Brad Kessel – President and Chief Executive Officer Rob Shuster – Executive Vice President and Chief Financial Officer.

Brendan Nosol – Sandler O’Neill & Partners Kevin Reevey – D.A. Davidson John Rodis – FIG Partners Damon DelMonte – KBW.

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..

total originations of $117 million, of which $53 million was non-salable 30-, 20- and 15-year fixed rate; $27 million of adjustable rate loans; $30 million of construction loans, most of which were adjustable; and $7 million of second mortgages.

The weighted average rate on these originations was 4.13%, the average FICO was 751, the average LTV was 76% and the average debt-to-income ratio was 33%. The mortgage pipeline continues to be strong and the outlook very favorable as we move into the second half of 2017.

Page 11 provides some information on our capital as well as four quarter rolling averages for return on assets and return on equity. We are targeting tangible common equity to range between 8.5% and 9.5%. Tangible common equity totaled 9.79% of tangible assets at June 30, 2017, as compared to 9.99% one year ago.

Our plan is to retain capital for organic loan growth and return capital through a consistent dividend payout plan and share repurchase plan. On July 25, 2017, the Board of Directors of the company declared a quarterly cash dividend on our common stock of $0.10 per share with a record date of August 7, 2017, and a payment date of August 15.

In January of this year, the Board of Directors of the company authorized a new share repurchase plan for 2017. Under the terms of the share repurchase plan, the company is authorized to buy back up to 5% of our outstanding common stock. This plan is authorized to last through the end of this year.

During the second quarter of 2017 we did not repurchase any shares. At this time I would like to turn the presentation over to Rob Shuster to share a few comments on our financials, credit quality and management’s outlook for the second half of 2017..

net revenue, fair value change due to price and fair value change due to paydowns. The fair value change due to price, which we view as not being a part of core results, was a negative $648,000 in the second quarter of 2017 or $0.02 per diluted share on an after-tax basis. The fair value change due to paydowns was a negative $583,000.

We view this as being part of core results. Hopefully, you found this table helpful in analyzing this component of non-interest income. Finally, we were pleased to see growth in both service charges on deposits and in interchange income on a year-over-year basis.

As detailed on Page 15, our non-interest expense totaled $22.8 million in the second quarter of 2017 compared to $20.9 million in the year ago quarter and $23.6 million in the first quarter of 2017. This year-over-year increase was primarily in compensation and benefits. We increased full-time equivalent employees by approximately 69 or 8.9%.

Of this increase, about 90% related to the expansion of our mortgage banking operations. Loan and collection expenses were up on both the year-over-year and sequential quarterly basis, due primarily to higher loan production volumes.

Also recall that the first quarter of 2017 did include a $200,000 reimbursement of previously incurred loan and collection costs related to one commercial credit relationship. As outlined on Slide 16, we closed on the sale of Mepco on May 18, 2017, with an effective date of May 1.

During the second quarter of 2017 Mepco reported no net income, with $338,000 of net interest income and $338,000 of non-interest expenses. Investment securities available for sale decreased $25.2 million during the second quarter of 2017 as funds from runoff were utilized to support portfolio loan growth.

Page 17 provides an overview of our investments at June 30, 2017. Approximately 27% of the portfolio was variable rate, and much of the fixed rate portion of the portfolio is in maturities of five years or less. The estimated average duration of the portfolio is about 2.68 years.

Page 18 provides data on nonperforming loans, other real estate, nonperforming assets and early-stage delinquencies. Total nonperforming assets were $10.9 million or 0.41% of total assets at June 30, 2017. Nonperforming loans decreased by $500,000 and other real estate decreased by $2.9 million during the second quarter of 2017.

At June 30, 2017, 30- to 89-day commercial loan delinquencies were just 0.03%, and mortgage and consumer loan delinquencies were 0.52%. Moving on to Page 19, we recorded a provision for loan losses of $0.58 million in the second quarter of 2017 compared to a credit provision of $0.73 million in the year ago quarter.

As just outlined, asset quality metrics improved across the board, and loan net charge-offs were negligible at only $37,000 in the second quarter of 2017. Thus loan growth was the driver of the provision expense this quarter. The allowance for loan losses totaled $20.6 million or 1.14% of portfolio loans at June 30, 2017.

Page 20 provides some additional asset quality data including information on new loan defaults and on classified assets. New loan defaults were just $1.5 million in the second quarter of 2017. Page 21 provides information on our TDR portfolio that totaled $71.3 million at June 30, 2017, a decline of $1.6 million during the second quarter.

This portfolio continues to perform very well, with 93.4% of these loans performing and 91.1% of these loans being current at June 30, 2017. Page 22 is our report card for 2017. We compare our actual performance during the year to the original outlook that we provided back in January 2017.

Overall, we believe that our actual performance in the first half of 2017 has been better than our original outlook. We achieved annualized loan growth of nearly 34% in the second quarter of 2017. We expect to substantially maintain this growth in the third quarter and then expect a seasonal slowdown in the fourth quarter.

Second quarter 2017 net interest income grew 9.5% on a year-over-year quarterly basis compared to our forecasted growth rate of about 3%.

We now anticipate a year-over-year growth rate at least in the high single digits for net interest income in the second half of 2017, even with the sale of our payment plan receivables, because of the aforementioned loan growth. We had a provision for loan losses in the second quarter of 2017, $583,000.

This was within the range of our original forecast but was caused by loan growth rather than any deterioration in asset quality or increase in loan defaults. We generally expect stable asset quality metrics during the remainder of 2017.

However, with strong forecasted loan growth, we would still expect to see a provision expense for loan losses in the third and fourth quarters of this year. Second quarter 2017 non-interest income was a bit below our forecast, primarily due to the aforementioned $648,000 fair value decline on the price of capitalized mortgage servicing.

We expect non-interest income to move up into our forecasted range in the next two quarters absent any further fair value declines due to price on capitalized mortgage loan servicing. Second quarter 2017 non-interest expense was a bit above our forecasted range.

This was principally due to the mortgage banking expansion and the delay in the Mepco sale. We expect non-interest expense to move within the forecasted range in the last two quarters of 2017 due to the closing of the Mepco sale and continued improvements in the operating leverage of our mortgage banking area.

Finally, we expect an effective income tax rate between 31% and 32% going forward in 2017. That concludes my prepared remarks and I would now like to turn the call back over to Brad..

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..

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..