Independent Bank Corporation (IBCP) Q4 2019 Earnings Report, Transcript and Summary

Good day and welcome to the Independent Bank Corporation's Fourth Quarter 2019 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Brad Kessel, President and CEO. Please go ahead.

Good morning. Thank you for joining Independent Bank Corporation's conference call and webcast to discuss the Company's 2019 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 retiring Chief Financial Officer. Also joining is Steve Erickson, Executive Vice President and Incoming Chief Financial Officer. Before we begin today's call, it is my responsibility to direct you to the important information on Page 2, the cautionary note regarding 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, independentbank.com. The agenda for today's call will include prepared remarks followed by a question-and-answer session and then closing remarks. Before we being reviewing our financial results, as previously announced, Steve Erickson is the Incoming Chief Financial Officer for IBC, following Rob's retirement on January 31, 2020. As this is Rob's last earnings call, I want to take a moment and thank Rob for his service to IBC over the last 25 years. His contributions to the organization have been instrumental to our success, and I want to wish Rob well as he embarks on his well deserved retirement. Rob, do you have any comments that you'd like to make before we begin today's section?

Yes. First, I would like to thank the Board of Directors, the executive management team, and all of my fellow associate that Independent Bank Corporation for their support. Being the CFO of IBCP has truly been a labor of love for me. In particular, I like to thank James Twarozynski, our Controller; and the entire accounting team; Dean Morris, our Head of Finance and his team, and Amy Anderson, our Head of Secondary Marketing and her team. Their hard work and professionalism overall these years is very much appreciated. There are countless external business associates who have made my job better and who have been of great assistance over the years, and I wish that I could recognize them all; however, two in particular, Mike Wooldridge and Kim Baber from our outside law firm Varnum have been with me nearly every step of the way during my journey at IBCP. Finally, since this is an earnings conference call, I think our analysts, our investment bankers, and our shareholders for their support. I would like to recognize some institutional investors who I have known in some cases for nearly 30 years and who have taught me so much. First, Rich Lashley and John Palmer from PL Capital who I have known since their days at KPMG; next, Joe Hall and Terry Maltese from Maltese Capital Management who I have known since my days back to Mutual Savings Bank. And finally, Joe Steven from Steven Capital Advisors who I have known for a very long time, and who taught me how much time it takes the Sun to set once it touches the horizon. Steve, I wish you much success, and Brad, I appreciate the opportunity to make a few remarks and my special thanks to you for all of your support, but especially for your friendship.

Thank you, Rob, and best wishes to you and Diane. At a high level, I am very pleased with our fourth quarter and full year 2019 results. For all of 2019, we continue execute on our operating plan, delivering strong growth in earnings, growth in loans, while maintain excellent asset quality, growth in core deposits and effectively managing our capital. Our fourth quarter growth in net income in earnings per share was fueled by an increase in net gains and mortgage loans and a credit loan loss provision, primarily as a result of net recoveries and previously charged off loans. On the balance side, growth in our mortgage loan portfolio more than offset the higher than usual payoffs we experienced in our commercial loan portfolio. To yield net overall growth for the 23rd consecutive quarter, mortgage loan origination surpassed $1 billion in production for only the second time in our company's history. Turning to Slide 5 of our presentation with a little more detail on the core, we are reporting fourth quarter 2019 net income of $13.9 million, or $0.61 per diluted share versus net income of $9.9 million or $0.41 per diluted share in the prior year period. This represents year-over-year increases in net income and diluted earnings per share of 39.7% and 48.8%, respectively. Impacting our fourth quarter results for both 2019 and 2018 are the changes in the fair value due to price of our capitalized mortgage loan servicing rights. For the three months ended December 31, 2019, an increase in the fair value of our capitalized mortgage loan servicing rights due to price increased non-interesting income by approximately $600,000 or $0.02 per diluted share after-tax. This compares to a $2.4 billion decrease in fair value due to price, or $0.08 per diluted share after-tax for the three months ended December 31, 2018. Also positively impacting the fourth quarter 2019 was a reduction of non-interest expense of approximately $400,000, or $0.01 per diluted share after-tax related to the Company's use of its FDIC Small Bank Assessment Credit. The Company does not have any assessment credit remaining to offset 2020 expense. For the fourth quarter of 2019, our return on average assets and return on average equity were 1.56% and 15.92%, respectively. These ratios decrease to 1.47% and 14.97% respectively, when excluding the after-tax impact of the MSR change and the assessment credit. For 2019, the Company reported net income of $46.4 million or $2 per diluted share, compared to net income of $39.8 million or $1.68 per diluted share in the prior year period. This represents an increase of $6.6 million or 16.6% in net income and a $0.32 or 19% increase in diluted earnings per share. Our return on average assets and return on average equity for the year ended December 31, 2019 improved to 1.35% and 13.63% respectively. We are optimistic about our future and recently announced an 11% increase in our quarterly common stock cash dividend to $0.20 per share, to be paid on February 14th, 2020. This annualized dividend rate is equal to a 40% payout on our 2019 earnings, and a dividend yield of approximately 3.6%. Slide 7 of our presentation provides a good view of our footprint. You will note that we are opening a new loan production office in Toledo, Ohio in Q1 2020. We are very pleased to be able to attract and experience a high-caliber residential mortgage lending team 2019 in this market. Turning to Slide 8, Michigan business conditions continued to be generally favorable with lower employment, some job growth, affordable housing, and continued good demand for commercial real estate. Our region portfolios are shown on Page 9. Our two strongest growth regions are the West or Grand Rapids region up $69 million in loan balances and our Southeast Michigan region up $40 million in loan balances. The introduction of a reciprocal cash suite product has continued to generate significant deposit growth for our franchise while some of the regional declines in deposits reflect the migration of larger deposit customers into reciprocal deposits. 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 while working to effectively manage our overall cost of funds. Independent has $3.04 billion in total deposits, of which $2.43 billion or about 80% are non-maturity deposit accounts. When comparing fourth quarter 2019 to the same quarter one year ago, we increased total deposits by $204.3 million or 7.7%. This excludes broker deposits. Our total cost of funds decreased 10 basis points on a linked-quarter basis and is up 3 basis points, when comparing to the same quarter one year ago. Our success in growing deposits while managing the overall cost has been primarily through growth in our commercial deposits and the sale of the insured cash suite product to public fund entities. Details of our loan portfolio are found on Page 11. We continue to target a diversified loan mix with the largest portfolio being our commercial book of business. At December 31, 2019, our loan mix included 42% commercial, 39% mortgage, 16% installment and 3% held-for-sale. Total mortgage originations for the quarter were $302.5 million, reflecting a $27 million decrease from the third quarter's very strong $329.5 million and up from the fourth quarter one-year ago of $190.3 million. Portfolio mortgage loans increased by $28.9 million for the quarter, and we are out $56 million or 5.4% for the year for that category. The commercial portfolio declined by $22.3 million during the quarter but was up $22.2 million or 2% for all of 2019. The decline in balances during the fourth quarter was primarily due to $16 million in pay-outs and our pay-downs of watch credits. For the year, we booked new commitments of $326 million with new outstandings of $265 million. At year end, our pipeline was stable. Consumer installment loans declined by $4 million during the quarter, due primarily to seasonal factors, as these loans are sourced primarily through our indirect lending line of business, which targets Michigan Marine, Power Sports and RV dealers. For the year, our consumer installment portfolio increased by $64.3 million or 16%. Total loans outstanding now aggregate to $2.8 billion, including $69.8 million of loans held-for-sale. Excluding loans held-for-sale, our loan portfolio grew $2.6 million in the fourth quarter, bringing total loan growth for 2019 to $142.5 million or 5.5%. Excluding portfolio loan sales and securitizations of $76.4 million, total loan growth for all of 2019 would have been $218.9 million or 8.5%. In terms of capital management, earning assets are up 6% year-to-date reflecting all organic growth. Our capital levels continue to be strong with tangible common equity, the tangible assets of 8.96% at December 31, 2019, which represents an increase of 25 basis points from September 30, 2019. This level is near to midpoint of our targeted TCE range of 8.5% to 9.5%. We paid a quarterly cash dividend of $0.18 per share at November 15, 2019. There were no share repurchases during the fourth quarter, and during 2019, the Company completed the repurchase of 1,204,688 shares at a weighted-average purchase price of $21.82 per share. In addition, we've recently announced a 2020 share repurchase plan for up to 1,120,000 shares or approximately 5% of our current outstanding shares. At this time, I'd like to turn the presentation over to Steve to share a few comments on our financials, credit quality, CECL and our outlook for 2014.

Thanks, Brad, and good morning everyone. I'm starting on Page 13 of our presentation. Fourth quarter 2019 net interest income declined by approximately $160,000 or 0.5% compared to the third quarter of 2019, due primarily to a decline in our net interest margin. The decline in margin was partially offset by a $35.7 million increase in average earning assets. Our tax equivalent net interest margin was 3.7% during the fourth quarter of 2019, which is down 6 basis points from the third quarter of 2019 and down 23 basis points from the year ago quarter. Average interest earning assets were $3.32 billion in the fourth quarter of 2019, compared to $3.29 billion in the third quarter 2019 and $3.12 billion in the year ago quarter. On Page 14, we see a more detailed analysis of the linked quarter decline in net interest income. There's a lot of data on the slide but to summarize a couple of key points. The linked quarter tax equivalent yield on loans decline 14 basis points and the tax equivalent yield on investments declined 11 basis points, leading to a decrease in our yield on average earning assets of 16 basis points to 4.44%. This primarily reflects lower market interest rates, particularly short-term rates. Partially offsetting the decline in yields, our average cost of funds decreased by 10 basis points to 0.74% in the fourth quarter, we will comment more specifically on our outlook for the net interest margin and net interest income for 2020 later in the presentation. Moving on to Page 15, non-interest income totaled $15.6 million in the fourth quarter of 2019 as compared to $9 million in the year ago quarter and $12.3 million in the third quarter of 2019. The increase was driven primarily by mortgage banking related activity, namely changes in net gain on mortgage loans and mortgage loan servicing income caused most of the quarterly comparative year-over-year variability in non-interest income. Fourth quarter 2019, net gains on mortgage loans increased to $6.4 million compared to $2 million in the fourth quarter of 2018. The increase in these gains was due to increases in mortgage loan sales volume, the mortgage loan pipeline and our profit margin. Mortgage loan application volume is very strong in the fourth quarter. We do expect to see a normal seasonal will slow down in the first quarter of 2020. Brad already discussed the changes in the fair value due to price of capitalized mortgage loan servicing rights. Our capitalized mortgage loan servicing rights assets of $19.2 million at December 31, 2019, represented a value just 74 basis points on our $2.58 billion of mortgage loan servicing. As detailed on Page 16, our non-interest expense totaled $29.3 million in the fourth quarter of 2019, as compared to $26.8 million in the year ago quarter and $27.8 million in the third quarter of 2019. Actual fourth quarter non-interest expenses were above the high-end of our projected range of $27 million to $27.5 million, due primarily to an increase in performance based compensation driven by the Company's financial performance in the fourth quarter. We'll have more comments on our outlook for non-interest expenses later in the presentation. Investment security is available for sale increased to $78.7 million during the fourth quarter of 2019. Page 17 provides an overview of our investments at December 31, 2019. Approximately 28% of the portfolio is variable rate and much of the fixed rate portion of the portfolio is in maturities of average lives of 5 years or less. The estimated average duration of the portfolio is about 2.64 years with a weighted average tax equivalent yield of 2.84%, which is down 16 basis points from September 30 of 2019. Page 18 provides data on non-performing loans, other real estate non-performing assets and early stage delinquencies. Total non-performing assets were $11.4 million or 0.32% of total assets at December 31 of 2019. Non-performing loans increased by $2.9 million during the fourth quarter of 2019, driven primarily by the residential mortgage loan portfolio. At December 31, 2019, 30 to 89-day commercial loan delinquencies were 0.02% and mortgage and consumer loan delinquencies were 0.45%. Moving on to Page 19, we recorded a credit provision for loan losses of $221,000 and an expense of $591,000 in the fourth quarters of 2019 and 2018, respectively. In addition, we recorded net loan recoveries of $221,000 and loan net charge-offs of $104,000 in the fourth quarters of 2019 and 2018, respectively. The allowance for loan losses totaled $26.1 million or 0.96% of portfolio loans at December 31, 2019. Page 20 provides some additional asset quality data including information on new loan defaults and unclassified assets. New loan defaults were only $7.9 million during 2019. Page 21 provides information on our TDR portfolio that totaled $50.7 million at December 31, 2019, an increase $0.5 during the fourth quarter. This portfolio continues to perform very well with 93.8% of these loans performing and 92.2% of these loans being current at December 31, 2019. Page 22 provides a detailed timetable for our implementation of the CECL accounting standard. We will discuss our current CECL estimate shortly in the 2020 initial outlook slide on Page 24. Page 23 is our final update for our 2019 outlook to see how actual performance during the year compared to the original outlook that we provided back in January of 2019. Our initial loan growth outlook estimated loan growth into 8% to 9% range. We achieved actual annualized loan growth of 0.4% and 5.5% for the fourth quarter and full year of 2019, respectively. If you recall from Brad's earlier comments, we sold and/or securitized $76.4 million in portfolio mortgage loans during 2019. The portfolio mortgage loan sales and securitizations were done for asset liability management purposes including balancing the mix of our overall loan portfolio. Without those transactions, loan growth would have been 8.5%. Our original forecasted growth rate of 10% to 11% for 2019 of net interest income was based on a forecast that included a single 25 basis point federal funds rate increase in June of last year, instead the Federal Reserve cut their target rate by 75 basis points in 2019. In our Q2 update, we've brought our expected range down to 8% to 9%. It's under those changing conditions that fourth quarter 2019 and full year of 2019 actual net interest income increased 0.1% and 8.2% from comparable respective periods in 2018. As for loan loss provision, we expect a generally stable asset quality metrics during 2019, so our outlook suggested that 20 basis points of average total portfolio loans would not be unreasonable for the year. During 2019, our actual provision was $824,000, well under the expected 20 basis points. As we experienced net loan recoveries for the year and asset quality remained healthy and stable. We will provide the 2020 outlook under CECL in a few moments. Moving onto non-interest income, our actual total for 2019 was $47.7 million which is at the high-end of our initial outlook. This is driven primarily by net gains on mortgage loans. It's worth noting that included in our non-interest income for 2019 were $6.4 million of reductions to the fair value of our capitalized mortgage servicing rights, due to price. With respect to non-interest expense, we ended 2019 at $111.7 million in total, which was above the high-end of our 2019 outlook of just under $109 million. While we remain very focused on managing expenses, our strong performance for the year increased our performance-based compensation expense relative to the initial forecast. Finally, our effective income tax rate was in line with our 2019 outlook. Turning to Page 24, this will summarize our initial outlook for 2020. The first section is loan growth. We anticipate loan growth in a mid-single digit range and are targeting a full year growth rate of approximately 7% to 8%. We expect to see growth across all three of our loan portfolios and expect most of the growth to occur during the last three quarters of year due to a seasonally slower first quarter. This outlook assumes a stable Michigan economy for 2020. Next is net interest income where we are targeting a full year 2020 increase of approximately 1% to 2% over 2019. This is driven by a net interest margin that is generally stable relative for fourth quarter net interest margin of 3.7%, but is lower than the full year of 2019 NIM. This outlook assumes no changes in the target federal funds rate in 2020 as well as a slight increase in the long-term rates relative to year-end 2019 levels. For provision, our outlook is based on the new CECL standard. It's a very difficult area to forecast as provision levels under CECL will be particularly sensitive to loan growth and mix, projected economic conditions, watch credit levels and loan default volumes. As we continue to refine our CECL modeling and related assumptions, the estimated range of our initial CECL adjustment was changed from when we first disclosed an estimate in the second quarter 2019's 10-Q. We now estimate our initial CECL adjustment effective 01/01/2020 to be approximately $7 million to $8 million. This estimate is still subject to certain final review procedures that will be completed in the first quarter of 2020. After the initial adjustment, we believe that a full-year 2020 provision for loan losses in the range of 15 basis points to 20 basis points of average total portfolio loans would not be unreasonable. Related to non-interest income, we estimate a quarterly range of $11 million to $13.5 million. We expect mortgage loan origination volumes to decline by approximately 15% due to lower refinance activity. We also expect that we will not experience a comparable level of fair value write-downs on our capitalized mortgage servicing asset due to price in 2020. Our outlook for non-interest expense is a quarterly range of approximately $27.5 million to $28.5 million. We expect compensation and employee benefits to be slightly lower in 2020 compared to 2019 due to lower incentive compensation expense. Our outlook for income taxes remains the same in 2020 as it was for 2019 at an effective rate of approximately 20%, assuming that statutory federal corporate income tax rate does not change during 2020. And lastly, we believe that share repurchases will be just above the midpoint of our authorization of approximately 5% of outstanding shares. That concludes my remarks for today and I will turn the call back over to Brad.

Thanks, Steve. 2019 was another very successful year for us as we had solid organic growth in both loans and deposits. This growth enabled us to improve our operating leverage. We exceeded our Company's targets of 1.3% return on assets and 13% return on equity. We pride ourselves on investing in our communities and providing exceptional customer service. During 2019 we committed over $1.7 billion in financing in our markets. We invested nearly $750,000 in sponsorships and donations, and our associates volunteered nearly 20,000 hours of time. Our customer base is growing, as is our brand. During 2019, we were recognized by Forbes for the second consecutive year as having the highest customer satisfaction for banks in Michigan. As we move forward into 2020, our plan is a continuation of those initiatives we have shared in the past. They are shown on Slide 25 of our deck. We believe the successful execution on these initiatives will continue to drive strong returns. As a community bank at the center of all our strategy is staying focused on serving our customers and investing in our markets and in our people. Our vision for the future is clear, 2020 actually. At Independent Bank, we know that our customers want to be independent with personalized, convenient and safe financial solutions from someone they can trust. Picking a financial partner can feel overwhelming when there are so many choices, yet we understand our customers' time is valuable. Banking just shouldn't be that hard. Here's how we simplify the experience. First, we collaborate with each customer defining their needs and warrants for the future. Next, we customize a plan that meets their goals. Then we empower each of them to be independent. At this point in time, we'd like to open up the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brendan Nosal with Piper Sandler.

Just want to start off on the net interest margin here. I appreciate the guide for being flat with the fourth quarter throughout most of the year. Just kind of curious as to the puts and takes that would allow you to hold the margin flat, I mean I'd imagine if the Fed does not cut rates further, that's certainly one of the things that could help out, but I'm curious what else underlies that expectation?

Well, this is Brad. I guess, first off for the fourth quarter we were at 3.7%. As we look into 2020, we've got some pretty respectable loan growth expectations there. And -- but I think we're -- maybe some of the lever for the Bank is still the opportunity on the cost of fund side. And over the years, we have structured the funding side with a lot of detailed segmentation of our customer base and really looking at the customers' usage of the bank services, the balances they carry and so on. So, I think prospectively one of the levers is on the funding side. Thereafter, we're going to continue to push on the production side, but not at the sacrifice of credit quality. Steve, I don't know if you have anything to add there.

Yes, the price and structure on the asset side are going to remain important to us and we're not going to get to credit quality. We're not going to change what our targeted structure of price range is on the asset side.

All right, great. That's helpful. And then if we can sneak in another one in there. Moving on to the revision, the outlook for 15 basis points to 20 basis points that's obviously a big step up from this year. Of course in 2019 you had nice net recoveries. I'm just curious how much of that higher provisioning level is driven by CECL. So I guess, kind of, what would you think it would be absent the new accounting guidance?

Absent CECL, it would be basically flat. If you look at where our ALLL is going into this transition into CECL, we're at 96 basis points of loans. CECL with the adjustment will get us up. Let's call it, approximately 1.25% of loans. So that provision guidance going forward allows for additional loan growth at and around that new CECL expected ALLL rate as well as allowing for some level of charge-offs.

Okay, got it. So basically it just kind of allows for you to hold the reserve at the new post CECL level?

That is correct. We don't anticipate 2020 having near the same level of recoveries as we've seen in the last couple of years. So we're allowing for both in that number.

No, we have had three consecutive years in net recoveries. So, it'd be nice to…

Understand that. Yes, that would be good.

All right, fantastic. Well thank you for taking the questions. And Rob, congratulations and best of luck.

Thank you.

Our next question comes from Russell Gunther with D.A. Davidson.

Thanks so much for all the detail on the loan growth outlook like. You've had 7% to 8%. I hear that the expectation is for contribution across your lending verticals. I would just be curious if there is -- I thought that that would be pretty evenly spread, if one particular vertical might have better strength than another. And then from a geographic perspective submarkets within the Michigan footprint that might be or continue to be bigger drivers of growth?

Right, right. Yes. So, Russell, that's a good question. Again, I think we believe that we are positioned to get the balanced growth in all three. One of the intentions of our Company in committing resources to the multiple categories is you just don't know. Well, one may be stronger at one time. Then another portfolio may be hitting a little stronger. And we saw evidence of that here in Q4 with the mortgage originations being very, very strong. But I hope that it would be coming out of all three. I think on the commercial front, when I look at the number of origination staff that we have starting the year versus where we started the year a year ago, we are up. We've been I think solidly moved forward in terms of adding talent to our team. And then there obviously continues to be disruption in our marketplace. So I think it's the addition of staff and the disruption in the marketplace that creates the opportunity for us on the commercial side. On the mortgage side, I am pleased to report and knock on wood here, we had a very little turnover in this team now for an extended period of time. And actually while we're down a little bit in the pipeline here at year-end versus the third quarter, we are better than or higher than we were a year ago at this time. And so I think we're approaching 2020 -- even though the Mortgage Bankers Association believes that overall mortgage volumes should be down principally because of lower refinances, I'm still very optimistic on the mortgage side. And then as we move over to the consumer side that really comes out of our branch network and I'm so pleased with the development of that team, the stability of that team and they continue to, I think, grow in their efforts to originate consumer installment loans and then of course the indirect, which has been the horse for us for multiple years. It's the same small group of team that are out knocking on our dealers and getting sort of first look at the best paper. And I applauded them this morning on an all-employee call as I said what are records meant for are they are meant to be broken and this team continues to break their annual production volumes year after year. So that's sort of how we're looking at growth in 2020. And Steve, I don't know if you have anything to add there.

No, nothing to add there at all.

I appreciate that guys and the detailed response. Last question would be, and in consideration of the guidance you laid out on the non-interest expense side, how do you tie all this together and think about a core efficiency ratio for 2020 and how that fits into your kind of near and long-term targets for that guidepost?

So as far as the noninterest expense side and our growth of just under 1% for the year, we anticipate, based on the budget, a lower incentive compensation expense for next year. However, we do also have merit increases that went into effect toward the end of the year and the beginning of 2020, and so the two of those will rather offset each other to keep those expenses about flat at under just 1 percentage increase. If you look at the efficiency ratio that is something that we intend to keep focusing on expenses, we intend to keep downward pressure on those expenses. And so that being said, our plan and our target is to keep those going down toward our long-range target of 60% in the next few years. As far as specific strategies, it's really going to be across the board, whether it'd be large contracts, management of head count, that type of thing. I don't know Brad if you have other questions….

Yes, I think that covers. I think one thing Steve is our deck on Slide 16 we have a nice trend line that shows year-over-year continued improvement in the efficiency ratio. That said, we still feel like it's higher than we would like it and there is a continued emphasis on dropping it. I think our accounting finance area recently shared that probably a 1% drop there is about a $1.7 million reduction in cost is what's needed. So that's our goal is to keep whittling away at that.

I think -- and sorry to tag team back and forth between Brad and myself, if you look at that trend, that downward trend of the efficiency ratio, our associates here, the staff here, has done a fabulous job of doing much more with less and we anticipate that we will continue to do that. The staff here really responds well to the challenge of continuing to bring that ratio down.

Our next question comes from Kevin Swanson with Hovde Group.

Just a follow-up on provisioning question. With ex-CECL provisioning relatively flat, it sounds like there is no real credit concerns on the horizon. But just interested on your perspective, if there is any areas you see heating up or areas that are kind of shying away from?

So, I am very pleased with our Company's -- where we're at today with overall asset quality. During '19 we did have through the third quarter some elevation in the watch credits. I think we are up at 7.2% of their commercial book and then here at fourth quarter, we were able to bring that down I think 6.7%. And I would just say that as we look through our top 50 relationships and as our team meets on a quarterly basis, looking at the entire portfolio there are not any one segment that necessarily stands out. We don't have tremendous concentrations to begin with that that's intentional. So I feel very, very pleased with where we're at. At year-end, we had a slight uptick in the retail past dues and I think it was -- there is one loan that is $1.1 million where there was a problem with the incoming ACH, not on our own, but of the sending banks and it and so that came current right after year-end. So I feel really good. I think the challenge has been, and we referenced this a little bit earlier, over the last x number of years, we've had this very strong stream of recoveries in both the commercial portfolio and retail portfolio and, hey, I think we're still going to have some recoveries. I think they'll be lumpy but we just -- we're not expecting them to be necessarily at the same level. Steve?

As far as credit trends are concerned, I mean, we don't see anything in any particular area or geography that leads us to think that there is any kind of systemic or widespread issue going on. Any of the items we talk about are or have just been one-off kind of situational items. So in our book, we don't see any danger there at this point.

Okay. Thanks. And then, adding the production office in Toledo. Is that kind of the most likely form of footprint expansion? And maybe just kind of comment on how M&A plays into the thought process there?

Yes. So, historically and prospectively, our growth in the market is just going to be talent driven. Several years back, we opened a number of LPOs including our entrance into Ohio, the Akron market and the Columbus market, and now here with this latest one in Toledo. And so, it was following up on the positive image and -- that the Company has in the marketplace with our mortgage, particularly in this case the mortgage banking side, we're looking at where can we find talent. These recruiting efforts don't happen overnight. They are over a period of time. What I like about this, obviously, it sort of connects the dots a little bit. With the other two Ohio locations, gets a little closer back to the core deposit franchise here in Michigan. And I am hopeful that at some point we can start converting some of these LPOs into full-service locations at a certain point.

Great, thanks. And then maybe just one final one, I appreciate the updated guidance for 2020. Maybe if we are on the call a year from now and you guys have a better than expected year, are there certain areas that you think would stand out leading to better results or are there certain areas that you're particularly excited about?

I think that -- that's a great question. And I think 2020 is going to have things that we expect to happen and things that we don't expect. And as I tell our team ultimately it's about how we respond to those unexpected challenges. And -- so I think we have a solid game plan for 2020. We've also put together a refresh of our five-year forecast. As we mentioned earlier in the call, I think we believe the efficiency ratio is an area that we need to continue to work on. So I'm hopeful that we can continue to chip away on the expense side. And I am cautiously optimistic that we can continue to have the exceptional credit levels and then maybe resulting lower provision levels. But -- I mean it's just been so benign here for multiple years, it's hard to say. So, I don't know if that doesn't tip my hand too much or maybe too much, but Steve anything to add there?

I'm not adding any of that as far as 2020.

Our next question comes from Scott Beury with Boenning & Scattergood.

So just kind of tying a couple of pieces of your guidance here together, with 7% loan growth and kind of mid single digit deposit growth, I'm just curious does that imply that overall balance sheet growth is going to be a little bit slower than the loan portfolio, i.e. like do you see remixing out of securities into loans being kind of a part of that forecast?

Yes, I think that's fair to say that we'll see some reduction. On the security side, we are actually up quite a bit at year-end. So, that's fair to say.

Yes. And I guess just to follow up on that. Do you have any sort of target range, whether it'd be in dollar figures or as a percent of assets trying to where you like the securities book to be and kind of how low you'd be comfortable with?

From a comfortable perspective, we generally look at kind of that 10% to 12% range as being where we want to be at the lowest.

So 10% to 12% of securities...

Of the, that total.

The total assets.

Correct.

Yes. There is a lot of metrics that we watch and monitor there in terms of liquidity. And I think that's a lot of what we're talking about here, but we consistently over the last few years, let's say, hey, we get to about 10% or 12% that's about our comfort level.

That's very helpful. And most of my other questions have been answered, but I guess just one follow-up. As it pertains to capital management and potential M&A opportunities, could you just give a refresher on kind of what your geographic target area would be for M&A?

Yes.

As well as maybe like size of target.

Sure. When we talk about M&A, I think it's sort of put a little further down the capital usage priority list. Again, we -- organic growth would be the first priority. But an acquisition would assist us in getting improved scale of course. And so when we think about target metrics, I'd say markets -- first would be our home market here in Michigan, and I'd say generally filling in within the holes of the existing footprint. And I'd say there is a preference probably for some of the stronger growth markets, albeit then also comes through oftentimes and more competitive pricing, but -- so that's sort of the -- on a markets standpoint. And then, I think there is a size where maybe because in acquisition involves a lot of resources and time that maybe has to be a certain size. And I think we felt like the Traverse City acquisition that we closed on 2018, a little over $300 million that was a nice size for us. I'd say sort of that size and we could go larger. It could be up to that $750 million, maybe a little bit more, but that's probably the sweet spot. Now having said that I -- hey, there's always exceptions, but that's sort of the target range.

Excellent, that's very helpful. And then just as we've seen kind of across the industry, they are starting to become a trend of more and more MOE type transactions. I guess just high level, what are your thoughts on potential opportunity of that nature and just kind of any high-level views on that?

Well, I think that MOEs can make a lot of sense and there is a lot of considerations and the financial metrics need to be better. So, that would be a starter and there's just some combinations when you just drill down on the financials, they don't make sense. But if it does make sense then it's about maybe culture and how are the cultures going to blend. And I agree, we have seen in recent history some where the cultures -- where the metrics made sense and the cultures didn't mesh and there was a lot of unexpected change. We've also seen MOEs where metrics made sense, the cultures meshed and they look really good. So from our standpoint, we would consider that in the same context that our Board and they do this on a regular basis. The entire upstream, downstream, i.e. MOE review, opportunity review, so that's sort of high level on MOEs side. Steve or Rob, I don't know if you guys have anything to add there.

No.

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

We 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.

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