Independent Bank Corp (Michigan) (IBCP) 2002 Q1 法說會逐字稿

At the request of the company, we will open up the conference for questions and answers following the presentation. I will now turn the conference over to Charles Van Loan, President and CEO. Sir, the floor is yours.

van loan: Thank you. Welcome, everybody. Well, this is our second earnings conference call. We hope it will be better edited this time than last time, but we'll keep at it.

Anyhow, we were very pleased with first quarter. The 37 percent increase in earnings per share was very strong. We are at 21.3 to 21.4, which would be a new record for us for a full quarter. In general -- and this was good -- we did have some challenges. Our non-performing loans increased some, and most of that was in one loan at -- it was a hotel loan in the , Michigan area. It was secured by real estate with some strong guarantors, but we can take an additional -- we preserved that loan during the quarter.

Overall we think our prior quality remains strong, though we foresee challenges in that area in forward as well. The quarter is positive , so the income and margin. The income in particular -- a lot of that had to do with the mortgage originations that were at least significantly impacted by the strength of the fourth quarter of last year. We still had a strong pipeline. We have a reasonable pipeline at this point as well, but not as strong as we carried into the first quarter.

I guess probably on an overall basis, one of the challenges that we see in the forward is developing good asset growth on the loan side. It appears there are more people willing to make loans than people who want loans at the moment, but we are having some competitive pressures. And our discipline in pricing loans sometimes means that we do not do a loan even though some of our competitors will, at a rate that does not make sense for us.

With that, I'll turn it over to for a little more detail in numbers.

Thanks, Chuck, and good morning, everyone. I think Chuck covered some of the highlights so I'll make my remarks brief and then we'll have as much time as possible for questions.

Chuck mentioned we had record earnings for the quarter, of $7.1 million, or 59 cents per share. The primary drivers of that performance have been consistent with what's driven the growth earnings over the last several quarters, which are interest income gains and sales of real estate mortgage loans and some of the components of other non-interest income.

Taking a look at net interest income in the market, tax-equivalent, net interest income was up about $2 million to $2.5 million, or 14%, to $20.5 million in first quarter '02, compared to first quarter '01. And on a quarter basis, it was up by half a percent, from $20.4 million in the fourth quarter of '01.

Margins in the first quarter were up about 35 basis points in '02 versus '01, predominantly because of what they caught in profit, under about 135 basis points. And that was factored to some degree by buy and yield on interest-earning assets of about 100 basis points.

Pretty much, we're looking overall at a decline in interest rates that we saw during the course of 2001. On a (win) quarter basis our net interest margin was up about seven basis points.

Chuck already touched on, and I'm going to challenge, our total earning assets were pretty flat. The average total interest in earning assets were pretty flat from fourth quarter on. The first quarter '02, a decline in average loans of about $24 million, were largely offset by an increase in an up in securities. So again my challenge point over this is leveled out.

And I think Chuck is exactly right that I've disciplined the pricing, for example, acquiring for us on very commercial loans and things -- I call them equity loans -- maybe result in us not getting certain transactions at other banks that didn't have that discipline pricing -- not paying. But we think it's our best to achieve 20% on at, you know, 7.5% on commercial loans when we make up the funding costs day in and day out on operating expenses.

Moving on to non-interest income. The securities -- the focus again has been net gains in both states. Loan fails and service charges on the are gains on real estate and loan fails. We'll have 1.8 million for the quarter, $147 million of loan sales that was up substantially from the first quarter of '01 when we had $67 million in loan sales, and just shy of $1 million in gain fund sales.

Here's a come-on beyond pipeline and loans out for sale, to kind of give you a measure of what the balance of the year will look like. At year-end 2001 the mortgage loan pipeline was about $142 million. At March 31, 2002, the mortgage loan pipeline was at $115 million, so the pipeline is down by $27 million. But still on a historic basis, our pipeline paper is relatively strong for us.

In terms of loan for sale, we dropped $77 million at year end 2001 to about $28 million at March 31, 2002. That $28 million figure is probably a more normal figure for us in terms of loan per sale.

(Inaudible) would probably indicate that the gains on loan sales will be well worth and where we were in the first quarter of 2002. We do have a core of moving in rather charges -- the seasonal off term that we would normally be seeing as we move into the swirling summer and purchase activity keeps up.

And then, in addition, we acquired the mortgage company called on March 15, which has 11 people and some support staff. And they did originally about $100 million of real estate mortgage loans in 2001. So we think that's going to be a great addition to our mortgage banking operations.

Just mentioning a couple other areas briefly in non-interest -- in other non-interest income. A surcharge on the positives continue to be strong and a total compared to about in the quarter '01.

They worked down a little bit on a lease quarter basis and that's partially due to having two less days in the first quarter. And then you do see some seasonality in the income in the fourth quarter that generally comes up because of how the seasons and simply more checks being written and perhaps more strain on the pocketbook for some people. So there's some on a comparative quarter basis. It was up dramatically.

The other area that was up by a bit was revenue from our title and insurance agency, which totaled $623,000 versus about $300,000 in the first quarter of 2001 and $517,000 on a quarter basis.

So those are kind of the two areas of other non-interest income that we're driving at increase. On the expense side, expense was (up) for the first quarter of '02 compared to '01, which was about 11%. Most of that in the salaries, the performance compensation and other compensation benefit areas. And perhaps we are turning to the issues. The non-performing loans were up from 55 basis points, or about $9 million, at 12/31/01, to about $12.5 million or .92% at March 31, 2002.

Most of that increase in the commercial loan category, and Chuck mentioned, was predominantly weighted to one loan, which was a hotel loan in , Michigan. Two credits combined about 50% of the total amount in the commercial area. One is -- I just referred to the $2.1 million hotel property in . And then the other -- I think we mentioned in last quarter's conference call, is the $1.3 million commercial office building just outside of Lansing in , Michigan.

And just yesterday we had been going through a judicial , having received a consent judgment on that credit. And just yesterday, we received a net particular credit of just in excess of a $200,000 payment from the principals on that loan, which cured in its entirety the delinquency, including payment of all sums due on principal interest. A property tax on that one due and all of our legal costs, so that is buying secured.

We do have, at least for the time being, until we see some more , continue to get that loan and non-accrual, but I think that demonstrated is once we received the consent judgment, we had to be able to procure that particular credit.

The hotel property in at $2.1 million is . The $600,000 on that credit. The property was originally appraised at $2.7 million in '99 and was actually billed for $3.1 million. But if you look at the current levels of occupancy and the average room rate, we do think that it is prudent to have somewhat .

Again we do feel confident that we have some on that product and some level of confidence that we'll be able to work through that through the course of the balance of 2002.

And the balance of the increase is again a small increase in mortgages and consumer and I think we're just seeing a little lift in some of the delinquency levels. They are the economy. It's remained at some thought, but perhaps we don't see the significant on that front in terms of problem credits or charge-offs. And that level of charge-offs was pretty much unchanged at eight basis points. It actually doubled a little bit on a dollar level in First Quarter of 2002 compared to First Quarter of 2001.

And with that, I'll ask Chuck again if he has any little comments. And we'll open it up for questions then.

van loan: I don't have any other comments, I guess.

Thank you, gentlemen. The question-and-answer session will begin now. If you're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press one followed by four on your touch-tone phones at this time.

Should you wish to withdraw your question, press one followed by a three. Please stand by for your first question.

Our first question comes from . Sir, please ask the question.

Actually, this is Steve Covington. Congratulations on a great quarter. Just a quick question. A couple quick questions.

First, regarding the hotel loan that you gave us a lot of detail on. We appreciate that. Do you anticipate having to proceed with foreclosure on that? Or do you think you'll be able to just work through it with borrowers?

van loan: We do have some strong financial recipes. And while we are moving toward foreclosure, they have asked for some leeway on that. And we told them that we'll give them an extra week before we go to the sheriff's sale. We think they're fairly collectible and evidently they do, too. So overall our guess is we think we're in pretty good shape on that. So certainly the $600,000 is warranted.

OK. And I guess secondly, I think you touched a little bit on this but as far as the economy goes and your markets, while it remains up, do you get a feeling that it's at least autumn, that it's starting to pick up?

van loan: In the manufacturing sector I think that's true. Big government is still down-thumbed there. Revenues are down so they have higher increases in place in some areas at least. And that is having somewhat of an impact. Of our market -- the Lansing markets in Michigan State are strong. They also have a rather large government piece of that economy.

So I would consider it bottom but still moving very strongly up.

I would like to add just a little bit to that. The Grand Rapids market obviously has a big furniture component and that's still been fairly soft. We don't , you know, any commercial end of exposure to that industry but we do have people employed in the Grand Rapids area certainly, that are directly involved in the furniture manufacturing industry. They've gone through kind of a cycle earning 2001, and at least what we see publicly in the furniture side of the business as opposed to companies that have sales are so relatively weak in that sector. So some might take an impact in the Grand Rapids area, anyways.

van loan: All right, thank you. I think from an , larger businesses are likely to wait until third and fourth quarter to start any significant discretionary expenditures.

Thanks again, and congratulations.

van loan: Thank you.

Thank you. Our next question comes from . Sir, your line is live.

Thank you. (Inaudible)

van loan: Hi, John.

Hey, John.

(Inaudible) your purchasing corridor. It looks like it was pretty aggressive. What was the actual number ?

van loan: It was aggressive, but part of that related to closing off a plan that Mutual Savings Bank had. And as we were doing that there were 400,000 shares that we repurchased through our repurchase plan.

We repurchased a total of about of 240,000 shares in the quarter and of 74,000 net. We had a plan, basically termination there, and so there was need of and shares and balance were open market purchased. It was clearly a in March that the repurchased an additional 500,000 shares. We're up to just a little shy of 450,000 shares in our last 500,000 shares . And so we're up to about 550,000 shares now that were or repurchased.

And I think it's -- we haven't done it market quickly just because of the proximity to the quarter end in our earnings release, but we do intend probably to be back in the market by next week.

OK. And how high can stock prices go before it doesn't meet your return?

van loan: Actually, part of that depends on the borrowing costs. I tell you that but generally it's very high. We're $50 a share.

And if you look at it just purely on the basis of what we're, you know, financing it at now an unsecured holding company line of credit that we still have availability on when we're borrowing currently at 2.5%. When you look at it on that basis, with those kinds of numbers, it's a very high price. As Chuck said, it's extraordinarily high.

You kind of have to temper that with, you know, a primary attention divertings per share growth. It does dilute the bulk value per share. By that's our share. So that's not a but has moved higher and higher. That's something that in the back of your mind.

When we analyze it, we sort of launder the term "hawk the funds" as opposed to where we're at today with these lower short-term interest rates. Even on half dates we can buy at prices higher than what we're currently at. (Inaudible) the increased earnings per share .

OK, good. One more quick question. In terms of loan growth, have you seen any rise and during the quarter?

van loan: We're still seeing somewhat of a flat varied for . A lot of people, when they did their refinance, took out their loan-equity loan with the new financing. So there was a compression in that. We are seeing, frankly, we had -- most of the quarter we had a runoff on consumer loans which we largely attributed also to refinancing of mortgages people would pay off -- consumer debt and proceeds.

But now that has turned around and we're starting to see sudden growth in consumer .

(Inaudible) definitely to fixed relief loans. You know, some of the was because with the refinancing acts, it tends to be, I think, as you move into more a purchase market inducing more opportunities for , loans that we put in our portfolio. And also I think the addition of mortgage and mortgage welfare, they can have kind of a support from a parent company like us that has a number of portfolio loan filings -- something that we've also had the sales for that help us to grow in that area much more strongly .

Thanks. next quarter.

van loan: Thanks, .

Thank you, . As a reminder, if you do have a question or comment, please press one followed by four on your touch-tone phones.

Our next question comes from . Sir, your line is live.

Hello, guys.

van loan: Hi, Brad.

A couple of questions here. First in regards to reclassification. It sounds like the reclassification is linked to '91. And that's been out there for some time. I guess, you know, why we reclassified these now?

That's a good question, Brad. I'll take that. Historically and probably give you an awful lot of examples that usually do this. But historically what our company did is if, for example, on the record financial mortgage loans, we collected a fee of $600 in total and our origination costs weighed in at about $450. But we have historically done and that model of $150 and leave the $450 up in income was largely an interest and fees on loans.

And then we did $450 origination costs down in expenses and over the course of time and, you know, the methodology that, you know, our accounting firm did not have any concerns about. But as we moved into 2002, if we looked at, you know, an absolute kind of a narrow plateau past '91, what is exactly in that where we collected the $600 in fees and $450 of costs that you shouldn't defer an entire $600 in fees and $450 expense fee net or still deferred on balance sheet $150.

Bottom line basis is absolutely on the same number, but it was a more exacting way of approaching '91. And we just felt that it was should we move forward and implement that and then do the requalification. And so that's what it specifically relates to.

But we still think there's banks out there, as we look at their P&L statements. They're doing it the same way we have historically been doing it. But we do think the way we've now done it in the first quarter all through, and we restated it -- I'm sorry, reclassified prior periods. We think it's more impacting up close to '91 even though there's probably a host of different ways that it may be being done exact approach to it.

OK. Looking at non-interest expenses and specifically the salary line items, it looks like salaries for the first quarter were down about to $1 million from the fourth quarter. Can you explain that?

van Loan: Well, part of that, Brad, is the reclass -- the full amount of reclass for the fourth quarter was $1.882...

First quarter or ...

van loan: No, fourth quarter of 2001 for the reclass . Page seven of the 4-K and 8-K that we filed and we can get you The majority of that was gone into salaries. The majority of that. So what you really need to do -- we didn't break down the reclass, we showed you the reclass total of that interest expense at $16 million, line item six -- we put it down by line items so that's why you're seeing that item change. It would affect salaries, it would affect, I think, performance based and then supply expenses to a modest degree. That's where your primary origination costs are.

OK, appreciate that. Lastly here on net interest margin. Do you have a monthly breakdown for the first quarter of ?

van loan: Yes, we do. I don't have that here with me but I could get that.

Was the progression upward or downward or flat? I guess was ...

The progression was pretty stable throughout the quarter. I mean, we only changed by seven basis points when compared to fourth quarter. So there wasn't a lot of movement, which is pretty steady.

I think last quarter I had mentioned that in terms of where we were kind of looking at things, we say to that, most of our growth in dollars of net interest income was going to actually come from because we anticipated that the margin was going to be relatively stable versus our fourth quarter 2001 run rate.

And I think what we're seeing is that statement was correct because we're up about 500 basis points. So we did see growth in the margin but it was relatively stable and real bigger swings from month to month. It was fairly steady progression.

OK, appreciate it guys.

van loan: OK.

Thanks, .

Thank you, . Our next question comes from . Sir, please pose your question.

Hi, guys. (Inaudible) I was wondering, you guys made some comments in the opening there about -- which included I guess a future credit card expense, a way to put it. What are you guys seeing or believe the trend is here? You know, you talked about obviously things that credit and the other stuff, but looking out, what's your take here?

van loan: I guess, and this is feeling because you can't really predict that, but I think we probably are high right now. I'd like to see and expect to see some tightening down next quarter and I hope a little more movement down in the following quarters. That's barring surprise but right now we don't see anything.

We kind of go through categories, you know commercial. We really don't see these issues if we look at the portfolio of anything big coming out. And the ones that are in there we figure you've got , you've got two credits that comprise about half the total of the balance of the creditor who primarily in the 200 and 300 range. And we think in those

So we don't see anything kind of sifting up through the portfolio in that category, so we have a pretty good feeling on the commercial side. But consumer and mortgage you may see a little bit more creep-up error and, you know, you can kind of get to the end of the with consumers in terms of layoffs or, you know, any softening in household income, that type of thing.

Again, the work historically, the charge-off levels have been quite modest in some really in those portfolios. So I think I go back to Chuck's remarks that we're partly into that, so we're kind of seeing the high. We don't see anything coming through the, you know, the portfolios right now. And we are relatively confident that the net charge-offs are going to remain in good shape.

All right. Thanks, guys.

van loan: Thanks, .

Thank you, sir. Again, if you do have a question or comment, please press one followed by four on your touch-tone phones at this time.

If there are no further questions I will turn the conference back to Mr. Van Loan to conclude.

van loan: Thank you. We were people that said earlier 2002 will have its challenges. I think long growth -- it's the one we're most focused on at the moment. We're still very confident that we will meet our goals for the year and think that we have strategies in place to accomplish that. Anything else from you, Rob?

No.

van loan: I guess not, so thank you, ladies and gentlemen. And we'll talk to you next quarter, if not before.

Ladies and gentlemen, that concludes our conference for today. Thank you all for participating and have a nice day. All parties may disconnect at this time.