Good day, ladies and gentlemen, and welcome to the Independent Bank Corporation Second Quarter 2017 Earnings Call and Webcast. [Operator Instructions] Please also note that this event is being recorded. I would now like to turn the conference over to the President and CEO, Mr. Brad Kessel. Please go ahead, sir.

Good morning. Thank you for joining the Independent Bank Corporation’s conference call and webcast to discuss the company’s 2017 second quarter 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 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. To follow along, I will begin with Slide 5 of our presentation. Overall, I am very pleased with the improved quality of our earnings this past quarter, as we grew revenue on a linked quarter and year-over-year basis while completing the divestiture of our high-yield payment plan business and recording a more normalized provision as a result of strong organic loan growth. As it relates to earnings for the second quarter of 2017, we are reporting net income of $5.9 million or $0.27 per diluted share versus net income of $6.4 million or $0.30 per diluted share in the prior year period. The second quarter’s results were driven by net interest income of $21.5 million, up $1.9 million or 9.5% from the year ago. Non-interest income also improved to $10.5 million, up $866,000 or 9%, primarily as a result of gains on mortgage loans of $3.3 million, up $815,000 or 32% from the year ago. In addition, we also saw year-over-year increases in both service charges on deposits and interchange income. These increases in revenue were offset by a $600,000 loan loss provision as compared to a…

Thanks, Brad, and good morning, everyone. I am starting at Page 12 of our presentation. Brad discussed the increase in our net interest income during his remarks, so I will focus on our net interest margin. Our tax equivalent net interest margin was 3.60% during the second quarter of 2017, which is up 8 basis points from the year ago period and down 9 basis points from the first quarter of 2017. I will have some more detailed comments on this topic in a moment. Average interest-earning assets were $2.42 billion in the second quarter of 2017 compared to $2.26 billion in the year ago quarter and $2.37 billion in the first quarter of 2017. Page 13 contains a more detailed analysis of the linked quarter increase in net interest income. There is a lack of data on this slide, but to summarize a few key points: decreases in net interest recoveries and prepayment fees on commercial loans reduced interest income by $619,000 in the second quarter as compared to the first quarter of 2017. This equates to a 10-basis-point decline in the average yield on interest-earning assets. Interest income on payment plan receivables declined by $652,000 in the second quarter compared to the first quarter of 2017 due to the sale of this business in May 2017. One more day in the second quarter increased net interest income by $121,000 compared to the first quarter of 2017. Finally, the average cost of interest-bearing liabilities moved up just 2 basis points on a sequential quarterly basis. Thus we overcame two significant headwinds: the declines in net interest recoveries and prepayment fees and the sale of our higher-yielding payment plan receivables. And we’re still able to produce some sequential quarterly growth in net interest income, primarily because of the strong overall…

Thanks, Rob. In summary, we are pleased to report a very good first half of 2017, both 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 net interest income. As we look ahead, we continue to be 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 the momentum generated over the last several years. At this point we’d like to turn the presentation and open it up for questions.

Thank you very much, sir. [Operator Instructions] Our first question is from Matthew Forgotson of Sandler O’Neill & Partners. Please go ahead.

Good morning, guys. This is actually Brendan on the line from Matt’s team. A few quick questions from me. Starting off on the margin, I was hoping to get a sense of the NIM trajectory going forward as you guys absorbed the full quarter’s drag from the Mepco sale.

I would anticipate that there would not be much drag on a go-forward basis. The Mepco net interest income in the second quarter was down to $338,000. So it wasn’t that significant in the second quarter. It was down $650,000 from the first quarter. So I think that, by and large, the sale of the payment plan receivables is already reflected in the margin, and the continued migration of loans at higher yields vis-à-vis investments at lower yields should support, certainly, a stable if not slightly growing margin.

And then turning on to the gain on sale, one, could you remind us of what the purchase-refi split was in the second quarter? And then two, on the gain on sale margin itself, it held in pretty nicely around 3.20%. Are you guys feeling any pressure here as refi players push into their purchase base?

I’d say a couple of things. Our split was about 85% purchase money mortgages and 15% refis. I think there’s been a consistent pressure in the markets, but I still think we’ve been able to maintain a pretty good margin here. It’s down a bit from where we were a year ago when you had more of a refi market. You typically see this when you gravitate to more of a purchase money market, but I still think margins are holding in reasonably well.

All right, great. Just regarding asset sensitivity and some of the complexion changes in your balance sheet, I believe in the K you guys offered that you’re roughly 3.5% asset sensitive under a 100-basis-point shock scenario. Just given some of the complexion changes in the balance sheet, how do you see that number as you stand today?

Well, actually, and just to give you some specifics, at December 31, 2016, with 100-basis-points rise in interest rates, net interest income increased by 4.04%. That same measure at June 30 in 100-basis-point rise, the percent change is plus 3.62%. So the sensitivity has not changed dramatically, plus the base has gone up substantially versus the year ago period because of the loan growth. And just to give you some stats on the mortgage portfolio itself, 65% of the portfolio is adjustable rate or variable rate. 47.3% of the portfolio have adjustable or variable rates that will adjust in one year or less. 17.5% have adjustable rates that will adjust in over one year. The two of those combined equal that 65% of the portfolio. About 28.8% of the portfolio was fixed rate. About 3.3% is salable construction loans. 3% – or 2% are term home equity loans, and 1% of the portfolio is in the non-accrual bucket. So that kind of gives you a much more detailed look at the portfolio. So it’s still pretty rate sensitive as it stood at June 30. The other nice thing with portfolio mortgage loans is we’re able to pledge them to the Federal Home Loan Bank and borrow against them. And the one nice thing with Federal Home Loan Bank borrowings is you could do long-term borrowings and you could create kind of a ladder to absorb some of the fixed rate originations that are coming onto the portfolio.

All right. That’s fantastic color there, very helpful. Thanks for taking my questions.

Thank you. The next question is from Kevin Reevey of D.A. Davidson. Please go ahead.

Good morning.

Good morning, Kevin.

So Brad, earlier you talked about your loan-to-deposit ratio was roughly about 80.65% at the end of the quarter. As you look out towards the end of the year, do you have any specific internal goals that you’d like to get to on that ratio?

Well, Kevin, that’s a great question. We’re having a lot of discussions internally as the growth rate has been a little faster than the – projected at the start of the year. Our latest forecast have us at that 90% level or plus or minus. So quite a bit of change from where we were one year ago, and even from where we’re at today.

And then moving along on your mortgage banking, are you pretty much done as far as adding to staffing there?

Yes, I feel like the team we have today – Rob mentioned 69 new associates on the team, the bulk of which are related to the mortgage expansion. And we’re now at a period of digestion and just getting people comfortable in processes. And so for the near term, I’d say for 2017, I think we’ve got the team we want to have generally.

And then on the C&I side, do you see any pricing competition in your markets for those types of loans?

Absolutely. I mean, it’s very competitive and we feel like we work really hard to deliver competitive pricing and structures ourselves, quick turnaround times. But there’s no doubt we can spend significant time on requests and still not get the deals. So it’s competitive, and that’s just part of the market. But I feel very good about the team that we have today. I feel like we’re getting at least our fair share. And again, our niche is that $1 million to $5 million commercial relationship. And I’m very pleased, actually, the progress we’ve made over the last several years in actually raising the average commercial loan size for our company, which has translated into improved efficiencies for us.

Great. Thanks for taking my question.

Thank you.

Thank you. The next question is from John Rodis of FIG Partners. Please go ahead.

Good morning guys.

Good morning, John.

Hey, Rob, just a follow-up for you on net interest income. I just wanted to make sure I heard you right. So you’re looking for high-single-digit growth in the second half. That’s relative to the second half of 2016?

Yes, that’s correct. I said at least high digit, high-single-digit loan growth. Correct.

High-single-digit growth, okay. And then, Rob, just a question on expenses. As we look to next year, 2018, do you sort of expect to keep operating expenses in this current range or do you think there will be modest growth off of that level? Or do you think there’s some room for some savings, just as you look at things right now?

We’re always trying to find opportunities to gain efficiency. I think we had been sort of in a period of time where over the last two years or three years, where our non-interest expenses were trending lower. And then we had the opportunity to undertake this expansion of our mortgage banking operations. Really, that started in the last quarter or so of 2016. As Brad commented, I think we’re where we want to be with that expansion now and with the addition of the loan production offices. So I don’t really see a lot of drivers of areas where that would be growing next year other than what I would call sort of normalized things like merit increases and the like. But hopefully, we could find areas of efficiency where we could keep the non-interest expenses at reasonably the same kind of run rates we’re currently at or only slightly higher. But I think the more powerful thing is that our anticipation now is for revenue growth at a much higher pace than what we otherwise would have been thinking, say, a year ago.

Great. That makes sense. Okay. Thanks, Rob.

Yes.

Thank you. Our next question is from Damon DelMonte of KBW. Please go ahead.

Hey, good morning guys. How are we doing today?

Good, Damon.

My first question is could you give us a little perspective as to how big you will have the residential mortgage portfolio that’s being held on balance sheet yet as a percentage of total loans?

So, Damon, that’s a great question and we’re, again, that’s a subject that’s getting a lot of discussion internally. And today we’ve talked about sort of where one portfolio sits relative to the other portfolios that we have. And I’m probably not in a position today to say, hey, this is the limit, or, this is the max. What we’re trying to do as a company is build a balance sheet where we have a nice diverse mix of loans by category. And so our intent is not to have one portfolio necessarily dwarf all the others.

And one other thing – Damon, one other thing just on the mortgage portfolio, there is a segment of that portfolio, the resort lending piece of $96 million, that’s really in runoff. And we would expect, as those loans continue to age, the runoff pace will pick up a little bit. So at least there’s one area of the portfolio that’s sort of moving in the other direction that I think will support the ability to continue to originate and grow as we’ve been doing so far the first half of this year.

And then on the consumer installment loan portfolio, could you just remind us of some of the kind of underwriting dynamics of those loans: what the average size of those loans are, what the type of credit scores for those borrowers?

Well, yes, off the top of my head, you’re probably looking in the $15,000 to $25,000 average loan size, very strong FICOs, 700 and above, got the income of in that probably $30,000 to $35,000 range, good LTVs. Duration’s a little longer, particularly on the RV and the marine, probably a duration closer to four, four-plus years. And...

Just a little more color on the consumer installment loan portfolio. About $22 million are real estate secured first or second liens. $126 million, roughly, are marine-related loans. About $90 million are recreational vehicle-related loans, and about $71 million is in other categories. And the vast majority of the portfolio has FICO scores. And if you recall in our Qs, we break out those portfolios by FICO. And the vast majority have FICOs at 700 or higher, with the biggest portion of the portfolio at 750 or higher. And the final comment I’d make is when we went through the great recession, that portfolio was our best performing. So I think the underwriting, at least based on our historical results, is very strong.

All right. Great. That’s an excellent color. That’s all I had, I’m out of questions, where has been answered. Thank you.

Thanks Damon.

Thank you very much. That concludes today’s question-and-answer session, and I would now like to turn the conference back to Mr. Kessel for any closing remarks.

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 everybody a great day.

Thank you very much, sir. Ladies and gentlemen, that concludes this conference call, and you may now disconnect your lines.