Good morning and welcome to the Independent Bank Corporation Fourth Quarter 2018 Earnings Conference Call. All participants are in a 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 2018 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 important information on page two regarding the cautionary note for forward-looking statements. 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 five of our presentation. I am very pleased with our company's fourth quarter and full year 2018 results. We continue to execute on our operating plan, delivering strong growth in core earnings, growth in our core funding, and growth in loans while maintaining excellent asset quality and effectively managing our capital. We are reporting fourth quarter 2018 net income of $9.9 million or $0.41 per diluted share versus net income of $1.7 million or $0.08 per diluted share in the prior year period. This quarter's results include a decrease in the fair value due to price of our capitalized mortgage loan servicing rights of $2.4 million or $0.08 per diluted share. The increase in fourth quarter earnings as compared to 2017, reflects a $7.4 million increase in net interest income and a $7.3 million decrease in income tax expense that were partially offset by a $2.5 million decrease in non-interest income, a $200,000 increase in the provision for loan losses and a $3.7 million increase in our non-interest expense. For the fourth quarter of 2018, our return…

Thanks Brad and good morning everyone. I am starting at page 13 of our presentation. Brad discussed the increase on our net interest income during his remarks, so I will focus on our net interest margin. Our tax equivalent net interest margin was 3.93% during the fourth quarter of 2018 which is up 28 basis points from the year-ago period and up two basis points from the third quarter of 2018. I will have some more detailed comments on this topic in a moment. Average interest-earning assets were $3.12 billion in the fourth quarter of 2018 compared to $2.57 billion in the year-ago quarter and $3.04 billion in the third quarter of 2018. This significant year-over-year increase reflects both the Traverse City State Bank merger and organic loan growth. Page 14 contains a more detailed analysis of the linked quarter increase in net interest income. There's a lot of data on this slide, but to summarize a few key points, the linked quarter net interest margin again increased by two basis points. This was primarily due to a $346000 increase in net recoveries of interest on previously charged off or non-accrual loans. Fourth quarter 2018 discount accretion of $423000 on the TCSB acquired loan portfolio was down $185000 from the $608000 we recorded in 3Q 2018. This discount accretion increased the net interest margin by 5.4 basis points and 7.9 basis points in 4Q 2018 and 3Q 2018 respectively. We'll comment more specifically on our outlook for net interest income for 2019 later in the presentation. Page 15 compares our quarterly average cost of funds which is annualized interest expense divided by average earning assets to the monthly average effective federal funds rate during the quarter and the spot federal funds rate during the quarter. You can see the relatively…

Thanks, Rob. 2018 was a very successful year for us as we had very good growth both organically and in adding Traverse City State Bank associates and customer base. This growth enabled us to improve our operating leverage. We met or exceeded our company targets. Our updated return on asset and return on equity targets are 1.3% or better on ROA and 13.0% or better respectively on ROE respectively. We continue to pride ourselves on investing in our communities and providing exceptional customer service. Along those lines this past year, we were very pleased to be named one of the best in-state banks by Forbes Magazine coming in as the best bank headquartered in Michigan. In wrapping up our prepared remarks, we have listed our strategic initiatives on slide 25 of the presentation. We have four areas of focus. The first area is growth principally through organic means, leveraging our sales associates as well as attracting new sales associates to our team. Organic growth can be supplemented with selective and opportunistic bank acquisitions and branch acquisitions. Our second area of focus is in process improvement and cost controls. We have identified an initial dozen technology/digital banking projects that will advance our digital offering, reduce costs and assist us in better leveraging technology, so as to make it easier to bank with us and easier for our associates to service our customers. Our third area of focus is in talent management. Over the last several years, we have made a number of changes to recruit, retain and develop the best team in the marketplace. We will continue to advance this area of focus. Finally, effective risk management is critical to delivering sustained high performance for our shareholders. 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 Brendan Nosal of Sandler O'Neill & Partners.

Hey good morning guys. How are you?

Very good Brendan. Thank you.

Good. Just starting of here on the net interest margin outlook. If you back out the accretion income, it looks like the core margin was around 3.88% for the quarter. I know that your outlook for the coming year assumes one more mid-year rate hike. But could you just walk through your expectations for the core NIM as we move through 2019 if the Fed doesn't hike rates any further?

If the Fed doesn't hike rates any further, it's roughly about a $300,000 in change impact reduction in the margin. So, that's what that mid-year 25 basis point change in our forecast results in terms of dollar. So, it wouldn't have a material impact on either the margin or on net interest income.

Got it. Okay, that's helpful. And then moving over to the outlook for gain on sale revenues. It seems like the outlook is in-line year versus 2018 which assume some pickup in margins. Can you just walk through your expectations for gain on sale margins to improve? Is it just excess capacity coming out of the industry or are you seeing something else?

I would say we're seeing a little bit more rational pricing here as we've moved into 2019. So, I'm I guess guardedly optimistic that margins are going to be -- even now it's going to be primarily a purchase market and we don't expect a significant refinance volume. I'm guardedly optimistic that margins are going to be a bit better. I would say 2018 was a bit of a transitional year. And so you saw a little bit more I think pricing competition. But we feel that 2019 is going to be a little bit better than where we were in 2018.

Got it. Okay. And then last one for me and then I will step back. Yesterday, there was obviously a sizable MOE announcement in the State of Michigan yesterday. Any early thoughts on what opportunities could arise for you guys at such a large combination in your markets if any?

Sure Brendan. Well, today Chemical Bank would be one of our largest competitors if you were to try -- draw a one mile radius around our branch locations -- our 68 locations, we actually cross paths with them about in 25 markets. So they're a significant competitor. And what we've experienced in prior significant mergers in our markets, going back to last couple of years, it does create quite a bit of disruption and opportunities for the other banks in the marketplace, including ourselves, both from a customer acquisition side as well as potential talent acquisition side. So, I think there is an opportunity and time will tell to see how it all plays out.

All right. Fantastic. Thanks for taking my questions.

Thank you.

The next question comes from Kevin Reevey of D.A. Davidson.

Good morning.

Good morning, Kevin.

First question, I was wondering, if you could give us some more color on how your various deposit growth initiatives are coming along. I know you've got treasury management services as a focus. You talked a little bit early about digital in your retail and checking I was looking for a little more color here.

Sure, Kevin. So I'm very pleased with the job that our team has done this past year in growing the core deposit base. We've had very nice growth. It's been a team effort. That – this side of the balance sheet is not a new focus. It's been a year-after-year focus for us. And in fact, you will see in our annual proxy statement, we'll list our annual corporate goals for the company in deposit growth has and will continue to be a category for our company and the goal – company goals. You know, it's always been a focus of getting the checking account, whether it be at the consumer level, or the commercial level. And if I look at the – on the commercial side, first, we've had some very excellent new relationships brought into the bank this past year. And I'm very pleased to see that, with that we've been successful in bringing in their core checking accounts. And then alongside with that, we've done a nice job then going out and working with the owner on his or her personal checking and the employee base and capturing success there. In fact, recently one of our offices here in West Michigan for a new commercial customer was successful in opening up about 30 new health savings accounts. And so it's that type of just teamwork and basic blocking and tackling along with we've been very successful in the mortgage origination front and seeking to capture the personal checking account in that situation, whenever possible. And I'm very pleased with the penetration level that we've had there. And then finally, our treasury management team and as I outlined in our prepared remarks has – continued to knock on doors of the public funds sector and large commercial sector…

Appreciate the color. Thanks for taking my questions.

Thanks, Kevin.

And next we have a question from Damon DelMonte of KBW.

Hey, good morning, guys. How's is it going today?

Good, Damon. How are you?

Very well. Thanks. Just a quick follow-up on the loan growth. Could you just talk a little bit more about the drivers of your expected loan growth in the commercial channels? And geographically where it's in the footprint you think you have the best opportunity for growth?

Sure. I will take first shot at that. And you know as you've seen quarter-over-quarter and here now we're in 19 consecutive quarters of loan growth. It's been pretty balanced. I'd say this past year we were real strong in mortgage portfolio growth, although we've seen that sort of taper back here. And somewhat intentionally here the tail end of the year. But we think the -- we've got very solid pipelines today in the commercial side. I like where the pipeline stands today versus at the end of the third quarter and also where it stands today versus one year ago at this time. So we think that Southeast Michigan will continue to be a strong market for us as will the West Michigan market. And we think -- we're also hearing very positive things albeit as we get into the December-January timeframe, the indirect originations for us somewhat slowed down as does the mortgage side. So we'll see a little bit of softness here over year end. But that should pick up near the end of the first quarter, and we should get some momentum into the second quarter. So Rob anything to add there?

No, I think you covered it. I think that the growth is going to be broad-based and the reason as I mentioned in my comments, we actually grew 13% plus in 2018 and the reason for the outlook being more in the 8% to 9% range is largely because of the mortgage side and the originations in higher percentage of them being held for sale. The rest of it with commercial and consumer I think it's just going to be more of what we've been doing. Although I think on the commercial side as Brad said we look at the pipelines and feel like that we're well set up to have a good year in 2019. But on the consumer side, we continue to have a very strong offering in the RV marine power support arena. And we think that market will be solid again in 2019.

Okay. That’s great. I appreciate the color on that. And then I guess just a broader base question, what are your thoughts on M&A at this point? Now that you have a completed and pretty much integrated, do you guys have an appetite to do more transactions?

I would say our primary focus is on organic growth. I think that M&A side of things is somewhat opportunistic. You have to have a buyer and a seller and you have to have some alignment of pricing expectations and you have to have alignment of culture and strategy etcetera. So we never build our models and our forecasts assuming there is going to be that type of opportunity. I mean having said that, I think we would be open to looking at different things. But I think our primary focus is to continue to gain operating leverage through growth in earning assets. It's sort of a simple formula, but we think it's very effective when you combine that with share repurchases and a strong dividend then it does create, we think solid returns for the shareholders.

Okay. All right. All my other questions have been asked and answered. So thank you very much.

Thank you.

And the next question comes from John Rodis of FIG Partners.

Good morning guys.

Good morning John.

Rob just on the -- I think on the -- Rob or Brad I think you said on the share buyback, I think you said you bought 44,000 shares so far in January. How should we sort of think about buyback activity going forward, given the stock has rebounded some? Is it more opportunistic going forward or do you expect to be more active?

I think it's probably more opportunistic, I think as we go -- I think we have a model we run that works off of a tangible book dilution earn back timeframe and probably the most sensitive input to that is projected earnings in the future. And - so we just feel like hey if there is opportunities out there at certain prices and you could see kind of where we bought at, with what we've done to-date. I'm not saying that's a complete reflection of the kind of levels. But we certainly view at those levels that it meets our economic criteria and it's certainly accretive to earnings per share growth. So I think we'll just sort of may be not have quite the velocity we had in the fourth quarter and it'll be more somewhat dependent on kind of what happens in the marketplace. Brad, I don't know if you want to add anything there?

I agree.

No. That makes sense. Thanks, Rob. And then one other question, Rob, just on the balance sheet, the securities portfolio, should we still expect some sort of continued run-off there like we saw in the fourth quarter?

Yes. There is about $9 million of run-off. We're kind of -- we kind of feel just for liquidity purposes, we have to retain investments at a certain level. So, I mean, there may be a bit of run-off, but I don't think it will be significant. I think will try to maintain a level at $400 million or so. And again, that's more out of liquidity management than anything else.

Okay. Make sense. Thanks, guys.

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

We would like to thank each of you for your interest in Independent Bank Corporation and for joining us on today's call. We wish everybody a great day.

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