Good day, and welcome to the IBCP Independent Bank Corp. Fourth 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 Mr. Brad Kessel, President and Chief Executive Officer. Please go ahead, sir. William “Brad” Kessel: Good morning. Thank you for joining Independent Bank Corporation's conference call and webcast to discuss the company's 2015 fourth quarter and full year results. I am Brad Kessel, President and Chief Executive Officer 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 Bank today, you can access it at our company's Web site, 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, we are reporting for the fourth quarter of 2015 net income of $5.6 million, or $0.25 per diluted share, versus net income of $3.9 million, or $0.17 per diluted share, in the prior-year period. For the year ended December 31, 2015, the company reported net income of $20 million, or $0.86 per diluted share, compared to net income of $18 million, or $0.77 per diluted share, in 2014. This represents a 11.1% and a 11.7% increase in net income and diluted earnings per share, respectively, over the prior year. Turning to the fourth quarter financial highlights slide, Page 5, this quarter's results were highlighted by…

Thanks, Brad, and good morning, everyone. I am starting at Page 11 of our presentation. Our net interest income totaled $19.4 million during the fourth quarter of 2015, an increase of $1.3 million or 7.2% from the year-ago period and an increase of $0.5 million on a linked quarter basis. Our tax equivalent net interest margin was 3.56% during the fourth quarter of 2015, which is unchanged from the year-ago period and down slightly by 2 basis points from the third quarter of 2015. At this point, we believe the net interest margin has pretty much stabilized and I will comment more on this topic when we discuss our outlook for 2016. Average interest earning assets were $2.18 billion in the fourth quarter of 2015 compared to $2.03 billion in the year-ago quarter and $2.11 billion in the third quarter of '15. As Brad mentioned, for all of 2015, net interest income totaled $75 million, an increase of $1.7 million or 2.4% over 2014. Page 12 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 new loan production and yields is as follows. Portfolio loan production, excluding mortgage loans originated for sale, in the fourth quarter totaled $131 million, of which 56% had variable or adjustable interest rates and 44% had fixed interest rates. The overall yield on this portfolio new loan production was approximately 4.11%. This compares to a total loan portfolio yield of approximately 4.82% during the fourth quarter. We will comment more specifically on our outlook for net interest income for 2016 later in the presentation.…

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

Hi. Good morning, gentlemen. William “Brad” Kessel: Good morning.

How much of the high single digit loan growth you’re expecting in 2016, on how much of that should we expect to be resi bulk loan purchases? William “Brad” Kessel: We are anticipating not more than 50 million of bulk purchases, so the balance would be organic growth.

Okay. And in your NIM forecast you’re assuming two rate hikes that’s slightly more aggressive than the forward curve is currently implying. Just as a but exercise, if you strip out these rate hikes, Rob, how much pressure would you expect on the stabilized margin?

I still think the margin would be stable, we would actually anticipate a little upward drift in the margin if we get those two rate hikes. So we would still even, absent those, expect the margin to be stable.

Okay. William “Brad” Kessel: Rob, just part of that is just it’s a combination – one, we did get a 25% increase in mid December, which really essentially had no impact on 2015 and then second would be the continued migration into higher yielding loans from the lower yielding investment portfolio. So even in the absence of additional increases in Fed funds, we would expect the margin to be stable to maybe a tiny upward drift. But with the two bumps, we would expect a little more upward drift.

Okay. And next on expenses, just I hear what you’re saying about the fourth quarter run rate, the $1 million of non-run rate spend that you identified. Is it fair to say that we should expect that $1 million to fall out in the first quarter of '16 or is that too aggressive an assumption to make? William “Brad” Kessel: No, I don’t think that would be aggressive at all. What we do with incentive comp is every quarter we’re – the goals we set are disclosed in the proxy statement. Those goals are based on net income, which is measured by earnings per share, which is 32% of the overall, asset quality is 16%, deposit growth 16%, efficiency ratio 16% and individual goals for the particular person is 20%. Those are all laid out in our proxy statement. So we move through the year we’re measuring not just our actual performance but our forecasted performance for the balance of the year vis-à-vis those disclosed incentive targets in adjusting incentive comp. And I could just tell you in the fourth quarter as you can probably appreciate that we’re not budgeting or forecasting large credit provisions or there may be certain other factors as well. So what that impacts is when you have a quarter, like we did in the fourth quarter where we had a lot of things going on a positive basis that bumped up that incentive accrual and it sort of got moved more disproportionately into the fourth quarter.

Okay. And then lastly and then I will hop out. I know there are a lot of moving parts in the provision, Rob, but assuming stable asset quality, is it fair to think that you’d run a zero provision across '16 or should we expect it to swing into the positive such that you’re providing for loan growth?

Well, it’s so difficult to project because there’s all those factors that go into it. I would just say this. That 1.49 we look across the landscape, we’re still a little bit higher than peer group. We see peer group is low for some institutions down toward that 1% area, but I think peer last I looked was in the 1.30-ish handle. I’m not suggesting we’re moving down to that. What I would say is where we probably have a bit more of allowance relative to peers is in our TDR portfolio, which as you know we put a slide in every quarter to the extent that that portfolio continues to perform well. In decline, we could see releases of specific reserves there. In addition, if we run low new default rates and relatively low charge-offs and have relatively strong recoveries, I mean that would be sort of the factors that would get you into the range where maybe it’s zero to a small credit. It’s hard and I think you pointed it out in your comments this morning, it’s hard to envision that. You’re going to see a continuation of credits but certainly I could envision factors that would have the provision very low in 2016 even with some loan growth.

Thank you very much.

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

Good morning, guys. William “Brad” Kessel: Good morning, John.

I guess most of my questions were asked and answered but maybe just a question for either for Brad or Rob just on the – I guess just the trends in the loan portfolio during the quarter. I mean if you look at commercial loans, they were down a little bit and then commercial real estate was up. Could you just maybe – I’m assuming pay downs were probably up on the commercial side. And then on the commercial real estate side was the growth fairly granular or did you see a couple bigger loans in the quarter that sort of drove the increase?

Well, actually John, so commercial was up pretty good as a whole for the quarter and for the year. And what we liked there is that it’s a good mix between the C&I originations and the commercial real estate originations. It’s a good mix between each of our free markets, again, with our Southeast market being the strongest followed by our West Michigan market and then Central market. And it is very granular in originations. And in fact we target sort of that $1 million to $5 million commercial financing asset side and I think we had about 61 deals there last year. And in fact through all this growth, we did not have any originations over the $10 million mark. We had some larger ones when we sold off beyond the 10 million, so it was very granular in nature. And then finally, the pipeline continues to be real strong. So I think we’ve – in many of the bookings actually here in the fourth quarter on the commercial side, we’re late in the quarter in the month of December. William “Brad” Kessel: John, I’ll add one thing on the C&I side. We did have one relatively large payoff on an automotive-related credit in Southeast Michigan. So your comment regarding that sort of change in mix between September 30 and December 31 balance is influenced by that factor.

Okay. Okay, guys, fair enough. Thank you.

Thanks, John.

Our next question will come from Damon DelMonte from KBW. Please go ahead with your question.

Hi. Good morning, guys. How are you doing? William “Brad” Kessel: Hi, Damon.

My first question just regarding the provision, I know there’s a lot of moving parts there and it is difficult to provide great clarity as to what a quarterly run rate would be. But as you put on new loans, what’s the typical level of reserve you’re taking for the loans you’re putting on currently? William “Brad” Kessel: Well, it depends on a lot of factors. For example, on the commercial side it’s driven to a large degree on the grade of the loan. So with that you’re going to see more variation on commercial credits. But I would say you could see a range of under 0.5% to say 1.5%. So it’s a relatively wide range there. If we look on the retail side, you’re on an overall basis down more towards 50 basis points, which includes a historical allocation and then there is a portion of subjective allocations. So when you blend those altogether you would generally be probably down toward the 1% mark. And again, that driven to some degree by where on homogeneous pools like consumer and mortgage where incurred losses have been and on the commercial side it would be driven by a loss given default and probability of default rate, which is a direct factor of the loan rating and then migration factors. And I should add on the retail, we also do a migration that’s based on FICO score. So, I would just say as an overall comment that when you mix all that together it would generally be less than the current allowance of 1.49%.

Got you. That’s great color, thank you. And then with respect to the securities as a percentage of earning assets, what’s your targeted level over time? William “Brad” Kessel: I would say the targeted level would be more toward a 15% or so, so that would be more in the 300 to 350 range, so it would be down a couple hundred million from where we’re at.

Okay. William “Brad” Kessel: And that would be influenced too – it would be reflective of still a deposit base that’s predominately core and not a lot of wholesale funding, which we expect the balance sheet to be like that.

Right, okay. And then just with respect to the bulk purchases of the mortgage loans. Could you just talk a little bit about the thought process behind adding longer term fixed rate assets on the books at this point in time? William “Brad” Kessel: Sure, Damon. So I think we have shared consistently that sort of the profile of our balance sheet be very asset sensitive with both short duration on the securities portfolio as well as very short on the loan portfolio. And again, this overall strategy of working to migrate out of the securities into higher yielding loans and then within that a higher loans to deposit ratio. So, we in '15 made a decision that if we can find quality paper we would look to take on some interest rate risk while also managing appropriately the credit risk. So we booked just under 33 million, it’s in-market collateral, very good FICOs, very reasonable LTV, some seasoning. And our team went through a high percentage due diligence effort and I think we feel very good about the overall process. And as a result have gone back and said, hey, if we can find that paper again, we would continue with that strategy. And I think Rob on an earlier comment said maybe up to another $50 million.

Yes, I’d just add one – it’s a relatively modest amount relative to our balance sheet, which is as Brad covered quite asset sensitive. And then too and I mean hey, it’s not like we’re trying to forecast where the market is but even with some movement in the Fed funds rate, we still feel like longer-term rates are probably not as likely to move up as much. And in fact if you look at what’s happened with the 10-year thus far this year, that’s certainly been the case. So we kind of feel if we could get near that 4% level on a longer duration asset that it still makes some sense given the entirety of our balance sheet profile.

Got you, okay. That’s helpful. All of my other questions have been answered. So thank you very much.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Kessel for any closing remarks. William “Brad” Kessel: I would like to thank each of you for your interest in the Independent Bank Corporation and for joining us on today’s call. We wish everyone a great day.

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