Good morning and welcome to the IBCP Independent Bank Corp Third Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Brad Kessel, President and CEO. Please go ahead, sir.

Good morning. Thank you for joining Independent Bank Corporation's conference call and webcast to discuss the Company's 2015 third 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 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 our 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 third quarter of 2015 net income of $5 million, or $0.22 per diluted share, versus net income of $4.9 million, or $0.21 per diluted share, in the prior year period. For the nine months ended September 30th, 2015, the Company reported net income of $14.4 million, or $0.62 per diluted share, compared to net income of $14.1 million, or $0.60 per diluted share, in the prior year period. Turning to the 2015 third quarter financial highlights slide, page five, this quarter's results were positively impacted by growth in net interest income of $700,000, or 3.6%, on a year-over-year basis, reductions in non-interest expenses of $205,000, and continued improvement in asset quality metrics, with net recoveries for the third quarter of $260,000, which led to a $244,000 credit provision. One of our key strategies for long term profitability and growth continues to be centered on changing our earning asset mix from lower yielding short duration investments into higher quality -- into quality higher yielding loans. This past quarter our portfolio loans…

Thanks, Brad, and good morning, everyone. I am starting at page nine of our presentation. Our net interest income totaled $18.8 million during the third quarter of 2015, an increase of $0.7 million from the year ago period and an increase of $.1 million on a linked quarter basis. Our tax equivalent net interest margin was 3.58% during the third quarter of 2015 compared to 3.61% in the year ago period and 3.62% in the second quarter of 2015. Two factors, in addition to the prolonged low interest rate environment, contributed to the slight decline in the net interest margin in the third quarter. First, the yields on new loan volumes remained below the weighted average yield on the total loan portfolio. Second, we had significant deposit growth, some of which occurred late in the third quarter. And thus, some of these funds could not be deployed by quarter end, which resulted in an increase in cash and cash equivalents. Average interest earning assets were $2.11 billion in the third quarter of 2015 compared to $2.02 billion in the year ago quarter and $2.08 billion in the second 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 that was partially offset by an increase in interest expense on deposits and borrowings. A little more color on the new loan production and yields is as follows. Portfolio loan production, excluding mortgage loans originated for sale, in the third quarter totaled $137 million, of which 56% had variable or adjustable rates and 44% had fixed interest rates. The overall yield on this portfolio new loan production was approximately 3.87%. This compares to a total portfolio…

Thanks, Rob. We are pleased to report solid overall results for the third quarter of 2015. We reported revenue growth, continued reductions in non-interest expense as compared to the same quarter one year ago, continued strong asset quality metrics. Our quarterly return on assets was 86 basis points, and our return on average common shareholders' equity was 7.84%. 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. As previously shared, our target or roadmap to this level of performance is built in improving net interest income to $20 million or better per quarter, non-interest income of $10 million or better per quarter, non-interest expense of less than $21 million per quarter, and 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; first, generating revenue growth through the migration of our earning assets from lower yielding securities portfolio to a higher yielding loan portfolio; second, 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 to increase long term shareholder total return is 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 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. We believe 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, sir. [Operator instructions] Our first question comes today from Damon DelMonte with KBW.

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

Good.

Good. So, my first question just relates to the buyback. Thanks for the color on the repurchase activity this quarter. Could you talk a little bit about maybe pricing sensitivity? I know the shares have been strong lately, and the average price at which you've bought back the stock year-to-date has been significantly lower than where the shares are today. How do you factor that into the equation, given where the stock price is?

Well, we have an internal model that we utilize with a target in terms of tangible book dilution recovery in the two to three year range. So, obviously some of the inputs there are earnings and where the stock will trade on a P/E basis. But, that's sort of what we're using. And as we reflect on where we feel earnings are moving towards, it gives us sort of roadway of where we think it's wise to repurchase the shares at. So, certainly there's been some times where we weren't buying. But, I would say most of this year we have been buying, including into October.

Okay, that's helpful. Thanks. And then, I appreciated the commentary on the margin. And from a modeling perspective, it sounds like you're probably going to feel a little bit more pressure, just given where the new production was this quarter versus what the portfolio yield is. Is that a fair assessment?

What was a little unusual this quarter was we got quite a bit of deposit growth that was late in the quarter that we just couldn't get all out to work. And then, some of the loan growth, just the timing of the closings sort of fell later in the quarter on the commercial side. So, I mean, even with the gap between the new production, and I had given you the numbers with the average yield at 3.87%, and recognize about 60% of the new production was variable or adjustable rate. So, that tended to push a little bit there, and that compares to an overall yield of 4.83%. So, that gap is still roughly, if this is representative, about 100 basis points. But, the rotation, if we're growing those loans and the money is coming out of the investment portfolio, we still feel like that migration can keep the margin relatively steady. Now, again, some of the push this quarter was just from a timing perspective and not being able to get all those dollars out. But, I do think there is still, with that gap, a little bit of downward pressure. But, we're hopeful we could sort of make that up on the margin through the transition of dollars out of lower yielding securities and into higher yielding loans, even if that loan yield is more around 4%. And then, certainly we feel like we could continue to push the dollars up toward that $20 million a quarter that Brad mentioned. And I don't know if you want to add anything, Brad.

That was very good, Rob.

Okay, great. That's all that I had for now. Thanks.

Thanks, Damon.

Our next question comes from Matthew Forgotson with Sandler O'Neill & Partners.

Hi. Good morning, gentlemen.

Morning, Matthew.

Good morning, Matthew.

I'm sorry if I missed this, but would you mind just giving us a little bit of color about what exactly drove the quarter-to-quarter increase in deposits? Was it a new campaign? Was it municipal inflows? Just looking for a little granularity there.

Very good, Matthew. So, actually I'm very pleased with the deposit growth, and I think it's a reflection of a continued emphasis within our company to grow the core deposit base. And we've had people out in our markets regularly knocking on doors and asking for the business. So, it's great to see it come in. This quarter I'd say there was quite a bit of pick up in our municipal or Pub Fund client base, and really across the board, across our markets. And a lot of that's seasonal in terms of tax revenues coming in and then being shifted back out into their respective markets. But, I think it reflects continued confidence in Independent Bank by our customer base. On top of that, I would say that we continue to work real hard at growing our checking account base. We do direct mail and a series of activities at growing that client base too. So, we feel really good about the growth this third quarter there.

Okay. Can you give us a sense about kind of the trajectory to $21 million non-interest expense run rates? I know we've been talking about this being a level that you want to achieve as we move into 2016. But, is it -- how are you seeing it? Is it reasonable to expect you to get there for the fourth quarter, or is this really pushing now into the first quarter of next year?

Go ahead, Rob.

Yes. I think we'll be down in the fourth quarter. I don't think we'll be down to the $21 million level. I commented we had a handful of what I would classify as nonrecurring items that were $200,000 to $300,000. That was kind of the quarter-to-quarter linked quarter jump that were spread between communications, data processing, and other. And then, on the comp side, we had some bump because one just -- we had an additional workday in the quarter. That's $130,000 or so, but plus we had a lot going on in our mortgage operations with the conversion to a new origination system and getting ready for TRID, which came into play in the first week of October. Some of that may bleed into the fourth quarter, but we think longer term that trajectory, once we get TRID behind us and once we're I think more used to this new system, it's going to improve the productivity there and ultimately lead to better efficiency. And then, there are certain things we talked about I think in the past. In 2016, with some roll off of some software costs and other things that are pretty significant, and some occupancy costs that collectively are probably getting upward toward $1.5 million annually, that's going to sort of fold in between November of this year and about April of next year for that to be kind of fully achieved. So, I think to sort of summarize, lower in the fourth quarter versus where we were this quarter is what we believe. And then, moving progressively toward that $21 million or better, certainly we feel by the second half of next year we'll be there. And our goal is to get to $84 million for the full year.

Okay. And then, I'll just finish up with another point on buyback. Let's just assume the current market price. Is it reasonable to expect that, if the stock holds in the current range, that you're going to work through the balance of the authorization by the end of the year?

I would say that is reasonable, yes.

Okay. Thank you very much.

You're welcome.

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

I would like to thank each of you for your interest in Independent Bank Corporation and for taking the time to join us on today's call. I wish everyone a great day.

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