Good morning and welcome to the Independent Bank Corp. Second 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 Brad Kessel, President and Chief Executive Officer. Please go ahead, sir.

Good morning. Thank you for joining Independent Bank Corporation’s conference call and webcast to discuss the company’s 2015 second quarter results. I am Brad Kessel, President and Chief Executive Officer 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 2 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 4 in our presentation, we are reporting for the second quarter of 2015 net income of $5.6 million or $0.24 per diluted share versus net income of $6.1 million or $0.26 per diluted share in the prior year period. On a pre-tax basis, this is a $300,000 or 4.4% year-over-year increase. For the six months ended June 30, 2015, the company reported net income of $9.4 million or $0.40 per diluted share compared to net income of $9.2 million or $0.39 per diluted share in the prior year period. Turning to the 2015 second quarter financial highlights slide, Page 5, this quarter’s results were positively impacted by growth in net interest income and non-interest income on both a linked quarter basis as well as compared to same quarter last year, reductions in non-interest expenses of $1 million or 4.3% on a year-over-year basis, and improved asset quality metrics which led to a $100,000 credit provision as compared to the prior year’s $1.8 million credit provision. One of our key strategies for long-term profitability and growth continues to be…

Thanks, Brad and good morning everyone. I am starting at Page 9 of our presentation. Our net interest income totaled $18.7 million during the second quarter of 2015, an increase of $0.2 million from the year ago period and an increase of $0.6 million on a linked quarter basis. Our tax equivalent net interest margin was 3.62% during the second quarter of 2015 compared to 3.74% in the year ago period and 3.57% from the first quarter of 2015. Although the net interest margin remains under some pressure due to the prolonged low interest rate environment, we did achieve an increase in the margin on a linked quarter basis for the first time since the start of 2013. As I mentioned last quarter, we are optimistic that the downward trajectory of the net interest margin has generally come to an end. Average interest earning assets were $2.08 billion in the second quarter of 2015 compared to $2.01 billion in the year ago quarter and $2.06 billion in the first quarter of 2015. Page 10 contains a more detailed analysis of the linked quarter increase in net interest income. This increase was primarily due to increases in interest income on loans and on securities and investments and a decrease in interest expense on deposits and borrowings. In addition one more day in the second quarter of 2015 as compared to the first quarter increased net interest income by about $100,000 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 this presentation. Moving on to Page 11, non-interest income totaled $11 million in the second quarter of 2015 as compared to $10.1 million in the year ago quarter and $9 million in the first quarter of…

Thanks, Rob. We are pleased to report strong overall results for the second quarter of 2015. We reported revenue growth, continued reductions in non-interest expense, improved asset quality and a quarterly return on assets of 0.98% and return on average common shareholders’ equity of 8.86%. However, our management team recognizes we need to continue to grow revenue and improve our overall earnings as we work toward a sustained performance of 1% or better return on assets and 9% to 10% or better 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, non-interest expense of less than $21 million in a normalized provision. 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 the migration of our earning assets from a lower yielding securities portfolio to higher yielding loan portfolio. This strategy includes the originations of a high credit quality, diverse mix by segment, diverse by geography and a very granular makeup of credits. Secondly, we will continue to focus on and invest our resources 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 market. Fourth, we will continue to improve the bank’s 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 shareholder total return through the prudent management of our capital. As it relates to capital, our near-term target for tangible common equity is 10.5% and the longer term target is near 9.5%. Our plan is to retain capital for organic loan growth and return capital through consistent dividend payout plan and share repurchase plan. We believe the sound execution on these strategies will generate solid total shareholder returns over the long run. At this point, we would now like to open up the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Matthew Forgotson of Sandler O'Neill & Partners. Please go ahead.

Hi, good morning gentlemen.

Good morning.

Can you give us a sense of the loan pipeline, the balance is complexion weighted average coupon and remind us also where it was last quarter?

Sure. Sure, Matthew, this is Brad. I start with the mortgage pipeline and our mortgage pipeline is a little bit under where we were at the start of the second quarter, what it’s still at a lofty level. And we see closings continue to be strong through the third quarter. On the commercial side, our pipeline is very strong. It is higher than it was at the start of the second quarter. And I think the yields continue to be probably on a weighted average basis in that 4.5% range. And it’s a very good mix of C&I and commercial real estate, very granular in nature and very diverse in terms of geography.

Okay. In terms of the balance sheet remixing, I should say the loan portfolio remixing, as you look at your securities to assets ratio kind of what should we expect that to be on a stabilized basis? I am trying to get at how much incremental margin expansion we could see from this level barring a material shift in rates say over the next 12 months?

I think longer term we like to see loans assuming total assets of roughly the same level as that we have today at about $2.3 billion, another couple of $100 million in loans and $200 million less in securities. So, that would add roughly 9% to where we are at today in terms of loans to assets and we think that would be a very comfortable level in terms of still maintaining good liquidity within the balance sheet, but having fuel to really boost net interest income.

Okay. Just moving over to expenses, if you are at $21.6 million today, where would you ultimately expect this to flush out saying the third quarter, once the branch sale takes effect and if I recall correctly you also have some amortization expense that’s rolling off as well. So, where do you see that trending?

Well, I think we will keep working on our way down toward $21 million as we moved through this year. And then as we move into the following year getting that pushed below the $21 million level, but amortization you are referring to is some software amortization that runs out after the first quarter of 2016. So, by the second quarter that sort of kicks in, and that’s about $900,000 annually that software amortization. So, we will get the benefit of that. And then as you mentioned, we do have – we will start to see the full benefit of the branch consolidation that took place on April 30 in these last two quarters of this year and then moving into next year, we didn’t really get that much of the benefit in this second quarter. So, the combination of those two items will help start to push us below that $21 million figure, that’s our target as we move into 2016.

Thank you very much.

You are welcome.

Our next question will come from John Rodis of FIG Partners. Please go ahead.

Good morning, guys.

Good morning, John.

Rob, I guess one question on the loan portfolio, I noticed METCO loans were up slightly this quarter and I know it was only like $2 million, but that was the first quarter they have actually not gone down in quite a while. Could you just maybe just talk to that real quick?

Well, yes, we are just at sort of a volume level. Presently, that portfolio was stabilized at this juncture. We are still working on some initiatives to try and shift that business, where the volume will become more through auto dealerships as opposed to direct marketers of service contracts. So, if that push is ultimately successful, we think we could get some growth there. It certainly would not be significant growth, but it would sort of stop the trend of that portfolio of heavy move down, but right now, we are sort of at this juncture, where the incoming volume and the run-off of the portfolio are sort of a sequence now, so the portfolio is somewhat stabilized.

Okay. I also noticed on the mortgage side, I guess the gain on sales spread was down from the first to second quarter, can you just talk about what we should expect and I know what’s sort of a volatile number, but what you see going forward?

Yes. A couple of things, one is I think we will see that the margin pump up a bit as we move into the third quarter. The second quarter couple of things affected it, one is there was just the competitive landscape was such that we just saw some compression what we call primary and secondary spread. So I think that was part of it. The other piece was the actual close ratio was a bit above where our hedge ratio was. And if you recall during the second quarter the 10-year treasury was up quite a bit, that’s what triggered the MSR recovery. So some of the margin compression on the gains on sales, were just because we were selling some additional loans that had not been hedged because of the closing ratio being a bit higher and the pricing was coming down during the quarter, so that we had a modest impact as well. But based on where we are seeing volumes coming and where the pricing is done in the pipeline right now, we expect to see a bit of a bounce back on that margin in the third quarter.

Okay. And then maybe just one final question for me on the buyback, I think you guys said you bought back like 206,000 shares in the quarter, would you sort of expect that to be the quarterly pace going forward or how would you characterize I guess the pace of activity going forward?

Well, our ultimate goal is to try and fulfill the 5% by the end of the year which we are at 1.2%, so we probably have to pickup that pace a bit. What we are really focused on there is increasing value for our shareholders. So we are cognizant of what the tangible book dilution recovery timeframe is. And we are looking obviously for opportunities to buyback the stock. Secondly I think we certainly don’t want to be the price driver in the market, so we are careful about that. But having said all those things, we would like to see if we can get to that 5% by the end of the year. So we are 3.8% shy which would mean bumping that level up the next two quarters to get there.

Okay, it makes sense. Thanks guys.

And at this time we will conclude the question-and-answer session. I would like to hand the conference back over to Brad Kessel for his closing remarks.

Very good. I would like to thank each of you for your interest in Independent Bank Corporation and for joining us on today’s call. And wish you all great day.

Thank you. Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.