Good morning and welcome to the Independent Bank Corporation's fourth quarter 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 that this event is being recorded. I would now like to turn the conference over to Brad Kessel, President and CEO. Please go ahead.

Good morning. Thank you for joining Independent Bank Corporation's conference call and webcast to discuss the Company's 2016 fourth quarter and full-year results. I’m 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 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. We are pleased to report solid overall results for the fourth quarter of 2016. Net loan growth and strong mortgage loan originations and sales contributed to a 5.1% year-over-year increase in our quarterly net income. Quarterly earnings per share grew by 8% year-over-year reflecting both the increase in net income and the benefit of our share repurchase activity. Further, despite continued pressure from low interest rate environment, we did achieve growth in net interest income on both a year-over-year and sequential quarterly comparative basis. For the fourth quarter of 2016, we are reporting net income of $5.9 million or $0.27 per diluted share versus net income of $5.6 million or $0.25 per diluted share in the prior-year period. The fourth quarter results were driven by net interest income of $20.25 million up $897,000 or $4.6 from the year ago quarter and up $252,000 or 1.3% from the third quarter of 2016. The fourth quarter results were also very positively impacted by $2.8 million in gains and mortgage loans, up $1.1 million or 65.7% from the year ago quarter and $2.4 million recovery of previously recorded impairment charges…

Thanks, Brad, and good morning, everyone. I’m starting at Page12 of our presentation. Brad discussed the increase in our net interest income during his remarks, so I will focus on your margin. Our tax equivalent net interest margin was 3.45% during the fourth quarter of 2016, which is down 11 basis points from the year ago period and down six basis points from the third quarter of 2016. I will have some more detailed comments on this topic in a moment. Average interest earning assets grew to $2.37 billion in the fourth quarter of 2016 compared to $2.18 billion in the year-ago quarter and $2.29 billion in the third quarter of 2016. For all of 2016, net interest income totaled $79.6 million an increase of $4.7 million or 6.2% over 2015. Page13 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. Returning back to the topic of the net interest margin, the six basis points of linked quarter compression when in anticipated with I spoke last quarter. A few factors influence this. More than anticipated pre-payment activity particularly in the commercial loan portfolio, more than anticipated new loan growth but yield on the new loans were below the total loan portfolio average yield. The combination of these two items drove the average yield on a loan portfolio, down to 4.53% in the fourth quarter of 2016, from 4.59% in the third quarter of 2016. In addition, the cost of funds rose to 0.32% in the fourth quarter of 2016, from 0.3% in the third quarter of 2016. This was solely due to a $44.8…

Thanks, Rob. In summary, we are pleased to report solid results for 2016 with growth in earnings and earnings per share. The improvement is directly related to the successful execution of our strategy to migrate earning assets from lower yielding investments to higher yielding loans in order to grow our net interest income. Our quarterly return on average assets was 0.91% compared to 0.93% for the same quarter one year ago. And for the full-year return on assets improved to 0.92% from 0.86% one year ago. Our quarterly return on average common shareholders' equity was 9.29% compared to 8.80% for the same quarter one year ago and for the full-year our return on equity improved to 9.21% from 7.89% one year ago. Excluding the after-tax cost associated with our litigation settlement, our adjusted ROA and ROE for all of 2016 would have been 0.98% and 98.82% respectively. As we look ahead to 2017 and beyond, we are focused on driving high performance, with balance sheet growth and strength, quality earnings, per share value and strong profitability levels. We continue to build on a momentum generated the last several years. Our management team recognizes we need to continue to grow revenue, control expenses, stay disciplined in credit and leverage our teams risk management best practices. As we work toward sustaining high performance, including profitability of 1% of better return on assets and 10% to 12% of better return on equity. At this point, we would now like to open up the call for questions.

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Brian Zabora of Hovde Group. Please go ahead.

Hey guys good morning. A question on loan yields, have you seen any [indiscernible] in pricing in market with the post the Fed hike or just your just general trends on yields kind of again your asset of Fed rates getting into January?

I would say we have seen it most pronounce than the retail side of the business, so really on the mortgage side, I think on the commercial side probably as much do to competitive factors, we haven’t seen as much as lift there. But I do think the gap between our average portfolio yield and the average yield on new loans is going to continue to compress and with that along with the quarter point we got stabilize the margin.

Okay and then on the deposit side, are you seeing similar trends where you are really not seeing much movement and you think you certainly are in the marketplace you see people kind of hold the line on deposit rate. Do you think you can maybe continue that into a couple of more rate hikes?

I would say, well at least through this rate hike, I think we have seen people hold the line. Again, I pointed out that our cost to funds on transaction accounts remained at 11 basis points from third quarter to fourth quarter. But I would anticipate as we move forward in 2017 if there are additional rate hikes there are going to probably be competitive factors that are going to at least result in some lift in cost to funds. For example, we are seeing money market funds now return to paying interest with this last Fed move and prior to that there were lot of money funds that basically were paying little over or no interest. So I think beyond just banks, you may see competition from money market funds again which we haven’t seen in a number of years.

It’s helpful, and then lastly on the mortgage expansion, were the branches or the new locations and the staff pretty much on board in fourth quarter or were some of these hires in first quarter of 2017?

Most of the additions were late in the fourth quarter, so there wasn’t a significant impact on the fourth quarter, there was some additions that bled over into the early part of 2017 as well.

Great. Thanks for taking my questions.

Our next question comes from Matthew Forgotson with Sandler O'Neill. Please go ahead.

Hi good morning gentlemen. Can you give us a sense of how far along you are now in terms of building out the mortgage group relative to where you needed to be to generate the 700 million or so production that you are expecting this year?

Well I think with respect to that, we are substantially complete. I do think there may be some additional opportunities in Ohio for example we are looking at an office in Fairlawn, which is a north east suburb Akron. We are getting good traction with people wanting to join our organization in the Ohio market. I think in Michigan, beyond the Dearborn office, which really is just relocating some of our existing staff and Troy. We don’t have anything on the drawing board for further expansion in Michigan.

Okay, and then just digging into the fee guidance, 10.8 million to 11.7 million per quarter, can you give us a sense of, I guess at the low and the high end of the range, can you give us a little bit as a flavor of what your production expectations are at those levels and also your again on sale margin expectations?

Sure, most of that variability is caused by more - revenue, so and a lot of it is seasonal, so we would expect to be towards the lower end of that range in the first and fourth quarters and toward the higher end of the range in the second and third quarter. And as I said, a lot of variability is being produced by the mortgage banking revenues. Our assumption for margin on loan sale gains is much reduced in 2017, works assuming the net margin of about 2.65% and that compares to 3.25% for all 2016, when we kind of exclude any variability caused by fair value adjustments. So we are expecting a relatively sharp decline in margin and that is a really a function of increased competition, I think as you are aware, everyone is expecting mortgage loan refinance volume to be lower. I think the expectation is that purchase money mortgage by, I mean 2017 is the bit higher. And as Brad mentioned one of the fortunate elements of our mortgage banking operation is we are about two-thirds purchased and only a third refinanced. So it impacts us a little less on volume, but we are expecting margins to be lower.

Okay and then within that the fee guidance as well, are you baking in any further MSR recovery?

No, we would expect MSRs to kind of be at what we would call a normalized run rate, so really we are not expecting any significant gains or losses from fair value adjustments on servicing. So it's really just what we would call sort of the normal environment where we are making revenue from service fees.

And then lastly from me and then I will hop out. Can you just give us a sense of your current assets sensitivity profile and the mortgage loans that you are retaining today out of the mortgage unit and how that ultimately impacts on your assets sensitivity going forward?

Sure, the balance sheet is fairly asset sensitive about half of them - commercial portfolio is variable rate, half is fixed rate, but even within the fixed rate portfolio it has got a relatively short duration, because a lot of it is balloons that may have had a origination of five year period or under. The mortgage portfolio at least as of the end of the year was more skewed to adjustable rate loans, probably almost three quarters is adjustable rate versus fixed rate. Now those adjust overtime, so a lot of them are one year adjustable. So not the entire portfolio adjusts all at once. In addition within the mortgage portfolio we have the home equity loans, which are all variable rate. The one portfolio that’s predominantly fixed rate is the consumer installment portfolio, but again the cash flow from that portfolio is fairly significant. And then lastly and I spoke earlier about the investment portfolio 27% of its variable rate and the duration is 2.25 years so there is quite a bit of cash flow coming off that portfolio. So we would anticipate a lift in net interest income, in that 20 basis points a little bit under $1 million over the course of the year in net interest income and at 100 basis points it’s a bit over $3 million. And then years two and beyond builds more, because then you get the full benefit of all the adjustable rate loans having replaced. Now those assumptions in our model they take into account certain assumptions on the deposit cost side and for each different deposit product we have a different profile of how much the cost to funds changes for various changes in market rate. So I think for all banks what is going to be interesting is what happens within their deposit portfolio as rates rise.

Thank you very much.

[Operator Instructions] Our next question comes from Damon DelMonte with KBW. Please go ahead.

Hey good morning guys, how is it going? My question just deals with the build out of the mortgage platform. The compensation that these originators are being paid, is that more variable rate so it is going to be driven by the amount of volume that they have?

Yes, there is a period of time to bring people aboard, because typically they are leaving behind a pipeline. So there is a period of time usually that may be three to four months where we have provided a guarantee of a base level of compensation, but after that drops off, it moves essentially to a variable form of compensation. And those direct origination costs, which include much of the compensation expense for the loan originators, and a portion of expense for other people directly involved in the origination process. Its differed and netted against the gain. So there is a component of expense, which ends up not showing up in non-interest expense and instead its netted against gains.

Got you okay. And then, as you look at the forecasted quarterly range of 10.8 to 11.7, I mean if you are taking your production from close to 400 million to 700 million and I understand that the gain on sale would come down from this current year's level. But if you assume the 265 and the 700 million volume that’s like 4.6 million per quarter, which is substantially higher than obviously where you are this past year. So it seems like the range of 10.8 to 11.7 is understating the potential impact from the mortgage banking?

Well, yes your math is all correct. The issues is a chunk of the 700 million is assumed to be originated for portfolio loans and not for loans originated for sale. So we have quite a bit of that production included as portfolio production. I think that number is roughly, out of all the production it is about $229 million of the 700 million. Now the long-term benefit there is that will grow the balance sheet and net interest income. And that’s in part how were accelerating the expected growth of overall loans from where we were in 2016 to 10 % to 11% in 2017. So that’s why you are not seeing all that flow into gains Damon.

Okay. All right, that means a lot more sense. I think that number is, right I got that. And then with regards to the provision this quarter, I know you had the charge-offs on a one commercial loan in the mortgage loan. Had you previously reserved for those loans?

Yes, largely we had, that’s why you are getting the release on the allowances, because there was largely those reserves already set up. So it just moved to a charge offs and then reduced the allowance. So that’s why you didn’t see sort of a corresponding jump in provision expense, because they had already been largely reserved for.

Got it and then so going forward are you comfortable with the current loan loss reserves in the 125 range or should we expect it to be growing that just given the expected loan growth in the coming year?

I think the ratio is probably right around where we absent any significant changes in asset quality. I think that level is probably right in line with where we have expected, at least to see it in the near-term going forward.

Okay. All right, okay that’s all I had. Thank you very much.

Our next question comes from Scott Beury with Boenning & Scattergood. Please go ahead.

Good morning guys. Most of my questions have already been answered particularly in the mortgage area. I guess just one fair, as what you had in your slide is you know the kind of position you are focusing on increasing your servicing assets to drive P revenue. And I’m curious of kind of how you think about it in terms of what the need for potential investments or expansions of personal and based on kind of what your capacity is in terms of how many loans you can service and kind of how are you thinking about that?

So Scott, today we service 1.6 billion, 1.7 billion, it is about 20,000 loans all together and we have been sort of flat for extended period of time at those levels, at the same time we have over the last several years put in place a lot of efficiency initiatives. Imaging is an example and improved work flow, we have actually been able to reduce the overall cost to service. The one exception would be - well actually even in this area would be the collection cost side, but I think bottom line to your question as we grow this I think we will have to add some staff, but I don’t believe that it’s going to be a material amount. I think one of our competencies as a company is the servicing side, we compare ourselves to the Mortgage Bankers Association and look at what the peer group is and we stack up pretty well against peer on cost to service. So there would probably be some adds, but I don’t think it's going to be a material amount.

Okay. Thank you. That’s helpful. That’s all I have.

This concludes our question and answer session. I would now 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 joining us on today's call and we wish you a great day.

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