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Edited Transcript of IBCP earnings conference call or presentation 24-Oct-19 3:00pm GMT

Q3 2019 Independent Bank Corp (Michigan) Earnings Call

IONIA Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Independent Bank Corp (Michigan) earnings conference call or presentation Thursday, October 24, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Robert N. Shuster

Independent Bank Corporation - Executive VP, CFO & Corporate Secretary

* William Bradford Kessel

Independent Bank Corporation - President, CEO & Director

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Conference Call Participants

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* Brendan Jeffrey Nosal

Sandler O'Neill + Partners, L.P., Research Division - Director

* John Lawrence Rodis

Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts

* Kevin Kennedy Reevey

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Independent Bank Corporation 3Q '19 Earnings Conference Call. (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.

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [2]

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Good morning. Thank you for joining Independent Bank Corporation's conference call and webcast to discuss the company's 2019 third quarter results. I am Brad Kessel, President and Chief Executive Officer, and joining me is Rob Shuster, Executive Vice President and Chief Financial Officer. Also joining us today is Steve Erickson, Executive Vice President and Treasurer.

Before we begin today's call, it's my responsibility to direct you to the important information on Page 2 regarding the cautionary note for 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.

As previously announced, Steve Erickson will be taking on the role and responsibilities as Chief Financial Officer for IBC following Rob's retirement on January 31, 2020. There is no doubt we will miss Rob upon his retirement. However, I am very pleased that we're able to find and attract an individual like Steve and that we are able to do so with a transition period allowing Rob and Steve to work together through a couple of quarter ends, a year-end and a budgeting process.

Today, we are reporting third quarter 2019 net income of $12.4 million or $0.55 per diluted share versus net income of $11.9 million or $0.49 per diluted share in the prior-year period. This represents year-over-year increases in net income and diluted earnings per share of 4.4% and 12.2% respectively.

Overall, I am very pleased with our third quarter as we were able to report strong results for the bottom line, both net income and earnings per share, fueled by growth in net interest income, 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. Additionally, we had a very good quarter of loan originations, both portfolio and salable production, which net of portfolio mortgage loan sales and reclassifications, still yielded net overall loan growth for the 22nd consecutive quarter.

Asset quality continues to be very strong with low past dues and an acceptable level of watch credits. Additionally, we crossed the $3 billion mark for deposits.

Turning to Slide 5 of our presentation with a little more detail on the quarter. Impacting our third 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 3 months ended September 30, 2019, a decline in the fair value of our capitalized mortgage loan servicing rights due to price decreased noninterest income by $2.2 million or $0.08 per diluted share after tax. This compares to a $610,000 increase in fair value due to price of -- or $0.02 per diluted share after tax for the 3 months ended September 30, 2018.

Positively impacting the third quarter of 2019 was a reduction of noninterest expense of $300,000 or $0.01 per diluted share after tax related to the company's use of its FDIC Small Bank Assessment Credit. Approximately $400,000 of assessment credit remains available to offset future expense.

For the third quarter of 2019, our return on average assets and return on average equity were 1.42% and 14.64% respectively. These ratios increased to 1.58% and 16.34% respectively when excluding the after-tax impact of the MSR changes in the assessment credit.

Also for the quarter, our efficiency ratio at 63.8% was up slightly from the year-ago quarter of 63.6%. This third quarter 2019 ratio improves to 61.5% when excluding the after-tax impact of the MSR changes in the assessment credit. For the 9 months ended September 30, 2019, the company reported net income of $32.6 million or $1.40 per diluted share compared to net income of $29.9 million or $1.27 per diluted share in the prior-year period. Slide 7 of our presentation provides a good overview of our footprint.

Turning to Slide 8, Michigan business conditions continue to generally be favorable with low unemployment, some job growth, affordable housing and continued good demand for commercial real estate. We continue to closely monitor the impact of the GM UAW strike on our customer base as well as the Michigan market as a whole. We are optimistic with last week's announced tentative settlement and are hopeful that the union does in fact ratify the settlement and resume production.

Our regional portfolios are shown on Page 9. Our 2 strongest growth regions are the Grand Rapids region, up $79 million in loan balances and our Southeast Michigan region, up $55 million in loan balances. 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 and well -- as well as continued growth in this portfolio while working to effectively manage our overall cost of funds. Independent has $3.05 billion in total deposits, of which $2.43 billion or 80% are nonmaturity deposit accounts. When comparing third quarter 2019 to the same quarter one year ago, we increased total deposits by $262 million or 10.1%. This excludes broker deposits.

Our total cost of deposits was flat on a linked-quarter basis and is up 25 basis points when comparing to the same quarter one year ago. Our success in growing deposits or manage the overall cost has been primarily through growth in our commercial deposits and the sale of our insured cash suite product to public fund entities.

Similar charts are also reflected on Page 11, but in this case, we are displaying our loan portfolios. We continue to target a diversified loan mix with the largest portfolio being our commercial book of business. At September 30, 2019, our loan mix included 42% commercial, 38% mortgage, 16% installment and 4% held for sale. Total loans outstanding now aggregate to $2.85 billion, including $124 million of loans held for sale.

The commercial portfolio grew by $13 million or 4.4% annualized during the quarter. Consumer installment loans were up $19.1 million or 17.1% annualized for the quarter, primarily through our indirect lending line of business, which targets Michigan Marine, Power Sports and RV dealers.

The mortgage originations for the quarter increased to $329 million, up from the second quarter's $241 million and up from the third quarter one year ago of $232 million. Portfolio mortgage loans declined by $16.3 million primarily due to $46.5 million of executed or pending portfolio mortgage loan sales.

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-to-tangible assets of 8.71% at September 30, 2019, which is essentially unchanged from the June 30, 2019, level. This level is well within our targeted TCE range of 8.5% to 9.5%.

We paid a quarterly cash dividend of $0.18 per share on August 15, 2019. During the first 9 months of 2019, the company has completed the repurchase of 1,204,688 shares at a weighted average purchase price of $21.82 per share. At September 30, 2019, 274,298 shares remain in the 2019 share repurchase plan.

At this time, I would like to turn the presentation over to Rob Shuster to share a few comments on our financials, credit quality, CECL and our outlook for the balance of 2019.

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [3]

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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 margin. Our tax equivalent net interest margin was 3.76% during the third quarter of '19, which is down 15 basis points from the year-ago period, and down 11 basis points from the second quarter of '19. I will have some more detailed comments on this topic in a moment. Average interest earning assets were $3.29 billion in the third quarter of '19, compared to $3.04 billion in the year-ago quarter and $3.19 billion in the second quarter of '19.

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, the linked quarter tax equivalent yield on loans declined 13 basis points and the tax equivalent yield on investments declined 17 basis points. This primarily reflects lower market interest rates, particularly short-term rates. In addition, investment yields were negatively impacted by a $25.2 million increase in the average balance of lower-yielding interest bearing cash balances, due to a seasonal increase in deposits.

We were generally able to offset the adverse impact of lower yields on earning assets by a $93.8 million increase in the average balance of earning assets. The average cost of funds declined by 2 basis points to 0.84% in 3Q '19 from 0.86% in 2Q '19. We will comment more specifically on our outlook for the net interest margin and net interest income for the balance of 2019 later in the presentation.

Page 15 compares our quarterly average cost of funds to the monthly average effective federal funds rate during the quarter and the spot federal funds rate during the quarter.

Moving on to Page 16, noninterest income totaled $12.3 million during the third quarter of '19 as compared to $11.8 million in the year-ago quarter and $9.9 million in the second quarter of '19. Mortgage banking related activity, namely gains on mortgage loans and mortgage loan servicing, caused most of the quarterly comparative year-over-year variability in noninterest income.

Brad already discussed the changes in the fair value due to price of capitalized mortgage loan servicing rights. Our capitalized mortgage loan servicing rights asset of $16.9 million at September 30, '19 represented a value of just 68 basis points on our $2.5 billion of mortgage loan servicing. 3Q '19 net gains on mortgage loans increased to $5.7 million compared to $2.7 million in the year-ago quarter. 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 was very strong in the third quarter and continues to be strong at the start of the fourth quarter. In addition, we had $36.6 million of portfolio mortgage loans in process to sale at September 30, '19, on which we expect to record a gain on sale of approximately $1.1 million in October. As a result, we expect another strong quarter of gains on mortgage loans to end 2019, followed by our normal seasonal slowdown in the first quarter of 2020.

As detailed on Page 17, our noninterest expenses totaled $27.8 million in the third quarter of '19, as compared to $26.7 million in the year-ago quarter and $26.6 million in the second quarter of '19. Actual third quarter '19 noninterest expenses were just slightly above the high end of our projected range of $27 million to $27.5 million. We'll have more comments on our outlook for noninterest expenses later in the presentation. Investment securities available for sale increased to 9 -- increased by $9.3 million during the third quarter of 2019.

Page 18 provides an overview of our investments at September 30, 2019. Approximately 31% of the portfolio was variable rate and much of the fixed rate portion of the portfolio is in maturities or average lives of 5 years or less. The average duration of the portfolio is about 2.65 years with a weighted average tax equivalent yield of 3%, which is down 12 basis points from June 30 of '19.

Page 19 provides data on nonperforming loans, other real estate nonperforming assets and early stage delinquencies. Total nonperforming assets were $8.4 million or 0.24% of total assets at September 30 of '19. Nonperforming loans decreased by about $700,000 during the third quarter of '19. At September 30, 2019, 30- to 89-day commercial loan delinquencies were just 0.04%, and mortgage and consumer loan delinquencies were just 0.35%.

Moving on to Page 20. We recorded a credit provision for loan losses of $271,000 and $53,000 in the third quarters of 2019 and 2018, respectively. We recorded low net recoveries of $516,000 and $950,000 in the third quarters of 2019 and 2018, respectively. Finally, the allowance for loan losses totaled $26.1 million or 0.96% of portfolio loans at September 30, 2019.

Page 21 provides some additional asset quality data, including information on new loan defaults and unclassified assets. New loan defaults were just $4.3 million through the first 9 months of 2019.

Page 22 provides information on our TDR portfolio that totaled $50.2 million at September 30, 2019, a decline of $1.9 million during the third quarter. This portfolio continues to perform very well with 95.2% of these loans performing and 92.7% of these loans being current at September 30, 2019.

Page 23 provides a detailed timetable for our implementation of the CECL accounting standard. I'm proud to say that we were one of the very first community banks to publicly disclose the estimated impact of CECL on our allowance for credit losses. In our second quarter 2019 Form 10-Q, using June 30, 2019, data, we disclosed an estimated increase of $9.5 million to $11.5 million in our allowance for credit losses under CECL.

Using September 30, 2019, data, the estimated increase moved down slightly to a range of $9 million to $11 million. The primary factor driving this expected increase is the longer contractual maturities of our mortgage loan and consumer installment loan segments. In addition, the midpoint of our range uses a 2-year economic forecast period and a 2-year reversion period.

Page 24 is our update for 2019, where we compare our actual performance during the year to our original outlook that we provided back in January 2019. Overall, we believe that our actual performance in the third quarter of '19, particularly when factoring out the negative fair value adjustment due to price on capitalized MSRs, was better than our original outlook.

We achieved actual annualized loan growth of 2.3% and 7.2% for the third quarter and first 9 months of 2019, respectively. Our loan growth was purposely slowed in the third quarter of '19 due to our decision to sell or securitize $46.5 million of portfolio mortgage loans. Of this total, $9.9 million was sold in the third quarter of '19 and $36.6 million was transferred to held for sale at September 30, 2019, and the sale will settle in October 2019.

Nearly all of the $36.6 million is being securitized with Freddie Mac, and we intend to hold most of these securities. So you will see an increase in available-for-sale securities in the fourth quarter of 2019. The portfolio mortgage loan sales were done for asset liability management reasons, including continuing to balance the mix of our overall loan portfolio. As a result, we now expect our 2019 full year actual loan growth to be just a bit below our original 8% to 9% goal.

With the shape of the yield curve and the additional expected cuts in the federal funds rate, we do expect some continued downward pressure on our net interest margin. As I stated last quarter, we reduced our original forecasted growth rate of 10% to 11% for net interest income for all of 2019, down to 8% to 9%. That updated forecast assumed 25 basis-point cuts in the federal funds rate in July, September and December. At this point, we still feel comfortable with the 8% to 9% full year increased range.

As to our net interest margin, I wanted to make some comments about our efforts to maintain it despite a difficult environment. On the cost of funds side, we did utilize interest rate caps that totaled $150 million at September 30, 2019, to manage the cost and duration of wholesale funds, particularly broker deposits. As a result of our use of caps, we can take advantage of lower market interest rates. In fact, we have about $197 million of broker deposits maturing during the fourth quarter of 2019 with an average cost of 2.07% that we expect to replace at rates on average at least 25 basis points lower.

As to the rest of the deposit base, we continue to proactively manage funding costs and walk the fine line of retaining and growing deposits, while pushing down interest rates where we can. Bottom line, we expect our future cost of funds to drop more quickly than the 2 basis points you saw in the third quarter of '19.

On the asset side, we continue to try and extract every basis point possible on both loans and investments. I heard an analyst ask another bank about interest rate floors on loans in a recent conference call. Only about 6% of our variable rate commercial loans have interest rate floors. In contrast, about 90% of our variable rate home equity loans have floors. However, we would need to see an additional drop in interest rates of about 150 basis points before a lot of these floors would begin to kick in. Thus our variable rate loan portfolio will continue to be susceptible to lower prime or LIBOR rates.

Looking longer term, if history is a guide, our lowest net interest margin over the last several years was 3.52% during 2016 when average short term interest rates were still well below 1%. As to the loan loss provision, we expect generally stable asset quality metrics during the last quarter of 2019. So loan growth is anticipated to be the main driver of our loan loss provision. We would not expect to see a credit loan loss provision in the fourth quarter of '19 as the third quarter benefited from strong net loan recoveries.

Excluding the negative fair value adjustment due to price on MSRs, our adjusted third quarter noninterest income would have been well above the high end of our forecasted range due primarily to net gains on mortgage loans. We expect net interest income to be above the high end of our forecasted range in the last quarter of '19 due to strong mortgage banking revenues, excluding any volatility associated with changes due to price and the fair value of MSRs.

With respect to noninterest expense, we expect to be at the high end of our forecasted range in the last quarter of 2019. If we are above the range, it would likely be due to a strong bottom-line performance that impacts our performance-based compensation accrual at year-end. Finally, our effective income tax rate was 20% in the third quarter of '19, which was exactly in line with our forecast.

That concludes my prepared remarks and I would now like to turn the call back over to Brad.

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [4]

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Thanks, Rob. On October 22, 2019, we announced that our Board of Directors appointed Ronia Kruse to the Boards of the Corporation and the bank. She will also serve on the Corporation's Audit Committee. Ms. Kruse is the Founder and CEO of OpTech, a talent development and solutions firm, providing services to Fortune 1000 and government clients. OpTech provides innovative solutions for clients in the areas of analytics, cybersecurity, application development and connected vehicles.

Prior to founding OpTech, Ms. Kruse was a senior tax consultant for a big 4 CPA firm, where she specialized in international tax planning. She is a certified public accountant, is active in a variety of organizations, and has served on the investment committee of Belle Michigan to help evaluate potential emerging technology portfolio of companies.

We are delighted to add Ronia to the Boards of Directors of both our parent company and the bank. She is a dynamic executive who brings us a unique ability to leverage technology, develop talent, and provide insight on the digital economy. In addition, her background with a big 4 CPA firm makes Ronia an important addition to our organization.

Finally, we have listed our strategic initiatives on Slide 25. During the first 9 months of 2019, we have made significant progress in each of these areas. We believe successful execution on these initiatives will continue to drive strong returns. As a 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 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). Our first question is from Brendan Nosal with Sandler O'Neill and Partners.

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Brendan Jeffrey Nosal, Sandler O'Neill + Partners, L.P., Research Division - Director [2]

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I just want to start off on the margin. I appreciate all the color you gave on some of the things you're doing to push back on the cost of funds, as well as trying to maintain on the asset side. If you could just kind of wrap up those moving pieces into what you think it means for the NIM in the fourth quarter, that would be helpful. And then what each incremental rate cut thereafter you think would mean for the margin.

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [3]

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Well, for the fourth quarter, I don't expect to see the same magnitude of drop that we had in the third quarter, the 11 basis points. I think it would be somewhere maybe in between -- so in that 7 -- 6 to 7 basis-point range. I think a lot of it is just going to depend on asset mix a bit and then just some timing on the cost of fund side.

Longer term, and part of why I gave that sort of long-term data point of 3.52%, that was when rates were down and not -- they had come up from 0, but not much. So I kind of feel like that sort of a low watermark for us. So I would see maybe a bit of a drift down, but not toward that kind of level. So we're at 3.76%. So maybe a bit of a drift down, but hopefully all of our efforts will result in stabilizing it not too far away from where we're at right now. And the other real goal is to continue to drive earning asset growth, so the dollars of net interest income continue to grow.

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Brendan Jeffrey Nosal, Sandler O'Neill + Partners, L.P., Research Division - Director [4]

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And then if I can speak one more in there. Just moving on to the C side of things, obviously a very, very good number here in this third quarter after you removed the MSR noise. And I appreciate the outlook for the fourth quarter to be above the high end of the range. But as I look at things, given continued strength in the mortgage market and then the $1.1 million gain you expect to take, it seems like fees could be meaningfully above the high end of that $11 million to $12 million range next quarter. So I guess just: one, I want to make sure I'm thinking about that correctly; and then two, if could give a finer point on how much above that $12 million mark you think you could be.

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [5]

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Well, that's a great question. I think given where the pipeline is and new application volume and, as you mentioned, the $1 million gain on the $36.6 million that moved into held for sale, I would certainly see a number approaching as strong as we were in the third quarter. I think the one caveat I will give you is with the way we record the fair value adjustments. The pipeline is likely to be lower at December 31 versus where it was in September 30. So that's going to cause us to have a downward adjustment and it's really going to be the magnitude of how much does that pipeline drop because actual loan sales are going to be as strong or stronger.

So the wild card is kind of the change in fair value related to the pipeline. And to the extent that, that holds up and app volumes hold, it could be, again, a number very similar to where we were in the third quarter. If the app volumes have a -- more of a seasonal decline, then it could be off a bit, but I certainly would expect it to be -- lead to us being meaningfully above the high end of the range.

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [6]

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Rob, I would add to that. In the third quarter 2019, we had a very strong swap fee income quarter 2 about $0.5 million.

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [7]

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Yes. That's in other noninterest income. So we may not be quite at that level in the fourth quarter, but the gains I would expect to be pretty strong in the fourth quarter. I know I'm not giving you an exact number because it's tough to project the one item on the pipeline, but I would be surprised if we are meaningfully above.

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Operator [8]

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(Operator Instructions) Our next question comes from John Rodis with Janney.

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John Lawrence Rodis, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [9]

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Rob, it has been great working with you over all these years. You won't have to worry about interest rates and all that exciting stuff and the yield curve.

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [10]

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I'll be a shareholder, so I'll still worry about it.

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John Lawrence Rodis, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [11]

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Now, don't worry about it too much. Hey, just a quick question, just on your thoughts on the buyback. Obviously, you've still got, what? About 270,000 shares remaining between now and year-end and then just thoughts on re-upping the buyback plan for 2020.

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [12]

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Yes. So I guess, John, I'll jump in there. So we had, through the second quarter, some very, very strong buyback activity. In fact, we completed the full initial authorized amount of 5% and then our board re-upped an additional 300,000 shares. And in the third quarter, we had a small amount of purchases for the third quarter. I would say going forward, we will continue to have the program in place. And so it would expire at the end of 2019.

I would think that our board would re-up that for 2020. And we continue to look at all the opportunities that we have to put our capital to work. And it's a balancing act. And so the pace that we were buying at through the first half of the year, obviously, has slowed down, but prospectively we'll -- we could do some purchasing, but not -- probably not nearly at the pace that we were at before.

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [13]

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Yes. I think that covers it well. I think the other thing is it's a good lever if organic growth in earning assets and loan slows a bit. Maybe it's economic factors in the marketplace, but it's a good lever to try and continue to produce growth in earnings per share if there is some slowdown in asset growth.

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John Lawrence Rodis, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [14]

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Yes. And I expect the stock will -- stocks -- or bank stocks will probably remain volatile, so. Just one other question. You guys sort of addressed it a little bit, just as far as the GM strike and maybe it's going to be over soon. But just your comments, it doesn't sound like you've seen any meaningful negative impact yet from the strike. Is that correct?

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [15]

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Yes. It's -- so we internally consult with our client base and there is no doubt that this has impacted the Michigan markets and the national markets. If you go back to pre-strike, there was some positioning by both parties that I think they had set themselves up so that for a short period of time, they could survive without maybe being too negative. And so while this is going on, I think longer than what people expected and anybody really wanted, it appears that they're close.

And so, hey, in our markets on the supplier side, there have been layoffs as production has slowed or ceased. But when we canvas our portfolio of clients, really, they are looking longer term and quite frankly they're bullish on 2020. I mean, they're -- there is a lot of uncertainty in the market, but they are definitely optimistic about 2020.

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [16]

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Yes. So, yes, I was going to add. We haven't seen anything impact-wise either in the retail portfolio, mortgages or consumer loans or on the commercial portfolio where it's affected someone's ability to make their payments.

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Operator [17]

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Our next question comes from Kevin Reevey with D.A. Davidson.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [18]

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Rob, congratulations on your retirement, well deserved. And Steve, I'm looking forward to working with you again.

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [19]

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Thank you, Kevin.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [20]

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So first question is, I was just curious whether -- are there any other levers on the asset side of the balance sheet that you can pull in order to mitigate margin compression in a lower rate environment?

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [21]

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I think the thing that we're just working the hardest on is trying to, where we can, hold the line and maybe expand margins a little bit on new lending. I kind of went through the fact that floors are not going to prevent on the variable rate loans a downward drift there. But I think those are the 2 key elements, is just trying to expand margin a little bit. And other than that, I think earning asset growth and getting more dollars of net interest income is the other key.

And the other thing I would say, and we have a slide on it, we do have a decent amount of the portfolio that is fixed rate. Now, to the extent you get prepayments, you can still have some drift down there as well. But we're reasonably balanced in those portfolios between fixed rate and variable rate. So we may not have quite as much pressure as maybe someone who has a vast percentage of their commercial portfolio at variable rates.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [22]

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And then your fixed rate loans, are most of them structured such that if there is a -- an early prepayment, that there's a prepayment fee that you can capture to kind of -- to benefit a little bit from the loss to the higher-yield asset?

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [23]

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That is correct on commercial. So virtually all of the commercial loans that are fixed rate would have some form of yield maintenance or prepayment penalty. That is not the case on retail loans. So that on retail loans, that's just not acceptable in the marketplace. So those loans, there is the ability to refinance without penalty. But again, the one thing I would say is, margins have kind of improved in the mortgage banking space, so that the -- what we call the primary, secondary spreads have widened out a bit. So hopefully that will help on the mortgage side.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [24]

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And then lastly, given CECL and your focus on consumer lending, do you expect to see any changes on your focus given the impact of CECL?

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Robert N. Shuster, Independent Bank Corporation - Executive VP, CFO & Corporate Secretary [25]

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That's a great question. I would say that we would be -- as we have been this year, I think we would be, a, active in doing some portfolio loan sales without recourse to try and moderate the growth rate there. I think longer term, the performance, it's more of a timing thing than anything else, so the credit losses or whatever they ultimately are, and I think over time, we'll probably refine where provisioning levels are.

I think when -- at the start, everyone is sort of in the same bucket of maybe being a bit on the conservative side as you start down the path with CECL in terms of the modeling. And I think over time, you'll get better on that.

So I think over time, it's not going to affect our desire to do consumer financing, both mortgage and the RV, Power Sport, Marine. But I think we'll try to maybe regulate those growth rates through sales.

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Operator [26]

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

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William Bradford Kessel, Independent Bank Corporation - President, CEO & Director [27]

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We 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 you all a great day.

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Operator [28]

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