Good morning, and welcome to the Independent Bank Corporation Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to 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 second 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's my responsibility to direct you to the important information on page 2 regarding 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 www.independentbank.com. The agenda for today's call will include prepared remarks, followed by a question-and-answer session and then closing remarks. I am very pleased with our second quarter results. To start off, we were again awarded the Forbes' Best-in-State Bank in 2019 taking first place. Forbes partnered with market research firm Statista to survey more than 25,000 citizens throughout the United States. They were surveyed for their opinions and their current and previous banking relationships. Banks were rated on overall recommendations and satisfaction as well as five subcategories including; trust, terms and conditions, branch services, digital services and financial advice. Nationwide financial institutions were excluded from the final rankings. I know how hard each and every associate within our company works to serve our customers and it is great to have our team get the Best-in-State bank recognition. Moving on to our financial results. At a summary level, we had good growth in net interest income with only one basis point of margin compression. We have strong fee income primarily through gain on mortgage loan sales and our expenses were well controlled coming in on the low end of our guidance. Team continues to do an excellent job of managing asset quality, enabling us to record only a small…

Thanks Brad and good morning everyone. I am starting at page 13 of our presentation. Brad discussed the year-over-year increase in our net interest income during his remarks. So I will focus on our net interest margin. Our tax equivalent net interest margin was 3.87%, during the second quarter of 2019, which is down six basis points from the year ago period, but down just one basis point from the first quarter of 2019. I will have some more detailed comments on this topic in a moment. Average interest-earning assets were $3.19 billion in the second quarter of 2019 compared to $2.96 billion in the year ago quarter and $3.15 billion in the first quarter of 2019. Page 14 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. Overall, we felt that the net interest margin held up very well in the second quarter despite a rather challenging environment. The amount of average loans increased $77.8 million and average loans represented 84.6% of total earning assets in the second quarter of 2019 as compared to 83.2% in the first quarter of 2019. This change in mix helped push our average yield on earning assets up by three basis points. The average cost of funds was up four basis points to 0.86% in the second quarter of 2019 from 0.82% in the first quarter of 2019. We experienced a $7.7 million decline in average non-interest-bearing deposit balances in the second quarter of 2019. However, this compares to a $27 million decline in the first quarter of 2019. Finally, one more day in the second quarter of 2019 increased net interest income by $159,000 compared to the first quarter. We'll comment…

Thanks, Rob. We have listed our strategic initiatives on slide 25. During the first half of 2019, we made significant progress in each of these areas. We believe successful execution on these initiatives will continue to drive strong returns as community bank at the center of all our strategies is staying focused on serving our customers and investing in our markets and in our people. At this point, we'd now like to open up the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Brendan Nosal of Sandler O'Neil and Partners. Please go ahead.

Hey, good morning, everybody. How are you?

Great. Thank you.

Good. Just want to start-off here on the NII outlook. I definitely appreciate the clarity on guidance that the revision back to 8% to 9% in aggregate for the year is due to the outlook for a couple of fed cuts. Just hoping you can put a finer point on what each fed cut means for the NIM in terms of basis points as you sit here today.

As we sit here today the impact -- and again some of this would be dependent on timing. So what we have forecast is a 25 basis point cut in late July this coming -- or next week a cut in September and a cut in December. So the December cut really does not have that dramatic an impact. And over time when you get a full year impact it could be a bit greater. But in general over the course of the six months assuming those cuts we're looking at a downward move in the net interest margin cumulatively of about 10 basis points. And how that spreads out between the two quarters I'm not as certain on that. But that -- on an overall basis that's about what we're looking at.

Got it.

We hope to hold the line on loan pricing as much as we can and push hard on deposits to try and mitigate some of that.

Okay. Great. And then just to clarify that will be a kind of a point-to-point from 2Q 2019 levels through the full impact of those three cuts correct?

Yes. But again as I said the December cut you really -- that doesn't have that big of an impact. It's only for a part of a month during that 6-month period.

Understood. Okay. And then moving on to the funding side. I mean you guys held the line really nicely on overall deposit cost this quarter. Just curious as your thoughts on and how much you can push back on deposit pricing with these expected fed rate cuts?

Well, I think in the public funds arena, I think, we could move fairly quickly. And there are a number of accounts where we model them with a beta of 100%. In other words they're -- and they may not be under their terms linked to a particular driver rate, but the way we price them is pretty much linked to a driver rate. So with respect to those dollars I think we could get an immediate move if we get a fed rate cut. Now those dollars are not as great as what we would see with an immediate cut on the prime rate with commercial loans et cetera. So that's where I think we could push immediately. On the balance of deposits that are smaller and balanced there we've tried to hold the line as we've moved up. So I don't know that there is as much push on the other way on the way down. So that kind of gives you a little bit of a mix on the funding cost. The other area I do think though that over time we'll get an immediate impact would be the wholesale funding side of things. So broker deposit rate should come down and borrowing cost should come down. And I think all of that into account in that sort of forecast for the NIM. But again to the extent we could hold the line on loan pricing get a little bit better earning mix there and push on deposits. I'm optimistic. We can do a bit better.

All right, thanks for taking my questions.

[Operator Instructions] Our next question comes from Damon DelMonte of KBW. Please go ahead.

Hey, good morning, guys. How are you doing?

Hi, David, good thanks.

Great, quick question on the margin, just a quick follow-up, Rob what are you forecasting for accretable yield for the next couple of quarters?

I think it was about five basis points. I can get to that slide. Yeah about I think four to five basis points. Yeah, 5.1 basis points, I don't -- I mean that's going to drift down over time as that portfolio shrinks. Now to the extent you get more payoff activity it could accelerate it a bit. But I don't see a material change there.

Okay.

… at least in the third quarter.

Okay. And then kind of switching over to loan growth, good to see that the outlook remains positive there, could you talk a little bit about what's driving the installment loan growth? Is that -- was that more seasonal here in the second quarter and that carries into the third quarter, or is it just greater demand for those types of loans, whether it be Marine or Power Sport or RVs?

Well, Damon I think that the strong performance for us here in the second quarter is directly related to continued consumer optimism in the marketplace. And, a majority of that production for consumer growth came through our indirect lending desk, which focuses specifically on RV, Marine and Power Sport. And the production that we have had through six months, out of that area, is slightly over what it was a year ago. But very similar to what we saw in 2018. And we continue to have a high expectation for credit quality there. Probably we give a little on yield to accomplish that. But we work extremely hard with the dealer network to be the preferred provider, for that high credit quality source of financing. I would imagine that we'll see it still continue into the third quarter. And then typically fall off in the fourth quarter and then early 2020.

Got it, okay.

…Rob is there anything you want to add?

Nope.

Okay. That's helpful. And then, I guess, could you just give us some thoughts on M&A and kind of what you're seeing as opportunities across your footprint in Michigan and your appetite to participate in any possible deals?

Well, there has been year-to-date in 2019, several announced deals. And we continue to see a shrinking population of banks within our immediate footprint. I would say that, we have said and we'll continue to run the independent plan focused on organic growth. And supplement it with acquired growth where it makes sense. I am pleased with the opportunity to be included where appropriate. But our game plan continues to be focused on organic growth. David, we've had, I think -- again as I mentioned our organic growth has come from the West Michigan portion of our footprint as well as Southeast Michigan. And in both those markets, we've been able over the last 12 months to 18 months add a number of new talented lenders, from the market disruption that's been taking place. And that has really been a nice source of our organic growth.

Great, okay, thanks for the color. That’s all that I have. Thank you.

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

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

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