Good morning and welcome to the IBCP First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, that this event is being recorded. Now I'd like to turn the conference over to Mr. Brad Kessel, President and CEO. Please go ahead..

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..

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..

Thanks, Gavin. Let's turn to Slide 26 in the deck and which displays a high-level view of our key strategic initiatives. And what are the most significant is our digital transformation initiatives, much of which we completed during the second quarter hereof 2021 or will be completed with the second quarter hereof 2021.

As I reported this time last year, we signed a core data processing agreement with the 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, that's 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 through all channels aka 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 think they will be pleased. At this point, we would now like to open up the call for questions..

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

Hey, good morning, Brad. Good morning, Gavin.

How are you guys?.

Good morning, Brendan. Doing well, thank you..

Good. Thanks, Brendan..

Good. Just want 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 if any quick thoughts on kind of how those might shape up the competitive dynamics in your market? And then you know, where if anywhere can you see yourself adding talents to your team if the opportunity presents itself as a result of these deals?.

Well, yeah so that - the M&A in the Michigan markets is a reoccurring thing.

And, of course, this past Monday with Flagstar and New York Community Bank partnering, and then earlier in the year, of course, the Huntington and TCF, you know, not unique to Independent, but for the remaining banks in the marketplace, of course, that disruption does create opportunity, I think it creates opportunity to add customers, it's an opportunity to add talent.

And over the years, I think we have shown our ability to take advantage of the disruption in the marketplace. And I think you know you'll see us work to do the same thing going forward..

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 quarters and this quarter, there's that 16 bps point 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, we pull it out and the margin is 2.90%?.

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

So what happened is, we accelerated that in Q4 -.

Yes..

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?.

Yeah, I think so. It's all right. So there is a 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?.

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

All right, fantastic. Thanks for the help there..

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

Hey, good morning, guys..

Good morning, Russell..

Good morning..

I wanted to follow-up on your comments on loan growth, looks like reiterated expectations for that kind of 5% to 7% ex-PPP.

And, you know, prepared remarks suggests 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 you know fairly even contributions from the three verticals or how you're thinking about that kind of core non-PPP organic growth mix?.

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 across the Board, evenly.

As a company, we you know really are working to have the commercial book continue to be the largest book of business for us. And I think as the economy returns to a stable, more stable footing, we'll see more commercial demand.

What's been interesting on the mortgage front in a headwind is, of course, the lower rates has accelerated prepayment rates on the existing mortgage book. And what previously was in our mortgage book as a result of size-only were jumbo loans. And over the last few years, the GSEs have, of course, materially raised their conforming loan limit level.

So what we've experienced over the last few quarters is loans that were previously portfolio are now being sold into the secondary market. I think, you know, we'll probably still continue to see some of that, but it'll wane as re-fis you know, are reduced. We are seeing a very good demand for residential construction.

We're seeing very good demand for the RV in Marine areas of financing too. So, again, back to your original high level, I think our goal and we still think that loan growth should be in mid single-digits and across the Board..

I appreciate all the color there. Next question you know relates a bit. Appreciate your comments on the margin and the glide path that you provide in the deck, you know, a big chunk was the excess liquidity that weighed on the quarter.

And so you know could you give us a sense for when you think you might be able to get that to put to work? And so that piece of it that excess liquidity drags, when you would anticipate that to stop weighing on the margin?.

Yeah, good question. And so we view this is, we're putting it to work in terms of the investment portfolio versus letting it set overnight in cash. So although not a wide or a very high raw yield, that 1.70% is much better than 10 basis points.

So we do - we feel like to put it into work in an appropriate manner to that should deposits either exit or loans pick up to absorb it, we can quickly roll the mix into the either on the outflows or more preferably fund the loans. But you know, our deposits just continue to grow.

And so I just think that's common here and it gives you an indication of the amount of liquidity that's out there..

Thanks, Gavin. I appreciate that. Last question, guys is on you know the anticipated P&L impact from the system's conversion. So you know, something that's been in the works, as you mentioned, 16 months, exciting to see it unveiled.

Do you have any, you know, bigger picture projections around what this could mean for revenue you know growth or expense declines? Just how you're thinking about the impact..

So that's a great question and let's go to the expense side first. So on the expense side, part of the new contract was an agreement to capture contractual savings immediately even before conversion.

So really going back to a year ago at this time, you would have seen or did see a reduction in our overall data processing expense, and we carried that forward each quarter through last year. And you'll see that here into 2021. The second component of cost save.

And this is the one essentially to be garnered by just really doing the business operating more efficiently. And its processes are that were in place for a long, long time are no longer there. And we have new processes in place.

And it's very difficult at this point, we got an idea, we haven't necessarily shared it publicly, but we think there are opportunities to capture significant efficiencies just through leveraging the new technology, and you know, the account opening, as an example, the account opening - new account opening process, you know, we can do today in a fraction of the time and digitally what previously involved, you know, human beings taking a lot more time.

And that's just one way, you know, one example or account maintenances or and so on. So there prospectively will be material cost savings, and I can't quantify it, I'm not in a position to share that today. On the revenue side, also very difficult.

We do believe that one of our core objectives within the company, actually two, one is to make it easier for our associates to service with our clients. And the second is to make it easier for our clients to bank with us. And that make it easier to bank with us, we think will drive more revenue. And but it's very difficult to quantify.

So, Russell, I know you're looking for X percent on the revenue side and X percent on the cost side, but at this point just very difficult to put down on a spreadsheet. But I hope that gives you some insight into how we're looking at it..

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

You're welcome. Thank you..

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..

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.

Despite a very difficult operating environment, our team continues to adapt to the circumstances, leverage the opportunities to go the extra mile for our customers and our communities. Each team member in his or her own way continues to do their part toward our common goal of guiding our customers to be Independent.

Finally, I would like to thank each of you for your interest in Independent Bank Corporation and for joining us on today's call. Have a great day..

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