Good day and welcome to the Independent Bank Corporation First Quarter 2015 Earnings Conference Call. 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 President and CEO, Brad Kessel. Please go ahead.

Good morning. Thank you for joining Independent Bank Corporation's conference call and webcast to discuss the company's 2015 first quarter 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 Bank 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 first quarter of 2015 net income of $3.8 million or $0.16 per diluted share. This was $0.6 million or 20.5% increase over the same quarter one year ago. I am very encouraged by these results particularly as this represents the fourth consecutive quarter of growth for our portfolio loans. Turning to the 2015 first quarter financial highlights slide, page 5, this quarter’s results were positively impacted by improved asset quality metrics which led to 0.7 million credit provision as compared to the prior year’s $400,000 expense provision, $1 million or 87% increase in gain on mortgage sales, continued reduction in noninterest expense, and a stabilization of net interest income. These were offset by $700,000 impairment charge on mortgage servicing rates and $200,000 in severance cost related to the branch consolidation initiative. Our strategies for long term profitability and growth continue to be centered on changing our earning asset mix from lower yielding short-term investments in to quality higher yielding loans. This past quarter our commercial portfolio continued to lead the way with 19.4…

Thanks, Brad, and good morning everyone. I am starting at page 9 of our presentation. Our net interest income totaled $18.1 million during the first quarter of 2015, a decrease of $0.4 million from the year ago quarter, and an increase of $34,000 on a linked quarter basis. Our tax equivalent net interest margin was 3.57% during the first quarter of 2015 compared to 3.79% in the year ago period and 3.56% in the fourth quarter of 2014. Although the net interest margin remains under some pressure due to the prolonged low interest rate environment that has resulted in declining average yields on the company's loan portfolio, we did achieve an increase in the margin on a linked quarter basis for the first time since the start of 2013. Thus we are optimistic that the downward trajectory of the net interest margin has generally come to an end. Average interest earning assets were $2.06 billion in the first quarter of 2015 compared to $1.99 billion in the year ago quarter and $2.03 billion in the fourth quarter of 2014. Page 10 contains a more detailed analysis of the linked quarter increase in net interest income. This increase was primarily due to an increase in interest income, on securities and investments, and a decrease in interest expense on deposits and borrowings that was partially offset by a decrease in interest in fees and loans. In addition two less days in the first quarter of 2015 as compared to the fourth quarter of 2014 reduced net interest income by about $0.2 million on a linked comparative quarterly basis. We will comment more specifically on our outlook for net interest income for the remainder of 2015 later in the presentation. Moving on to page 11, non-interest income totaled $9 million in the first…

Thanks Rob. The first quarter of 2015 was a solid start to the year for our company with $3.8 million of net income. 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 and 9% to 10% return on equity by 2016. Our target or roadmap to this level of performance is built on improving net interest income to $20 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 shareholder 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 credit quality, diverse mix by segment, diverse by geography, and a very granular make-up of credits. Secondly, we will continue to focus on investor resources in higher growth Michigan markets. Third, we will continue to leverage our loan 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 is to increase long-term share holder total return through the prudent management of our capital. As it relates to our capital our near-term target for tangible common equity is 10.5% and the longer-term target is 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. We believe sound execution on these strategies will generate solid total shareholder returns over the long run. Before…

[Operator Instructions]. And our first question comes from Matthew Forgotson from Sandler O’Neill. Please go ahead.

Hi, good morning gentlemen.

Good morning.

Just a question on your margin guidance, this quarter you put on some securities and now I believe the guidance says that you are going to drive -- hold the margin flat or drive some modest accretion by rotating securities into higher yielding loans, am I seeing the dynamic clearly there?

Yes. I mean the object is to achieve mid single-digit growth in the loan portfolio kind of the wild card with the securities is going to be the deposit growth side. So to the extent we do have deposit growth that exceeds that mid single-digit growth on loans, you could still see securities rise. But the real key from our perspective is bringing the mix of earning assets higher on the loan side and ultimately lower on the security side.

Okay.

Well again the driver on the margin or our net interest income would be the combination of earning, some earning asset growth along with margin stabilization or even growth because of that rotation out of the lower yielding securities and into higher yielding loans.

Okay, maybe I am reading too much into it but in the release and then again on the call you referenced that you are seeking further reductions in the expense base. Are you pointing to cost savings that are going to flow out from the branch consolidation or are you kind of speaking a bit more broadly and potentially teeing up the potential for a more broad based initiative?

Matthew, so I would say if you actually look at the expense categories on our income statement, I believe 16 categories and 12 of the 16 are down from a year ago. And so in essence it’s a continuation of turning over every rock and we still think there is some opportunity. We’ve tackled I think a lot of the low hanging fruit but I think there is still opportunity there. As an example we have a fairly large investment in some processing software which will completely be depreciated later in 2016. And so that -- while there is some additional investment there that could be likely, we think there will be huge savings there. And what’s really hard to quantify is when I mentioned this on some previous calls, we renegotiated our core processing contract with FIS a year ago this quarter. And since that point in time we’ve been in a streamlining of processes, endeavor and we continue that will be going on throughout 2015 where essentially we are having better integration through all our applications, we are having fewer vendors to deal with on all our applications, we are getting rid of a lot of the paper that’s in our company and we believe sort of bogs us down. So it’s difficult to say hey, the additional cost savings will be this as a result of those workflow streamlining efforts but I do believe that they will be material.

Okay.

And Matthew just to put some dollars on the comment Brad mentioned, we had some internally developed software that becomes fully depreciated in March of 2016. And that level of amortization is close to $1 million a year. So we expect to see data processing costs go down further once that becomes fully amortized.

Okay. And then lastly and then I will hop out, as far as share repurchases just a quick note, can you remind us number one, how much cash there is at the holding company level and then number two, what we should expect as far as the pace of those repurchases is concerned?

Well, the cash at the holding company is about 32 million-ish so there is a fair amount of cash available. 5% would be roughly on 23 million shares of somewhere around 1.15 million. So there is plenty of cash available at the parent company to accomplish the share repurchase. And the pace I would say we would prefer to do it sooner rather than later but at least at the start we were doing open market transactions. So there was limits on how much we can buy in a particular day. We would also be interested if there was blocks that come available but we are -- I guess the bottom line is we want to be able to be able to consistently be in the market through the course of 2015 and looking at opportunities on where we might be able to accelerate it or where there maybe opportunities to buy on weakness. So, we don’t have anything in particular on pace but we want to certainly accomplish the 5% over the course of the year.

Thank you very much.

The next question comes from John Rodis of FIG Partners. Please go ahead.

Good morning guys.

Good morning.

Guys, maybe just a quick question on the loan growth. You put up some pretty good commercial growth in the quarter. Was the growth this quarter, was it fairly granular or whether a couple of bigger credits drove the quarter?

John, it is the latter in terms of being very granular in origination and it was also I think a very good mix from a geographic standpoint. The West region led us this past quarter followed closely by our Southeast Michigan region and then even the Saginaw/Bay City "Thumb" market had some very good growth. So, and it was also I think a good mix. We now have more of greater allocation towards C&I as opposed to investor real estate and -- so that continues to be a positive trend for us.

Okay, makes sense. Just one other question on the -- I guess, the mortgage results this quarter, the gain on sales spread was I think about around 3% or 3.1%, what sort of break do you think you sort of expect going forward there and I know it can be volatile but…?

We do have on the table - a chunk of that is due to the fair value adjustment. And the fair value adjustment is basically we -- because of the derivative accounting we mark-to-market every quarter not just loans held for sale but commitments to originate loans, now we don’t take a 100. We assume a certain fall out ratio and then we also take into account commitments to sell loans. So we are marking three different items on a fair value basis at the end of each quarter. So on a quarter where we get growth in what we call the pipeline, commitments to originate loans that is going to push the margin higher because of fair value adjustments. So what we see in the second quarter for example will be sensitive towards the size of that pipeline to originate loans at the end of June. Now typically we see seasonal pickup there so to the extent the pipeline stays relatively the same, we wouldn’t have large fair value adjustments so we might see the margin come down but we would also see the volume of actual loan sales move up. So, the bottom line is we might see the margin, I would say a more normal margin would be more around 2.5% where you are not having those fair value adjustments and then you are going to have obviously depending on the volume of originations. But as we move through the next couple of quarters, we would typically see the seasonal increase in purchase volumes so even if the refinances come off a little bit we would still expect to have good solid results in terms of gains on loan sales whether we get to 2.1 million or we maybe a little shy of that. But we’d still expect good gains on loan sales and what we hopefully won’t see is any impairment charge on MSRs. So the net between loan sales gain and MSRs or mortgage servicing income or expense would be better in the second and third quarters versus the net in the first quarter that’s what we’d hope for. And then that would move us more in that $9.5 million to $10 million range for non-interest income.

Okay. That makes sense Rob. Okay, thanks guys.

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

Hi, good morning guys, how are you? First question has to deal with the outlook for the provision. I know you mentioned there is obviously lot of moving parts that go into how that shakes out each quarter but just kind of maybe you can help us frame it out a little bit, what are you expecting for full year net charge off?

Well we really don’t give specific guidance but I guess we would hope that the kind of run rate we are at down in that 20 basis point would be similar to what we see or better. We I guess the themes there are one, we are seeing less loss content on defaults, in other words collateral values are improved versus where we were a few years ago. So that helps in terms of just the new charge off rate and then secondarily if we continue to see decent recoveries like we did in the first quarter I would be optimistic that we could be at that 20 basis points or better as we move through the balance of the year, hopefully even better.

And then if you look back over the last few quarters you’ve had a credit to provision for the last four quarters in a row and absent first quarter 2014, a bunch more quarters before that. So I mean how should we look at I guess the provision line going forward. Your reserve is at 173, so we continue to model in a negative provision expense.

It’s difficult it’s not something we necessarily go into a quarter and expect a negative provision. We go through, we have a very what I would say rigorous process of how we do the modeling. What has helped and if we look at peer group, you are more around the 1.5 give or take a few basis points level. I think where we get some of the elevation is we still have 106 million of TDRs, a lot of our specific reserves are in that category. So what’s helping us move this down is a couple of things, one is, what the level of new defaults is and that’s been declining. What the level of net charge offs within net charge offs recoveries are, that’s been helping us as that has moved down. And in addition in those homogenous portfolios what helps those charge offs come down is that level of charge offs is what influences the reserve calculations within those portfolio. So within the homogenous portfolios we are looking at refreshed FICO scores. Those refreshed FICO scores give us a probability of default level as we do our migration analysis and then within the probability of default sort of a historical charge off rates give us that final loss given default level which sort of feeds into the provision. We then have a subjective portion that’s influenced a lot by economic data and the economic data has been improving. So that’s allowed us to have some release from the subjective and so those are kind of the primary influencing factors. It would be hard for me to see a scenario where we go well below or below that sort of peer range of that 1.5 and change. So my thought is you can’t stay with negative provisions. But if we have very good credit metrics, we might get a quarter or two more. But then I think at some point we are going to move to a more normalized provision level which I would think would be more in that 20 to 25 basis points range depending on loan growth and other factors. So maybe we squeeze out a couple of more quarters bottom-line that I think at some point it comes to an end. Brad I don’t know if you want to add any.

No, I think it was really good Rob.

That is very helpful. Thank you very much for that color. I guess just one other question, I think you had mentioned that you are hopeful that deposit growth would potentially exceed that loan growth this coming year, what are some of the initiatives that you have going on or some of the programs you have in place that give you confidence that you can grow strong deposit growth throughout the year?

I don’t know that I said we expected that. I said that if deposit growth exceeds the mid single-digit, loan growth then that might cause us to have to grow the investment portfolio. I think are more sort of normal range on an annualized basis for deposit growth and if you look at our proxy statement this is in the incentive plan would be more in the 2.5% to 5% range. And we would expect loan growth to hopefully be somewhat above that. So we saw strong deposit growth in the first quarter but some of that is seasonal in nature. We see figuring with our municipalities’ tax collections accrue a lot in February so there is some boost in deposits. So we would I guess on an overall basis not expect deposit growth to be quite as great as loan growth. Now the one other factor to consider is your base of percentage growth on deposits is coming off 1.9 billion, your base on growth on loans is coming more off a 1.4 billion. So dollar wise they still maybe in sync and Brad if you want to comment on some of the factors but lot of it is just efforts whether its treasury management, commercial, etc.

Yeah, I think you are right on with that. I would add that we view the deposit base as being huge value for our franchise. So deposits have always been our and will continue to be an emphasis for our people. And in fact again for 2015 it is one of the annual incentive plan category targets that we have for our people and there this is outlined there. Proxy we have a threshold goal of 2.5% growth of target, level of 5% growth, and then maximum level of 10%. So that’s what our people are striving for and there is not a quick fix to get there. It’s essentially blocking and tackling. It’s our structure, it’s our people, our community bankers knocking on doors, it’s our commercial lenders continuing to emphasize the C&I portfolio that does generate greater deposit balances, and again continuing to take very good care of our municipal customer base.

Okay, that’s helpful. Thank you for those points. That’s all that I have for now. Thanks.

Having no further questions this concludes our question-and-answer session. I would like to turn the conference back over to Brad Kessel for any closing remarks.

Okay. I would like to thank each of you for your interest in Independent Bank Corporation today and for joining us on today’s call. I wish everyone a great day.

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