Good day and welcome to the Independent Bank Corporation Fourth Quarter 2014 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 Brad Kessel, President and CEO. Please go ahead.

Thanks, Emily. Good morning. Thank you for joining Independent Bank Corporation's conference call and webcast to discuss the company's 2014 fourth quarter and full year results. I am Brad Kessel, President and CEO of Independent Bank and joining me is Rob Shuster, Executive Vice President and Chief Financial Officer. Before we begin today's call, it is my responsibility to direct you to the cautionary note regarding forward-looking statements. This is slide two in our presentation. 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. Beginning with the financial summary slide, Page four, we are reporting for the fourth quarter of 2014 net income of $3.9 million or $0.17 per diluted share. For the 12 months ended December 31, 2014, the Company is reporting net income applicable to common stock of $18 million, or $0.77 per diluted share, compared to $82.1 million, or $3.55 per diluted share, in the prior year period. Recall the full year 2013 results include an income tax benefit of $54.9 million associated with the reversal of substantially all of the company’s deferred tax assets valuation allowance in the second quarter of 2013. Turning to the 2014 fourth quarter financial highlight slide, Page five, we were particularly pleased with this quarter’s results as it relates to a number of areas. First, our growth and commercial loan balances which grew at 11.1% annualized rate in the fourth quarter of 2014. Secondly, we continued to see progress in improving asset quality with non-performing assets down 19.4% since September 30, 2014 and loan net charge-offs down by 66% compared to the fourth quarter of 2013. Third,…

Thanks Brad, and good morning, everyone. I am starting at Page 11 of our presentation. Our net interest income totaled $18.1 million during the fourth quarter of 2014, a decrease of $1.3 million from the year ago period, and a decrease of about $100,000 million on a linked quarter basis. Our tax equivalent net interest margin was 3.56% during the fourth quarter compared to 3.96% in the year ago period and 3.61% in the third quarter of 2014. The decrease in the net interest margin is primarily due to the prolonged loan interest rate environment that has resulted in declining average yields on our loan portfolio. Average interest earning assets were $2.03 billion in the fourth quarter of 2014 compared to $1.96 billion in the year ago quarter and $2.02 billion in the third quarter of 2014. Page 12 contains a more detailed analysis of the linked quarter decline in net interest income. This decline was primarily due to decreases in interest in fees and loans and interest on tax exempt securities that was partially offset by an increase in interest on taxable securities and a decrease in the interest expense. The decrease in interest in fees and loans was primarily due to the decline in average balance of payment plan receivables as well as decreases in the yields on commercial loans, mortgage loans and consumer instalment loans that were not fully offset by growth in average balances. The decrease in interest on tax exempt securities was primarily due to $88,000 in accelerated premium amortization on a municipal bond that was called. This reduced our overall net interest margin by two basis points in the fourth quarter. We will comment more specifically on our outlook for net interest income for 2015 later in the presentation. Moving on to Page 13,…

Thanks, Rob. 2014 was a solid year for our company with $18 million in net income and many accomplishments as outlined in my earlier remarks, however, our management team recognizes we need to continue to grow revenue and improve our overall earnings as we work towards a performance of 1% return on assets. Our target or road map to this level of performance is built on improving net interest income to $19.5 million, non-interest income of $10 million or better and non-interest expense of $21 million or less. As we look ahead we will continue to execute on strategies and initiatives to increase long term share holder total return. These strategies include the following. Revenue growth through asset migration from a lower yielding securities portfolio to higher yielding loan portfolio. This strategy includes originations of high quality -- high credit quality, diverse mix by segment, diverse by geography and a very granular make up of credits. Secondly, we will continue to focus on and invest early sources in higher growth Michigan markets. Third, we will continue to leverage our low cost core deposit base which will at some point provide greater upside in a rising rate environment. Fourth, we will continue to improve the banks efficiency ratio primarily through revenue increases but also continuing to aggressively attack our cost structure. And finally, the fifth strategy to increase long term shareholder total return is through prudent management of our capital. As it relates to our capital, our near term target for tangible common equity is 10.5% and longer tern the target is near 9.5%. Our plan is to retain capital for organic loan growth and return capital through a consistent dividend payout plan and share repurchase plan. The Company announced a $0.06 cash dividend on January 21 to shareholders of record on February 6 and payable February 17, 2015. The company also announced today a share repurchase plan. Under the terms of the share repurchase plan, the company is authorised to buy back upto 5% of its outstanding common stock. The repurchase plan is authorised to last through December 31, 2015 and we intend to accomplish the repurchases through open market transactions. The timing and amount of any share repurchases will depend on several factors including approval or return of capital request from the bank regulators, security law restrictions, other regulatory requirements, the trading price of our common stock, potential alternative uses for our capital and the company’s financial performance. We believe sound execution on these strategies will generate solid total shareholder returns over the long run. At this point, we would like to open up the call for questions.

[Operator Instructions] And our first question is from Mathew Forgotson of Sandler O'Neill. Please go ahead.

Hi, good morning gentlemen.

Hi Matthew.

Just on expenses, are there any one time expenses in the fourth quarter number, you know I’m just trying to understand how you stepped down from this $22.9 million level to the $21 million, $22 million range you are guiding across 2015?

Well a couple of items. One is, if you look linked quarter I got some detail on it, on the non-interest expense slide which is page 14. We did have a step up in comp and benefits of $700,000. That is largely due to when we hit certain targets and we do an estimate at the end of each quarter of where we think we’ll end up at year end and we in particular on the NPA side moved quite a bit ahead of where we were projecting in those early recorders. So in a sense, that skewed some of that expense into the fourth quarter which really should have been had we known exactly where we are going to end up for the year and that would have been spread out amongst the first three quarters more rateably [ph]. So that would be one piece of it. Another piece would be I’d say occupancy expense was skewed higher probably about a 100,000. We had a record snowfall not that this can occur at some other kind, but we had a record snowfall here in November which really pushed up our snow removal cost. So, those would be a couple of. If you’ll work on full year basis, comp and benefits declined including performance based compensation. So, we think between – you know, between sort of that skewing of few of those expenses into the fourth quarter as well as a host of other initiatives on other expense funds that we can move down into that range that we indicated in the 2014 or 2015 guidance.

Okay. So, now transitioning to the share repurchase, first, can you tell us pro forma for the return of capital? How much cash are you’re going to have at the holding company?

Yes. We currently have about $17.5 million of cash at the holding company and we intend to file a request with our regulators of at least $15 million, but potentially higher maybe as much as $18.5 million to $20 million and so we’d expect to have a bit north of $36 million of cash at the parent company. We certainly think that would provide sufficient funds for our 5% share repurchase and still leave north of $20 million of cash at the current company even taking into account the share repurchases which is about three years of operating expenses, dividend payments at $0.06 per quarter and interest payments and the $34.5 million of trusts we had remaining. So we still feel we’ll be in very good shape in terms of cash levels at the parent.

Okay. And then just in…

And Matt one other thing too is in your word, but you know the negative retained earnings at the bank in state laws that don’t allow a bank to pay dividend if it has negative retained earnings is what causes us. They have to go through these request for return of capital of the banks negative retained earnings had improved to minus $31 million at the end of 2014 and we hope certainly some time within 2016 that we’ll be in a position where we would just be able to normally dividend up earnings and not have to go through this regulatory request cycle.

Okay. Just a follow-up on that, can you give us a sense of kind of your current appetite for the shares? Should we expect you to burn through this authorization by December 31, 2015 and related to that you know kind of what earn back thresholds would repurchase need to clear in your mind?

Well, I would say a couple of things. One is our hope is that we could accomplish this through the course of 2015, of course its going to depend on opportunities and all the things that we had articulated. But I think our view is a repayment time frame on two to three years is certainly has some appeal to us.

And then lastly and then I will hop out. You mentioned kind of running towards 1% ROA. I guess two specific questions there. First, kind of what’s your provisioning assumption within that target return? And then secondly, how quickly you think you could get there?

Well, the provisioning assumption would be somewhere around 20 basis points, so that would be somewhere in the $3 million to $4 million range. And again the roadmap as Brad articulated was $19.5 million in net interest income. If you look the last half of 2013 we were will still at those levels. So we think the key is as just that continue build in loan growth that certainly not going to happen in the quarter or two, but just consistently building for that if we get a boost in interest rates that help us a lot more than just slugging it out with loan growth in this current environment. The non-interest income, Brad had said $10 million or better, you know our goal is to be on better side, more towards that $10.5 million with improvement in mortgage banking revenues and continued growth in interchange income. And then on the expense side $21 million or better, but more on the better side, and I think if you put all of that in the mix with the numbers you end up in that $8.5 million pretax which gets you right around than 31% to 32% effective tax rate gets you right into that 1% ROA range. So that’s kind of the thought process in terms of the provisioning level.

Okay. And in terms of time…

In time frame I think working consistently towards building towards that in 2015 and hopefully getting closer to those numbers by the end of 2015. Brad, I don’t know if you want to add in.

No, I think its pretty -- I would say probably the margin is in the latter part of 2015 I think we’re going to push hard on the expense side to get after the first quarter or sometime and really the non-interest income fees that really is hard to recall, but we’re not that far off from it right now.

Thank you.

Our next question is from Damon DelMonte of KBW. Please go ahead.

Hey, good morning, guys. How are you?

Good morning. Great. Thanks.

Great. First question is to kind of go back to the margin, could you just talk little bit again about your assumptions as far as transactions [ph] and potential rate moves in 2015. Did you say your rates were assuming only a 25 basis points increase during this year of 2015?

Yeah, it’s correct. So our model has really just 1.25% rate increase that occurs in September of 2015 and that set for the course of the year. And then, just a smaller move up in intermediate to longer term rate, so just the very little bit of flattening in the curve because we don’t have the longer term rates moving up quite as much now. I think you’re aware and everyone is aware that longer term rates was actually trended down a far amount early this year, so we’d expect to see that retreats and then longer term rates ending the year up a little bit from where they ended 2014. So we’re not anticipating a lot of movement in interest rates. Most of the growth in the margins comes from really the pressure sort of abating which we saw little bit of this quarter, so that the loan growth in that rotation that Brad mentioned out of lower yielding securities and into higher yielding loans, yields increases in net interest income.

Okay. So, would you expect the similar amount of compression in each of the next quarters as we saw from fourth to first, I’m sorry, from third to fourth quarter in 2014?

I think we feel what should really by the second quarter be flattened out. We’ve seen most of the pressures coming from just the differential of where the current loan yields are versus where new credits are coming in, but we just really feel like that sort of abates by the second quarter.

Okay. And then just with regard to the holding company cash you’d said, I missed a couple of details. You said there’s $17 million of cash at the holding company. And then did you say you’re upstreaming another $18 million to get to that $35 million, $36 million level?

Our goal would be the upstream roughly $18.5 million and that would take you to about $36 million of cash at current.

Okay. Is that will be during the course of the year or you’re saying it right now you’re going to?

No. Our intention is as we say in the releases to file a request with the State of Michigan before the end of this month and then we hope to be able to process a return of capital before the end of the first quarter.

Got you. Okay. That’s helpful. And then I think you kind of touch with the – for your outlook for the provision expense, I know you had for the year a negative reversal of provision. Can you give a little more guidance on how you are looking at that in 2015?

Well, you know if you work at our slide there, you’ll note that that’s one of the areas where we don’t give a numeric guidance and it’s really just reflects that its so difficult to project and predict that. You know, I guess I’d say this, if everything was sort of back to normal we wouldn’t see, you know, we would think that a 20 basis points provision level on average loans would be all that unusual given where kind of our normal level of charge offs are coming out, but offsetting that we have a lot of specific reverse on the TDR portfolio which continues to be performing very well and continues to be paying down. So we could have releases of reserves from that area and then in combination of new loan defaults are low and if we continue to see good recoveries that could still lead to some releases of the allowance at one point roughly 8.5% we’re still a bit above where we see the peer group average is. So I still think there is possibly room there, although you know its not going to be there forever. So the timeframe for that probably is starting to get to the end one year maybe cycle before you really get back to sort of normalize provisioning levels. But those are kind of the factors that could influence 2015.

Okay. And do you have a long term target for your loan losses level?

No, because its really just depends on working through our model and its depends on what’s going on with all of the different factors that influence the size of the loan portfolio, the composition, the level of charge-offs and recoveries. So no, we don’t – a there is no target, we just – it’s really dictated by the performance of the portfolio.

Okay. That’s all that I had for now. Thank you.

Thank you.

[Operator Instructions] Our next question is from Rick D'Auteuil of Columbia Management. Please go ahead.

Good morning.

Good morning.

So just a couple of questions, so it sounds like the plan is contingent on, more contingent on revenue growth and somewhat contingent on the expense reductions, the expense reductions I guess more in your control. Is there a plan be to address more expense reductions if the revenue growth doesn’t come through as plans?

Yeah, Rick, I think we continue to turn over every rock and look for every opportunity. And we have a lot of conversations internally that, hey, if rates stay we’ll like this for an extended period of time, there’s need to be further reductions on the cost side. So, we have those discussions. We think there is a plan. I’d say, there are things in the works as we speak that continuing to look at department, staffing levels, process flow. One of the big things that we’ve been working on for some time year ago, we’ve signed our core processing contract with FIS [ph] and as part of that effort there was quite a bit of technology purchases that we made whereby we would garner significant improvements in workflow and process flow. And we’re still in the process of executing or implementing those changes and it’s really hard to put your finger on how much of today’s efforts is going to fall by the way side, but I do feel there is material opportunities still in our workflow.

Thanks. It seems to me like even your short-term, near-term, mid-term targets are still sub here on the efficiency ratio, would you agree with that?

For longer term, we’d like to be at 65% or better. And you know I think if you look at our balance sheet makeup we have a lower than peer loan to deposit ratio, lower loan to asset, earning asset ratio. And so really you know, yes, there is opportunity to improve on the cost side, but we think there is tremendous upside on the revenue side by essentially moving out of securities earnings 1.5% to loans at 4%, 4.25% or better.

Is that contingent on hiring more bankers or just getting more from the ones you have?

I think its getting more from the ones we have. I mean, I think we have very good infrastructure in place today without adding more to provide the revenue lift. One of the things that I think if you look at our numbers quarter over quarter over quarter, it took us a while to get the loan generation efforts going. We probably start that effort in 2012 and you look back at early 2014 we were still lagging our peers a little bit. I think we caught up with them by mid year and here you can see in the fourth quarter real strong particular on the commercial side we have essentially 22 lenders. We do have our feelers out. We may add a couple of junior lenders in terms of watching for long run – long-term growth but bottom line I think we have an infrastructure in place today that its really leveraging that infrastructure.

And just an observation over the last 12 months, I don’t say your market, but the State of Michigan has seen a decent amount of consolidations and just wanted to get your thoughts on that and I assume as these returns improve it makes you more attractive down the road, but just curious what your thoughts are on the Michigan consolidation that we’re seeing?

Sure. So, couple of comments Rick. Number one, I think that from a competitive standpoint consolidations create opportunities for us. It creates opportunities to acquire new customers. It creates opportunities to enhance our talent base, so I think that’s the first thing. And we have been successful on both those fronts for last couple of years and it really varies by market depending who is doing what. So, that’s number one. Number two is that when we look at the consolidations the other – we look at ourselves in each of our markets really trying to compete with looking at whose all competing in the market and is it us and another community bank or two and then the big banks, is it us and just a big banks and so on. And so, sometimes its consolidation just takes out somebody that we’re running head to head with consistently and so that works to our advantage. I’d say number three, the multiples and several other deals have been very, very attractive. And I think when we look at ourselves internally at some point some of those multiples would maybe be very enticing for our board, our shareholder base. But challenge with that I think is that – I think the performance of our institution probably still has some room to improve to capture that higher multiple. And that’s where we’re working on. If this company ultimately does need to sell, we would rather sell on strength than on weakness. And so, I guess those are a couple of comments and Rob I don’t know if you want to add.

No. I completely agree with that.

I appreciate that. Thank you very much.

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

Okay. Thank you very much. And I would like to thank everybody that did turn – tune in for today’s call. Thank you for your interest in our company and we wish everyone a great day. Thank you.

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