fair value adjustment and the reason is we're adding to the servicing asset for the new loans that we originate and sell. Now the entry there is you are increasing mortgage loan servicing and increasing gain on sale.

But all other things being equal, there will be pay downs in the portfolio that occur during any quarter. And if market rates remain unchanged, you'd still have to capture that and it would typically be done in that fair value adjustment.

So I would tell you, and it's hard to predict that, maybe -- and we were at $800,000-some-odd -- $825,000, I think, when all the dust settled. I would say if rates were to remain unchanged, you might see it in the $700,000-ish to $800,000 range.

I think this first-quarter was probably a reasonably good barometer of a normalized level but maybe $100,000 or so higher. Because I think rates this quarter, when you go from the end of December to the end of March, I think they were relatively unchanged.

So that fair value adjustment I think took more into account, just the -- what occurred in pay downs in the portfolio rather than changes in market interest rate. So I don't -- that's sort of long-winded, but the $825,000 is probably a bit higher than what you might see normalized.

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Matthew Forgotson, Sandler O'Neill - Analyst [10]

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Great. Okay. Last one for me and then I'll hop out. Just in terms of the residential growth this quarter, can you give us a sense -- I guess, one, is it fair to expect a 50% retention going forward? And then, two, can you give us a sense of the complexion of the loans that you retained, in particular, the duration characteristics? Trying to get a sense of how much asset sensitivity you are utilizing in shifting to that retention strategy.

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Rob Shuster, Independent Bank Corporation - EVP & CFO [11]

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Good questions. I would say, first of all, that I don't think it would be -- at least the next few quarters, it wouldn't be unusual to see that mix still stay close to 50-50. Maybe it will move a little bit more toward the salable versus the non-salable. But I do think -- in a purchase market, we're going to continue to see a higher than at least what we historically saw in the percent that we are retaining.

Now, the mix of what we are retaining is pretty close to 50-50 between fixed and adjustable rate, but I -- and of the fixed, it's -- there was a fair amount within the category of 30-year jumbo. I think we were at about $19 million or so in -- I'm sorry, $24 million in the first quarter. That had a weighted average rate of about 4.32%.

And then we had another $6.7 million of 15 year that had a weighted average rate of 3.61%. That's about $30 million in that category. And then the rest were adjustable-rate and I would say if you just blended the rate, it would be probably right around the 4% area with the biggest bucket being 5/1 ARMs. Within the 5/1 ARM category, there was about $23 million. And so those would still have a duration probably in the three-year and change area.

And a fair amount of what we're seeing in there is what we call construction to permanent, so they start out as an adjustable-rate, and then they have a modification option once construction is complete. So some of those may be salable or may become salable on -- upon modification. They are underwritten to be salable.

But I think, as Brad mentioned in his comments, what we're seeing to bring up the level of portfolio loans is: one, a lot of construction lending; two, more jumbo because of the markets we've moved into; and three is what we call non-warrantable condos. It's a new condo development that hasn't been turned over to the developer, so at least at the outset they go into portfolio.

And then the final comment I'd make on it is, we're doing forward forecasts looking at the production, including more of this fixed production, and looking at its impact on our net interest income sensitivity and market value of equity sensitivity. So we're making sure that those things are not changing in a way that would shift the balance sheet dramatically.

We're currently still very asset sensitive, so we had the capacity between our lower loan-to-deposit ratio and the extraordinarily high level of variable-rate and short-term assets to take on some fixed rate, but it's something that we are monitoring and doing these forward forecasts on.

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Matthew Forgotson, Sandler O'Neill - Analyst [12]

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Great. Well, really appreciate that color. Thank you.

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Operator [13]

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Damon DelMonte, KBW.

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Damon DelMonte, Keefe Bruyette & Woods - Analyst [14]

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Hey, good morning, guys. How's it going today? So just wanted to kind of follow-up on the loan growth outlook. I just want to make sure I heard the comments correctly. So this quarter, obviously, over 15% linked quarter annualized growth. So the outlook from this point is that you are going to retain more of the residential mortgage loan production so that's going to drive your overall 10% to 11% annual growth number higher. Is that correct?

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Rob Shuster, Independent Bank Corporation - EVP & CFO [15]

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Yes, it's a combination of seasonality, so we would expect, for example, consumer installment lending to pick up over the next couple quarters as we move into a stronger just season for the areas we focus on consumer installment. I would say commercial as well, typically we see a pickup in the middle two quarters there. And then on the residential side, assuming the mix stays similar, we would expect that growth rate to actually accelerate. So, yes, we see that moving up over the next couple quarters.

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Damon DelMonte, Keefe Bruyette & Woods - Analyst [16]

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So then you kind of think that this 15% or so level is doable for the full year then, or are you saying higher than that?

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Rob Shuster, Independent Bank Corporation - EVP & CFO [17]

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Well, the fourth quarter is always tough to project, but I would say yes, that would be a pretty good estimate of a run rate for the year.

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Damon DelMonte, Keefe Bruyette & Woods - Analyst [18]

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Okay. Okay, great. And then I think you had mentioned that this quarter for the compensation expense, it was a little bit higher than probably expected because you had some guarantees on the mortgage originators. Is that correct?

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Rob Shuster, Independent Bank Corporation - EVP & CFO [19]

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Yes, $390,000 was the expense included in the first quarter that was guaranteed comp for loan originators because, as you know, when they leave a former employer, they have to leave their pipeline behind. So we have to transition them to make up for that loss in income.

So what you have is a period of time where they are just coming aboard and starting to build a pipeline. So we have expense there with no associated production of loans yet. And so, as I said in my comments, that will abate in the second quarter.

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Damon DelMonte, Keefe Bruyette & Woods - Analyst [20]

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Got you. Okay. And then, I guess, with regards to the deposit costs, they are only up 1 basis point from 25 to 26 basis points on the quarter. With the most recent rate increase and the expectation for a couple more this year, potentially, how do you see your ability to continue to lag -- kind of framing it from a beta perspective, your ability to lag having to increase at a much faster rate, just given the broader competition in the marketplace?

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Brad Kessel, Independent Bank Corporation - President & CEO [21]

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Well, Damon, that's a great question, and within our ALCO committee and monthly meetings, this topic gets -- is a regular agenda item and we've put in place some management tools to monitor both external pricing as well as internal deposit flows. And, obviously, the intent there is to not move any faster than we need to.

And at this point, even with the uptick, we were still able to see some growth in core deposits. So, that would be our preference, but again, it's really hard to forecast. Again, I would just say here in the first quarter, this is really the first time we've seen more pressure than maybe prior quarters.

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Damon DelMonte, Keefe Bruyette & Woods - Analyst [22]

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Got you. Okay. That's all I had. My other questions were answered. Thank you very much.

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Operator [23]

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John Rodis, FIG Partners.

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John Rodis, FIB Partners - Analyst [24]

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Good morning, guys. Just one question from me. On the buyback, obviously you didn't do anything this quarter. Can you maybe just talk about your thoughts there going forward? I would assume if loan growth remains strong you probably don't to a whole lot the rest of the year. Is that sort of the right way to think about it?

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Brad Kessel, Independent Bank Corporation - President & CEO [25]

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Well, I would say yes and if we can put that capital to work on organic loan growth, that would be our number one priority. The other component, obviously, is -- when we were buying back shares previously, it was at a significantly lower stock price and met the requirements of our dilution earn back that we talked about in the past.

We've shared sort of that -- maybe a three -- a little over three-year earn back period is something that we think that makes financial sense. At today's stock price we are over that time frame. So ideally if we could put the capital to work on the loan portfolio, that's our preference. And alternatively, if we see some kind of drop back in stock price, we may be back in the market again.

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John Rodis, FIB Partners - Analyst [26]

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Okay. That makes sense, Brad. Thanks a lot, guys.

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Operator [27]

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Scott Beury, Boenning & Scattergood.

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Scott Beury, Boenning & Scattergood - Analyst [28]

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Hey, good morning, guys. First question, in the context of the change in accounting treatment for the MSRs, I was just curious if you had any general feel for what the vintage looks like on your servicing portfolio, the underlying loans there?

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Rob Shuster, Independent Bank Corporation - EVP & CFO [29]

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Well, it -- I mean, the -- I would have to get a report for that, but the vintage is skewed really to the last few years. We've got about $1.7 billion in mortgage servicing and, just to give you some idea: 2016 of the $1.7 billion is $300 million of it, that vintage; 2015 is $238 million; 2014 is $129 million; 2013 is $202 million; 2012 is $248 million. So those are the years that make up the most. 2017 is about $43 million.

And so, the weighted average rates within those vintages are generally lower than current market rates, although the 10-year has moved down a bit in the last few weeks. So, I don't think there is a lot of -- if your question is, refinance pressure -- I don't think there is a lot in those more recent vintages.

I think if the 10-year were to drop further you could start to see refis pick up a bit. But the nice thing we have is, because we're a retail oriented shop, typically when we see prepayment activity picking up in our mortgage servicing portfolio, we are seeing gains on loan sales pick up as well, so we have a natural hedge there.

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Scott Beury, Boenning & Scattergood - Analyst [30]

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Right, no, that's helpful. I just was curious, wanted to see, obviously, since you're going to have to make the fair value adjustments now, [yes], prepayments accelerate, but no, that's very helpful.

And then I guess lastly, you mentioned that you are seeing more activity in -- on the residential side as it pertains to construction in condos, I believe. And I was just wondering if you could elaborate a little more on what types of deals those are.

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Rob Shuster, Independent Bank Corporation - EVP & CFO [31]

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Well, they range from just non-jumbo salable loans, so a fair amount of activity there, to some level of jumbo loans. But just to give you some idea on the numbers, we did about $30 million or so of what we call construction to permanent closings in the first quarter in portfolio, and then we did about another $3 million or $4 million of salable construction to permanent loans.

So probably in total, about $35 million or so of the $158 million we originated were construction loans. The balance would be largely -- well, non-construction type of loans. And then -- and I already had mention this -- the other thing we're seeing a little bit more of an increase in would be jumbo loan activity because of some of the markets we moved into.

And the condos are -- often times they start out as a non-salable, but once there is enough construction in the condo project that it could be -- that the developer moves the management of the homeowner's association to the actual owners, then those loans become salable. So typically it's sort of at the start of a new condo project that you would have what we call non-warrantable condos. Eventually again those become salable.

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Scott Beury, Boenning & Scattergood - Analyst [32]

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Okay, no, thank you. That's helpful. That's all I have.

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Operator [33]

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This concludes our question-and-answer session. I would like to turn the conference back over to President and CEO, Brad Kessel, for closing remarks.

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Brad Kessel, Independent Bank Corporation - President & CEO [34]

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Very good. I would like to thank each of you for your interest in Independent Bank Corporation and for joining us on today's call. And we wish everyone a great day.

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Operator [35]

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