Good morning and welcome to the Independent Bank Corporation’s Second Quarter 2018 Earnings Conference Call. [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.

Good morning. Thank you for joining Independent Bank Corporation’s conference call and webcast to discuss the company’s 2018 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 important information on Page 2 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 5 of our presentation. We are reporting a very good quarter for the Independent Bank team, with a 48.7% increase in net income and a 33.3% increase in diluted earnings per share. For the three months ended June 30, 2018, we generated net income of $8.8 million or $0.36 per diluted share as compared to $5.9 million or $0.27 per diluted share for the same quarter 1 year ago. This represents a return on average assets of 1.12% and return on average equity of 10.57%. Strong organic loan growth, the addition of Traverse City State Bank and a lower federal corporate income tax rate were the primary drivers of this quarter’s positive results. Our consistent quarter-over-quarter loan growth, coupled with the TCSB merger, fueled a year-over-year and a sequential quarterly increase in net interest income of $7.5 million or 35% and $5 million, 21% respectively. For the second quarter of 2018, we generated net growth in total portfolio volumes of $101.4 million or 19.6% annualized. Also for the second quarter of 2018, we recorded a $650,000 loan loss provision expense.…

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 3.93% during the second quarter of 2018, which is up 33 basis points from the year ago period and up 22 basis points from the first quarter of 2018. I will have some more detailed comments on this topic in a moment. Average interest-earning assets were $2.96 billion in the second quarter of 2018 compared to $2.42 billion in the year ago quarter and $2.61 billion in the first quarter of 2018. These significant increases reflect both the Traverse City State Bank merger and organic loan growth. Page 13 contains a more detailed analysis of the linked quarter increase in net interest income. There is a lot of data on this slide, but to summarize a few key points, as I stated, the linked quarter net interest margin increased by 22 basis points. Second quarter 2018 discount accretion of $628,000 on the TCSB acquired loan portfolio increased the linked quarter net interest margin by about 8.5 basis points. The balance of the linked quarter increase in the net interest margin of 13.5 basis points was a combination of organic loan growth, a rise in short-term market interest rates and the contribution of net interest income from the TCSB merger. As Brad mentioned, the average cost of interest bearing liabilities moved up by about 10 basis points on a linked quarter basis. Given the core data processing conversion that occurred in mid-June 2018, it is difficult for me to isolate the above referenced 13.5 basis point linked quarter increase in the net interest margin between IBCP on a…

Thanks, Rob. In wrapping up our prepared remarks, we have listed our ongoing strategic initiatives on Slide 23. Three points to be made here. First, we want to continue the rotation of and growth in earning assets for balanced growth in our loan portfolios. Second, we will continue to hold the line on expenses and look for opportunities to gain further efficiencies. Along these lines, for our efficiency ratio, our near-term target range is in the mid-60% range and the longer term target is in the low 60% range. After taking into consideration, the recent reduced federal corporate income tax rate, our return on asset and return on equity targets are 1.25% and 13% or better respectively. At this point, we would like to now open up the call for questions.

[Operator Instructions] The first question comes from Brendan Nosal with Sandler O’Neill & Partners. Please go ahead.

Hey, good morning guys. How are you?

Good morning.

Just to start off here a few on expenses. I guess, first question here is, does your expense forecast include the CBI amortization expense you laid out earlier? And then secondly in terms of timing of TCSB cost savings, do you think you are going to get pretty much all of that in the third quarter or will some bleed into the fourth quarter and early 2019?

The answer is yes to both those questions. The forecasted range does include the increase in the core deposit intangible amortization and we largely expect all the cost saves to be in place in the third quarter.

Alright, great. Appreciate the color there. And then just one on M&A, I mean I heard from a number of midsized regional players in and around your markets this quarter starting to talk up again the idea of Michigan-based M&A. So I am just curious if you are hearing increased interest in M&A within the state of Michigan and then now that TCSB is fully in the numbers and the integration is more or less done, just update us on your thoughts for additional deals going forward and what you might be looking for?

Sure, Brendan. So on the point of Independent and our appetite on M&A, so on the buy side, we have said quarter-after-quarter really our primarily use of capital is geared towards organic loan growth. And as we reported today, we have now 17 consecutive quarters of organic loan growth. So, that will continue to be the primary driver for us in terms of growing our earning asset base. The merger with Traverse City went very well and at the same time it was our first merger in many years and we learned a lot from that. We like the way it went. And if there were opportunities that had a similar profile in terms of financial metrics, earn back, EPS accretion, size, attractive market, we would be interested. In terms of just the Michigan market as a whole, I think it does appear that the price level demanded by sellers has gotten – has increased and what that may do is create actually maybe more of a disconnect between buyer and seller I don’t know. But at Independent, we have again said publicly that our primary goal is to operate in the best interest of our shareholders, create shareholder value and we will continue to operate that as our objective.

Alright, that’s it. Thanks for taking the questions, guys.

Our next question comes from Damon DelMonte with KBW. Please go ahead.

Hey, good morning guys. Thanks again for always providing such great clarity and guidance in your remarks. Just a couple of quick follow-ups. Rob, I think I missed what you had said about the expected accretable yield impact on the margin going forward, could you repeat that?

I didn’t really mention the impact on the yield from accretion. I sort of went through each of the dollar amounts, but what I did say about the margin is we expect to be stable to slightly increasing and I don’t anticipate at least for the next couple of quarters, a significant change in the impact of the various accretion items on the margin. So it was roughly 8 basis points in the second quarter and I think it will be a similar impact the next couple of quarters, so not much change at least for the next couple of quarters.

Okay, that’s great. Thank you. And then your outlook for the loan growth, you had said about 15% kind of going through the back half of the year, what areas are you expecting to see that? We have had a decent ramp-up in mortgage loans this year and during 2017, do we expect it to continue in that category or are you going to expect to see more growth on the commercial side?

Damon, I think that first off for the second quarter, we had very strong growth on the consumer installment side and much of that was fueled from our indirect desk, which finances RV and marine-type paper. I would imagine we have a solid third quarter there, and then it will probably tail off and that’s very typical. On the mortgage side, we have had a pretty strong second quarter in terms of portfolio growth and that will probably be an equivalent level maybe Q3, maybe a little less and then again taper off in Q4. And then I think on the commercial loan side, we have actually – I like the pipeline that we have there today. We mentioned in my remarks that we have had a little higher level of higher than normal payoffs. So I am hopeful that we actually have a little bit more of a pickup on the commercial side based on what’s in the pipeline today.

Okay, great. That probably – yes, those are the only two main questions I had. Again, I appreciate the detail you provided in your prepared remarks. Thanks.

Thank you.

Our next question comes from Kevin Swanson with Hovde Group. Please go ahead.

Good morning, guys.

Good morning, Kevin.

Can you guys just talk about how the impact of a larger balance sheet with Traverse City now and have you guys have been able to flex that, your skills and ability is in the balance sheet over to them at all yet or what the outlook looks like to that?

Well, their balance sheet was predominantly loans. They did not have a significant investment portfolio. So, there really wasn’t – we didn’t have to do any, what I would call financial engineering relative to the balance sheet. I think where we have been able to help is they had several loan participations, because they were limited in size of what they could have on their balance sheet and some of those have been brought back in full. So, that’s where we have been able to benefit them. And then in addition, their ability now to pursue larger relationships in the Traverse City market I think is a significant enhancement. And I think over time too, we have got a little bit broader array of treasury management products. So, I think that can also benefit them on the commercial side. In terms of their deposit base, their deposit base was somewhat similar to ours, but they had a bit more focus on commercial relationships. And I think the one area that we maybe of benefit over time is balancing that out with some more increase on the retail deposit side, along with their strong relationship on their commercial accounts, so really not that much they had. As I mentioned earlier, they had an attractively priced trust preferred security that was at LIBOR plus 220, so that was something we wanted to retain, but of course, as part of the purchase accounting entries, we discounted that, about $1.4 million and that’s getting accreted into interest expense. So that brings that attractive rate sort of up to a more market rate for trust preferred, but still that’s as I said a very attractive instrument, so really not much to do at the time of merger, more where we can add sort of on a long-term basis to their growth in that very attractive market.

Great, that’s really helpful. I guess my next question and then my final question was just on, can you give us an idea of kind of the deposit landscape you guys are seeing? Is there anybody out there doing anything crazy? It looked like the cost of funds went up a little bit, but still relatively low.

Well, I think there is, we are seeing CD specials that certainly are at, what I would call, market rates from a wide variety of competitors. And so I think over time, CD costs are going to ramp up a bit. We are not – I don’t think we are seeing anything real crazy on sort of the non-maturity deposit front although I think in the treasury management side of things where you are dealing with municipalities and other governmental units and larger commercial accounts. Certainly, there has been pressure to move money market rates up, because you have competition not just from banks, but from money market funds now as well. So over time, that’s been moving up a bit. I think the real key for everyone is for those banks like us that have a lot of non-interest bearing deposits, do you start to see much in the way of rotation out of those non-interest-bearing deposits into interest-bearing deposits and thus far we have not seen a lot of that. And I think one of the things that we benefit from is we have a lot of smaller balanced retail accounts. So there is not as much pressure there is what you would see if you had a lot of higher balanced accounts.

Great. Thanks.

Our next question comes from John Rodis with FIG Partners. Please go ahead.

Good morning, guys.

Good morning, John.

Rob just one quick question on the securities portfolio, I guess given your outlook for continued loan growth, should we kind of assume it’s flat to down some I guess on the second half of the year?

That’s a great question in one word discussing a lot is where do you kind of level off? I think if we got below 10% of assets, we would feel that just from a liquidity standpoint, we kind to need to maintain it at that level. So we are at about 451 now, 10% of assets, would maybe be 350ish or so. And I think as we move to that level, we would also change sort of the makeup of the investment portfolio. Now, it’s sort of been a complement to our yields. So we have included things like asset-backed securities and municipal securities where we could get a little bit better yields, but they are not pledgeable as collateral. So I think we moved to things that would be much more liquid and pledgeable as collateral as we move down to that number. So even though what represented less of our assets, it would be a more liquid portfolio in terms of borrowings. So I think you would see sort of a bit of a drift down toward that 350 figure over the next four to six quarters.

Okay. Thanks for the thoughts, Rob.

Yes.

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 has now concluded. Thank you for attending today’s presentation. You may now disconnect.