Independent Bank Corporation (IBCP) Q3 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Independent Bank Corporation Third Quarter 2017 Earnings Conference Call and Webcast. All participants will be in a 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 will now like the turn the conference over to Mr. Brad Kessel. Please go ahead sir.

Good morning, thank you for joining Independent Bank Corporation's conference call and webcast to discuss the company's 2017 third 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 on I will begin with slide 5 of our presentation. Today we reported third quarter 2017 net income of $6.9 million or $0.32 per diluted share versus net income of $6.4 million or $0.30 per diluted share in the prior year period. This represents a year-over-year increase in our quarterly net income and diluted earnings per share of 7.6% and 6.7% respectively. Excluding the after tax of $0.02 per diluted share charge related to a decline in price of our capitalized mortgage servicing rates, our third quarter results were very much in line with our expectations. Our efforts to grow our earning to grow both our earning asset base as well as improved mix from securities to higher yielding loans produced net interest income growth of $2.9 million or 14.6% over the year ago quarter and a 6 basis point increase in NIM for the quarter. For the quarter we recorded loan net recoveries of $300,000 and a provision for loan losses of $0.6 million compared to a provision credit of $200,000 for the year ago quarter. Well non-interest income up $10.3 million was a little lower than we expected principally due to lower gains on mortgage sales, our non-interest expense is at $22.6 million were in line with the high-end of our expectations and slightly down on a linked quarter basis. As it relates to our balance sheet we generated portfolio loan growth of $125.4 million or 27.5% annualized. We continued to report strong asset quality metrics with non-performing assets down 3.2% in this quarter. Our ratio of non-performing assets to total assets at 38 basis points compares favorably to the year ago quarter of 62 basis points and last quarter's 41 basis points. Our funding continues to trend very positively with total deposits growing 137 million on a year-over-year basis or 6.2%. The combination of our loan to deposit ratio at 82.65%, our asset sensitive balance sheet, and tangible common equity to tangible assets 9.67% provides further opportunity to grow net interest income. At September 30, 2017 our tangible book value per share grew to $12.47 per share up from $11.72 per share for the same quarter one year ago. Reflecting the growth in our earnings combined with our strong capital levels, we recently announced a 20% increase in the quarterly cash dividend on our common stock to $0.12 per share effective November 15, 2017. For the nine months ended September 30, 2017 we are reporting net income of $18.8 million or $0.87 per diluted share compared to the net income of $16.9 million or $0.78 per diluted share in the prior year period. This represents a $1.9 million or 11% increase in net income and $0.09 or 11.5% increase in diluted earnings per share. Slide 6 of our presentation provides additional highlights on significant performance categories for the first nine months of each of the last four years. Today Independent Bank is the fourth largest bank headquartered in Michigan. Our branch network is a combination of rural, suburban, and urban markets. The conditions in these markets continue to be generally favorable. Our balance sheet growth continues to come from our more urban and suburban markets. Michigan's unemployment rate was 3.9% in August of 2017, 0.6% lower than one year ago and 0.5% below the August 2017 U.S. unemployment rate of 4.4%. At a high level I would say the Southeast Michigan market and West Michigan market are the strongest. Common themes in many of our markets is that of a shortage of labor and a shortage of housing. Accordingly we are witnessing historically record low home listing times, rising residential real estate values, and an increase in new construction. The commercial real estate outlook also continues to be positive evidenced by positive trend lines in commercial industrial office and retail occupancy levels. Over the last 12 months we have expanded our presence in the Southeast Michigan market with new loan offices in Ann Arbor, Brighton, Dearborn, and Grosse Pointe. During the same timeframe we opened a new loan office in Northwest Michigan specifically Traverse City. We also entered the Ohio market opening an office in Columbus and offices in a suburb of Akron, Ohio. These offices are staffed with experienced mortgage banking professionals we added to our team as a result of disruption in the marketplace associated with multiple bank mergers. The favorable economic conditions have translated into very positive loan origination and deposit gathering results for Independent Bank. Page 8 contains a good summary of our loans and deposits by region. We have seen year-over-year loan and deposit growth in each of our four Michigan markets with the exception of our Southeast Michigan market where we have seen a slight decrease in total deposits principally due to the intentional runoff of some higher cost municipal funds. Independent's total deposits as seen on page 9 were $2.34 billion at September 30. 2017. This is comprised of 1.81 billion or 77% transaction accounts. Total deposits increased $49.2 million or 2.2% since the same quarter one year ago when excluding brokered CD's. We are seeing some limited pressure in our markets on the deposit pricing front particularly in the public funds sector. Our cost of deposits continues to be relatively low at 31 basis points but did increase 5 basis points this past quarter. When surveying our markets we generally see credit unions offering the highest rates several of which are now North of 2% with longer-term CD offerings. The same group as well as several large regional banks had the charts for tiered money market rates. We are monitoring closely and actively managing so as to retain core while also limiting the effects of rising rates on our deposit base. As seen on page 10 loans -- including loans held for sale increased to $1.95 billion at September 30, 2017. This represents the 14th consecutive quarter of net loan growth for our company. For the third quarter of 2017 total portfolio loans grew by $125.4 million or 27.5% annualized with organic growth in each loan category. The commercial team generated net growth of $8.5 million or 4.1% annualized during the quarter despite several large payoffs. Our new commercial originations continued to be very granular in size, diverse in industry, and a good mix between C&I and CRE. The pipeline is good when comparing to last quarter end and the same quarter one year ago. We do anticipate in this portfolio -- we do anticipate growth in this portfolio in the fourth quarter. However, we temper this growth expectation with consideration of several large expected payoffs. The consumers, lenders, and indirect debts generated consumer installment loan net growth of $10.1 million or 13% annualized. We continue to see very good demand for marine and RV financing from our indirect team. We do expect the annual seasonal slowdown to occur for this production in Q4 of 2017 and Q1 of 2018. Our mortgage team originated $264 million and we sold $121 million during the third quarter of 2017. Year to date in 2017 we have originated $657 million and sold 305 million as compared to 2016 when we originated $288 million and sold 215 million for the first nine months of that year. For the third quarter we grew our mortgage portfolio by $106.8 million or 62.8% annualized. As mentioned in recent earnings calls and in conjunction with our mortgage expansion we continue to portfolio a higher percentage of our total mortgage originations than we originally forecasted. Originally we anticipated selling two thirds of our production and one third going to portfolio. Our actual mix is closer to 50% saleable and 50% non-saleable. While we did plan for a shift to more purchase money versus refinances, we are also capturing a larger share of the jumbo mortgage market. This was the goal with the expansion. In addition we are seeing a higher demand for construction loans and non-warrantable condo loans. Non-warrantable condos are associated with new developments where the percentage of the development has yet to reach the percentage of completion phase to be eligible for salability purposes in the secondary market. All three of these product types we currently place in the portfolio. Some statistics on the loans placed in the mortgage portfolio for the quarter include the following; total originations of $129 million of which $41.3 million was non-saleable, 30, 20, or 15 year fixed rate loans. 35.6 million of adjustable rate loans, 39.8 million of construction loans most of which were adjustable rate, 8.3 million of second mortgages, and 4 million in vacant land loans. This strategy of originating and putting into portfolio loans more fixed rate loans than we did in years past has today somewhat reduced our assets since asset sensitivity. However, we are still asset sensitive and are carefully monitoring this change in the composition of our portfolio loans and the impact of potential future changes in interest rates on our changes in market value of portfolio equity and changes in interest -- net interest income. In addition we have been adding some longer duration borrowings to reflect the change in the loan portfolio composition. The mortgage pipeline is solid, however, we do look for the seasonal slowdown in the fourth quarter of 2017 and the first quarter of 2018. Page 8 provides some information on our capital as well as fourth 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 9.67% of tangible assets at September 30, 2017 as compared to 9.81% 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. In January of this year the Board of Directors of the company authorized a new repurchase plan for 2017 under the terms of the repurchase plan the company is authorized to buy back up to 5% of its outstanding common stock. This plan is authorized to last through the end of this year. During the third quarter and year to date in 2017 we have not repurchased any shares. At this time I would like to turn the presentation over Rob Shuster to share a few comments on our financials, credit quality, and management's outlook for the fourth quarter of 2017.

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. As Brad indicated our tax equivalent net interest margin moved up to 3.66% during the third quarter of 2017 which is up 15 basis points from the year ago quarter and up 6 basis points from the second quarter of 2017. I will have some more detailed comments on this topic in a moment. Average interest earning assets were $2.52 billion in the third quarter of 2017 compared to $2.29 billion in the year ago quarter and $2.42 billion in the second quarter of 2017. 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 I will summarize a few key points. Interest income and fees on loans increased by $1.882 million on a sequential quarterly basis due primarily to an increase in average balance of $129 million and very importantly an increase in the average yield on loans to 4.55% in the third quarter of 2017 from 4.49% in the second quarter of 2017. We provide details on the various loan portfolios on this slide. You will note that interest income on payment plan receivables declined by $327,000 in the third quarter compared to the second quarter of 2017 due to the sale of this business in May of 2017. One more day in the third quarter increased net interest income by approximately $125,000 compared to the second quarter of 2017. And finally the average cost of interest bearing liabilities moved up by 8 basis points on a sequential quarterly basis due primarily to growth in brokered CD's and other borrowings that were used to fund loan growth. The weighted average cost of savings and interest bearing checking accounts moved up 3 basis points from 0.12% to 0.15%. A little more color a new and renewal loan origination in yields is as follows. New and renewed commercial loan originations totaled $57 million of which 42% was fixed rate and 58% was variable rate. The weighted average interest rate was 4.59% with an estimated weighted average duration of 1.9 years. New consumer loan originations totaled $41.2 million with a weighted average yield of 4.38% and an estimated weighted average duration of 3.47 years. Finally, Brad mentioned new portfolio loan originations that broke down to 54% fixed rate and 46% variable or adjustable rate. The weighted average interest rate was 3.99% with an estimated weighted average duration of 4.04 years. We'll comment more specifically on our outlook for net interest income for the balance of 2017 later in the presentation. Moving on to page 14 non-interest income totaled $10.3 million in the third quarter of 2017 as compared to $11.7 million in the year ago quarter and $10.4 million in the second quarter of 2017. Our mortgage banking operations caused most of the quarterly comparative year-over-year variability and non-interest income with decreases in both mortgage loan gains and mortgage loan servicing income. We now include a table in the text of our earnings release that breaks out mortgage loan servicing into its component parts which is net revenue, fair value change due to price, and fair value change due to pay downs. As Brad mentioned, the fair value change due to price which we view as not being part of our core results was a negative $572,000 in the third quarter or $0.02 per diluted share on an after tax basis. The fair value change due to pay downs was a negative $518,000. We view this as being part of our core results. Although the 10 year treasury rate increased by 2 basis points during the third quarter of 2017, longer term mortgage rates actually declined a bit resulting in the negative fair value adjustment due to price. Despite the volume of mortgage loans sold increasing, games and mortgage loans declined due primarily to a decrease in the loan sales margin as well as fair value adjustments. The decrease in the loan sales margin principally reflects competitive conditions in the market as the primary secondary spread has contracted during 2017. As detailed on page 15 our non-interest expense totaled $22.6 million in the third quarter of 2017 as compared to $22.5 million in the year ago quarter and $22.8 million in the second quarter of 2017. This year-over-year increase was primarily in compensation and benefits. We increased total full time equivalent employees by approximately 66 or 8.4%. The FTE increase principally reflects the expansion of our mortgage banking operations. Our efficiency ratio continued to improve in 2017 and declined to 67.4% in the third quarter compared to 70.3% in the second quarter. Investment Securities available for sale decreased $35 million during the third quarter of 2017 as funds from runoff were utilized to support portfolio loan growth. Page 16 provides an overview of our investments at September 30, 2017. Approximately 26% 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 2.73 years. Page 17 provides data on non-performing loans, other real estate non-performing assets, and early stage delinquencies. Total non-performing assets were $10.6 million or 0.3% of total assets at September 30, 2017. Non-performing loans decreased by about $100,000 and other real estate decreased by about $200,000 during the third quarter. The ex-September 30, 2017 30 to 89 day commercial loan delinquencies were just 0.06% and mortgage and consumer loan delinquencies were 0.48%. Moving onto page 18, as Brad mentioned we recorded a provision for loan losses of $0.58 million in the third quarter of 2017 compared to a credit provision of $0.18 million in the year ago quarter. As just outlined asset quality metrics improved across the board and we recorded $0.3 million of loan net recoveries in the third quarter. Thus loan growth was the driver of the provision expense this quarter. The allowance for loan losses totaled $21.5 million or 1.11% of portfolio loans at quarter end. Page 19 provides some additional asset quality data including information on new loan defaults in unclassified assets. New loan defaults were $2.1 million in the third quarter of 2017. Page 20 provides information on our TDR portfolio that declined to $68.1 million at September 30, 2017. This is a decline of $3.2 million during the quarter. The portfolio continues to perform very well with nearly 93% of these loans performing and just over 90% of these loans being current at September 30, 2017. Finally page 21 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 for the first nine months of the year was better than our original outlook. We achieved annualized loan growth of nearly 28% in the third quarter of 2017. As Brad mentioned we expect a seasonal slowdown in the fourth quarter. In addition we expect to see a modest shift in mortgage loan originations to a higher percentage of salable loans. Despite these changes we anticipate portfolio loans will exceed $2 billion by year-end. Third quarter 2017 net interest income grew nearly 15% on a year-over-year quarterly basis compared to our original forecast to growth rate of about 3%. We now anticipate a full year-over-year growth rate of approximately 12% to 13%. We had a provision for loan losses expense in the third quarter of 2017 of about $600,000. 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 last quarter of this year. However with still somewhat strong forecasted loan growth, we'd expect to see a positive provision for loan losses in the fourth quarter. Third quarter 2017 net interest income was below our forecast primarily due to the aforementioned $600,000 fair value decline due to price on our capitalized mortgage loan servicing. We expect non-interest income to move up to the low end of our forecasted range in the fourth quarter absent any further fair value declines and capitalized mortgage loan servicing due to price. Third quarter non-interest expense was a bit below the high end of our forecasted range. We expect non-interest expense to remain near the high-end of our forecasted range in the last quarter of 2017. And finally we expect an effective income tax rate between 31% and 32% as we wrap up the end of this year. That concludes my prepared remarks. I would now like to turn the call back over to Brad.

Thanks Rob. In summary we are pleased to report continued solid performance for the third quarter of 2017 with growth in earnings and earnings per share, growth in loans and core deposits, and excellent asset quality metrics. As we look ahead we continue to be focused on driving high performance with a balance sheet growth and strength, quality earnings, per share value, and strong profitability levels. We continue to build on the momentum generated the last few years. At this point we would now like to open up the call for questions.

[Operator Instructions]. The first question comes from Matthew Forgotson with Sandler O'Neill. Please go ahead.

Hi, good morning gentlemen.

Good morning.

I was wondering, hoping we could start level with a strategic question, I guess by my math mortgage is now 43% alone, it is up from 33% one year ago. Wondering if you could talk about the optimal level for mortgage as a percentage of loans and I guess beyond that if you have a bright line or a ceiling for this segment?

Very good Matthew, that's an excellent question. And just sort of going back for a minute, a few years ago we had two out of our three portfolios were in a growth mode, the commercial portfolio and the consumer. And in fact the mortgage portfolio while we did a lot of mortgage funding, it was really flat-end in runoff. And so several years back we made a commitment to be in the mortgage business. We invested in a new mortgage origination platform encompassed by Elli Mae. And then following that a year ago we did some recruiting and really built out the mortgage line of business for us. And with that we've now seen -- we've reversed that trend and we've had very strong mortgage production. And as I put in my prepared remarks, the mix has been a little different than we originally anticipated. It's been more portfolio than saleable. Now, so it's working like we want it. In fact maybe a little better. Now to your question in terms of sort of what's the optimum amount and what do we -- for the mortgage portfolio. We're very cognizant of not putting all our eggs into one basket and so when we talk internally we sort of believe that the commercial portfolio is sort of a gauge or a soft cap for us. And so we're watching very closely how the mortgage category tracks relative to commercial. So that's sort of one point and then secondly how do you sort of manage to that and we are not just shutting down the operation when you get to that. And something we have talked about internally as doing some bulk sales so we can continue to produce but those originations turn around and sell. So, hopefully that sort of gives you a flavor of where we've been, where we're at, and sort of where we see it going and Rob I will let you jump in with anything additional.

I guess the takeaway is we've we don't want mortgage loans moving by any significant amount about where commercial loans are. So that as Brad said kind of gives you an idea of where we see that capping now. And the strategies to kind of keep those things in line again would be the consideration of some bulk sales and in addition we've made some programmatic changes. I mentioned in my comments that we expect to see the saleable component move up a bit and that largely reflect some of the programmatic changes we've made to try and change the mix a little bit more for saleable.

That's great color, thank you. I guess Rob to your comment on your asset sensitivity, can you give us the snapshot at 9:30 where you were in an up 100 basis point environment?

Yes, in an up 100 basis point we're still moving up about 1.4% and up 200 basis point we're moving up about 1.5%. The one other comment I made that I think is significant when we compare and this is on a static balance sheet off of September 30 so it doesn't reflect future growth or things we may do regarding for example extending durations on liabilities that type of thing. But the other comment I make when I compare it to where we were a year ago the base scenario is up against the December 31 level by almost 17%. So we've grown the base net interest income by 17% and we've kept the balance sheet still slightly asset sensitive yet again the expectation is plus 1.4% in 100 and plus 1.5% at 200. And finally I would add because as you can appreciate there's a lot of assumptions that go into those forecasts but I would say generally that what we've seen for actual changes in rates in the deposit portfolio as compared to the betas we use in our forecast seem that the actual changes in the market have been more modest than what we're using in our model on the deposit betas. Now whether that holds going forward or not, hard to predict but at least that would be the comment I would say on what's occurred thus far in 2017.

I guess lastly from me then I will hop back in the queue, just as we look into 2018, trying to get a feel for the loan growth, I guess if you're on track to do 25% plus a year is it growing off of the 25% growth rate is quite challenging I'd imagine, are you signaling that we revert to a more natural rate of growth in 2018 and if so what might that be?

I think you're spot on and I think what we wouldn't vision is more high single-digit maybe approaching the 10% level as we move through 2018. So if you're starting around 2 billion that gives you some idea of where we would anticipate going as we move to 2018. And again I think the components will still be that the mortgage volume is going to be the highest. But we're going to see that that portfolio we're going to again be limiting the growth there either through as I mentioned earlier programmatic changes or potentially through bulk sales of the portfolio product. So that's where we're going to get that regulation and growth rather than necessarily as Brad mentioned earlier we don't want to slow down production but we just want to get that mix changed so we keep the balance sheet or the loan portfolio comprised as we would like between the commercial, the mortgage, and the consumer.

Thanks for taking my questions.

Your next question comes from Kevin Reevey from D.A. Davidson. Please go ahead.

Good morning gentlemen.

Good morning.

So just to follow up on not Matt's first question surrounding the NIM and given the fact that it sounds like you're a little -- you've become a little more asset sensitive plus it sounds like you are not seeing the deposit costs in your markets rise as much as it's safe to say that we should expect to see the NIM perform pretty similarly as we saw in the third quarter?

A couple comments Kevin one is, when I went over the asset sensitivity we're still asset sensitive but a little less than where we were a year ago. So still asset sensitive but a bit less than where we were a year ago. Secondarily in terms of the net interest margin I would still anticipate that creeping up a bit for a couple reasons, one is it's the continued mix shift with a little less in lower yielding investment securities, a little bit more in higher yielding loans. And then secondly we anticipate at least maybe in the last month of this year a bump up in the federal funds rate and perhaps at least one next year. So those would be generally positive for us as well. So the combination of that remixing of earning assets and some potential for higher short-term rates we think would push the margin up a bit as we move forward.

That's great and then moving along the two hiring of talent are you pretty much done on that front or should we expect to see a couple more additions going into the fourth quarter?

Well, so hiring talent I would say mortgage side we built that out to how we want it. Now is there some tweaking that's going on there, yes in our business and actually mortgage commercial we're constantly recruiting. So, what I would say from an FTE standpoint we are where we want to be. Over on the commercial side we continue to look today we have approximately 25 relationship managers and we'd like to add to that group a little bit here. So that should be a little bit of a larger group hopefully in 2018, Kevin.

Great, thank you very much.

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

Hey, good morning guys.

Good morning Scott.

So I guess as we look at kind of the growth trajectory I know it was discussed in some of the previous questions but looking at what you've seen so far this year other than the addition of some of the mortgage lenders that you're obviously portfolio a little more than you set out to when you hired those guys, outside of that though what would you say is the biggest driver behind this growth that you're seeing so far this year, I mean is it share you're seeing, is it the activity in Grand Rapids and the Southeast markets?

Yeah, I think it's clearly share and it's moving into some more urban markets. So -- and I think there's a -- we have in the slide deck there's a slide on the regional market so, page 8 you could see in the portfolio loan total you've got 72 million in Ohio. So that's we opened up loan production offices in Columbus, Ohio and outside of Akron, Ohio and those offices are very strong producing offices with a lot of very good loan officers and support staff that we brought aboard. So there because we weren't in those markets at all we're capturing quite a bit more market share both saleable and portfolio. And then in addition we expanded in Southeast Michigan as Brad mentioned, we expanded our office in Troy, we opened up in Ann Arbor, Brighton, Dearborn, and Grosse Pointe. So again you're adding people and location and we're capturing more market share there. So, in Grand Rapids probably not as big of a change here. We had a pretty good footprint here and we've added a bit but we haven’t physically added here. And then there are certain other markets we added up in Traverse City for example. So it's really the addition of people and offices that have allowed us to capture more market share and that's been the primary driver. And as Brad said that's pretty much we anticipated doing that. It's probably been a little bit stronger than what we anticipated. And so it's been something that's been we feel very beneficial. The growth and net interest income has been fueled to a very strong degree by the mortgage portfolio but also by the consumer portfolio and the commercial portfolio too.

Rob thank you, that's great color. That kind of ties in to something else I was curious about, when you look at some of these other, these newer locations, some of the new LPO's do you have any idea kind of longer-term how you think about those newer markets, whether that has the capacity to become a full service branch and if so what does that timeline look like for let's say something like Columbus for example?

Yeah, well I would say this, I would say where we've opened the new loan offices are very good indications of where we see the growth. And so as an example Brighton we do have a commercial lender there in addition to our mortgage people. So, I would say we're going to continue to grow the originations through that process, we are working hard on cross selling and growing the underlying deposit base. So we are not starting from scratch. And longer-term we would like some of these to be full service branches. And I would say the other piece, it gets us in these markets, we learn them, we find out who the talented people are. And so, regarding Ohio I'm not going to say no, it won't be a full service branch but I would probably imagine that some of these Michigan sites will probably be ahead of the Columbus site.

Great, great, now that's very helpful. Hardest part to kind of model I think for all of us but looking at kind of the way the provision line is trended, obviously you are releasing a lot of reserves through 2015 and 2016, and now you've stated that you expect a positive provision expense. But I guess just do you have anything that you could say in terms of that could help us get a feel for what the reserve build is going to look like assuming that 10% organic growth rate, is it necessarily need to build -- and where the credit stands now?

Yeah I think it was certainly build in terms of dollars.

Oh, yes, yes. [Multiple Speakers]

Yeah, I mean it is at 1.11%. I mean I could see it drifting a little bit lower from that and part of the reason is for example when we model out and we have for consumer credits whether it's installment loans or whether it's mortgage loans we have a migration model we utilize using FICO scores and then model in the probability of default and the loss given default given the collateral position. I could tell you that the expected loss content and portfolio loan originations is well less than 1.11% for mortgage loans and consumer loans. Similarly it's less than 1.11% for commercial loans. So those new credits you're adding are coming in at that lower allowance levels. Now we've done some things to try and say well, hey, things are really great right now but looking long term you know there's going to be a change in cycle. So for example we have added a component in our ALLL that relates to commercial real estate because we're saying hey, there are some trends out there whether it's in multifamily or whether it's in retail that we think longer term there could be a little bit more risk. So we're going to add some more here. We've added more in our subjective reserve because it's very difficult to capture everything when you're just looking at current loss content because it's been so good. I mean we have had net recoveries so far this year. We've had very little in new loan defaults. We have had very low early stage delinquencies. So we're trying to do a few things to kind of make sure we're looking forward enough. So I guess when I summarize all of that the dollars are going to go up, the percent may drift down a bit but not a whole bunch. So that's kind of the summary I would say to walk away with on the ALLL.

That is perfect, that's very helpful. Yeah that is what I was looking for. Yeah, that's all I have for now and nice quarter guys, thank you.

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

Hey, good morning guys, how is it going today.

Very good Damon. Thank you.

Good to hear. To my first question, the organic growth has been phenomenal obviously, a lot of good discussion and color on that during this call. Have you guys given much thought to using M&A as a means to support growth or do you feel that the opportunities through the organic channels are just more than adequate for you guys to meet your business plan and there's really no need to look at M&A?

Well Damon, that is a great question and you know, quarter-after-quarter, year-after-year we talk about capital and our priorities with capital. And starting with organic loan growth consistent solid dividend, share repurchase where it makes sense. And we also talk about M&A where it makes sense for and/or is complimentary to the organic loan growth and capital usage. So I wouldn't rule out independent growing in that matter but it's not our primary matter and now I would say this, when -- I feel very good about Independent and in our performance and as opportunities come along we try to position ourselves so that people are learning about us for the very first time. So, and Rob do you have anything to add.

Yeah, the only thing I would say is Damon, I don't think there's any need for M&A for us to feel like we have enough levers to continue to grow earnings at a good clip. I think we still have a runway to do that and so it's not something we're dependent on if an opportunity came up that was very compelling. And I think anyone in our -- in the public company world at our size would probably want to take a look at it particularly as Brad said if it's a great fit strategically and in our footprint.

Got you, okay. That is helpful. And then I had jumped on the call late and I'm not sure if you had covered this but in this quarter's margin I know some of the commentary we're talking about is that you kind of expect the margin to go higher in the next quarter just given some dynamics and the components of the margin. But of that 3.66% this quarter is there anything in there that you would back out to get to like a starting point for the margin or is that solid number?

Yeah, I mean we have on, it is on page 13 of the slide deck, probably the only thing that was kind of something that you could never predict is what the impact is of interest recoveries and there they were up a bit versus the second quarter. So it did add a couple of basis points to yield. So I mean that's the one piece I mean but say next quarter it could be even higher. I mean you just don't know on the interest recoveries but absent that there is really nothing in the 3.66% that you back out or that was unusual. I mean the fourth quarter is going to have the same number of days so we're not going to have any impact by a difference in days and again the only other piece like I said that changes from quarter-to-quarter by any significant degree is those interest recoveries.

Okay, perfect. Okay, everything else has been asked and answered already, thank you very much.

Thanks Damon.

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

I 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. Thank you.