Independent Bank Corp (Michigan) (IBCP) 2014 Q3 法說會逐字稿

Good day and welcome to the Independent Bank Corporation 3Q 2014 earnings conference call and webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. 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 financial results for the third quarter of 2014. I am Brad Kessel, President and CEO of Independent Bank, 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. We will begin today's call with our prepared remarks and then open up the call to questions.

Beginning with the financial summary slide, page 4, we are pleased to report for the third quarter of 2014 net income of $4.9 million or $0.21 per diluted share. On an income before tax basis, we are reporting $7.3 million as compared to $3.8 million for the same quarter last year. This represents a $3.5 million or 92% year-over-year increase.

For the nine months ended September 30, the Company is reporting net income applicable to common stock of $14.1 million or $0.60 per diluted share compared to $77.3 million or $3.40 per diluted share in the prior-year period. Recall the third-quarter and year-to-date 2013 results included an income tax benefit of $57.3 million associated with the reversal of substantially all of the Company's deferred tax asset valuation allowance in June 2013.

Turning to the financial highlights slide, page 5, our 11th consecutive profitable quarter included improved asset quality metrics, which led to a $600,000 credit loan loss provision and quarterly noninterest expenses reduced by $3.9 million or 14.8% year over year. We remain optimistic about the Company's prospects for earnings growth.

Our balance sheet and capital position are strong, with net loan growth for the second consecutive quarter. Our growth is being driven by commercial growth of $17.8 million or 10.5% annualized and consumer installment loan growth of $7 million or 13.3% annualized.

Our tangible common equity ratio increased to 10.92% and our tangible book value per share increased to $10.65. On August 15, we paid a $0.06 per share cash dividend.

Our footprint shown on the core banking market slide, page 6, includes significant market presence and opportunity to gain market share in attractive Michigan markets. For the third quarter of 2014, Michigan market conditions continue to improve as compared to the same period one year ago, evidenced by a reduced unemployment rate, net job growth, and appreciation in real estate values. Commercial occupancy rates continue to improve for industrial, retail, and office space.

The table at the bottom of this slide provides a snapshot of our loan balances by market for the quarter ended September 30, 2014, in comparison to one year ago. As you can see, our West region has shown the largest dollar growth, followed very closely by our Southeast region.

Looking at our markets on a more regional basis, on slide 7, the Central West Michigan region, which includes our Lansing and Grand Rapids markets, showed a very strong second quarter for housing starts, stable growth in home prices, continued low single digit net job growth, and a regional unemployment rate falling to 5.6% and staying below the national rate.

Moving to slide 8, the Detroit MSA includes our five local and county branches as well as one branch each in Wayne, Macomb, and Lapeer Counties. This region also showed a strong second quarter for housing starts and high single-digit home price appreciation. Job growth continues to be weak and lagged the national rate and the unemployment level for this region is still elevated, at 8.2%.

Moving to the deposit franchise slide, page 9, we continue to emphasize growth in our core deposit base. We have $1.9 billion in total deposits at September 30, 2014, up 46.6% or 2.5% -- I'm sorry, up $46.6 million or 2.5% since the same quarter one year ago.

As indicated on this slide, $1.5 billion or 79% of total deposits are transaction accounts. For the third quarter of 2014, our cost of deposits was flat with the prior quarter, at 26 basis points.

Our loan mix and historical loan yield information is shown on slide 10. Total portfolio loans grew for the second consecutive quarter to $1.42 billion as of September 30, 2014.

For the third quarter, our commercial team led the way, with net growth of $17.8 million. Our consumer direct and indirect channels also reported net growth of $7 million. In addition, we originated $77.5 million of residential mortgages and sold $62 million, generating $1.5 million in net gains.

The 20 basis point decline in yield from the second quarter to the third quarter was evidence of the continued low rate environment and competitive rates on new balances being lower than rates on the existing portfolio. Rob will provide more detail in his remarks on this subject.

Our associates continue to execute on strategies to grow our loan portfolios, targeting the commercial small business and consumer markets. We also continue to be well positioned in our markets with a very experienced team of residential mortgage originators.

Year to date, we have opened four new loan centers -- three in our West Michigan region, specifically Grand Rapids, Kalamazoo, and Cadillac, and one in our Southeast region in West Bloomfield.

I would now like to turn the presentation over to Rob Shuster to share a few comments on our financials, credit quality, and management's outlook. Rob?

Thanks, Brad, and good morning, everyone. I am starting at page 11 of our presentation.

Our net interest income totaled $18.2 million during the third quarter of 2014, a decrease of $1.3 million from the year-ago period and a decrease of about $355,000 on a linked-quarter basis. Our tax equivalent net interest margin was 3.61% during the third quarter of 2014 compared to 4.10% in the year-ago period and 3.74% in the second quarter of 2014.

The decrease in the net interest margin is primarily due to the prolonged low interest rate environment that has resulted in declining average yields on our loan portfolio.

Average interest-earning assets were $2.02 billion in the third quarter of 2014 compared to $1.91 billion in the year-ago quarter and $2.01 billion in the linked quarter.

Page 12 contains a more detailed analysis of the linked-quarter decline in net interest income. As we discussed last quarter, we expected some further erosion in our net interest margin.

However, we also expected the decline in the net interest margin to be offset by earning asset growth, in particular loans. Thus, we anticipated net interest income to remain flat at about $18.5 million.

This did not occur due principally to two factors. First, the decline in the net interest margin was steeper than we expected due primarily to somewhat higher than forecasted prepayment levels in the consumer installment loan and payment plan receivables portfolios.

Second, quite a bit of the growth in the commercial loan portfolio occurred in the last two weeks of the quarter and the increase in the average balance of these loans was a bit below our forecast. We will comment more specifically on our outlook for net interest income for the last quarter of 2014 later in the presentation.

Moving on to page 13, noninterest income totaled $10.5 million in the third quarter of 2014 as compared to $9.8 million in the year-ago quarter and $10.1 million in the linked quarter. The most significant change was the increase in mortgage loan servicing income, as the third quarter of 2014 included a $500,000 recovery of previously recorded impairment charges on our capitalized mortgage servicing rights. Overall, total noninterest income in the third quarter was within our expected range.

As we previously reported, we did sign a new debit card brand agreement in January 2014. We expect this to add about $1 million of net interchange revenues annually and we completed the conversion of our database in September -- or of our debit card base in September.

As detailed on page 14, our noninterest expense declined to $22.1 million in the third quarter 2014 as compared to $25.9 million in the year-ago quarter. Many expense categories were lower in 2014, primarily reflecting our cost reduction initiatives. In particular, year-over-year quarterly credit-related expenses declined by $2.1 million.

Investment securities available for sale increased by approximately $71 million since the beginning of 2014, primarily reflecting the deployment of overnight funds that were held at the Federal Reserve Bank as well as funds provided from the year-over-year increase in deposits. Page 15 provides an overview of our investments at September 30, 2014.

47% of the portfolio is variable rate and much of the fixed-rate portion of the portfolio is in maturities of 5 years or less. The estimated average duration of the portfolio is about two years.

Page 16 provides data on nonperforming loans, other real estate, non-performing assets, and early-stage delinquencies. We continue to make progress on improving asset quality.

Nonperforming loans were relatively unchanged during the third quarter of 2014. However, ORE declined to $9.4 million at September 30, 2014 from $18.1 million at June 30.

In the third quarter of 2014, we closed on the cash sales of our two largest ORE properties. The combined book value of these properties was $8.6 million and we recorded an aggregate net gain of $560,000 on these sales. In addition, total 80 -- 30 to 89 day delinquencies remained relatively steady and totaled $10.2 million or 0.7% of portfolio loans at the end of September.

Moving on to page 17, we recorded, as Brad mentioned, a credit provision for loan losses of about $600,000 in the third quarter of 2014 compared to a credit provision of $400,000 in the year-ago quarter. Low net charge-offs declined to $57,000 in the third quarter of 2014 or just 0.2% annualized of average portfolio loans. This compares to $2 million of net loan charge-offs or 0.58% annualized of average portfolio loans in the year-ago quarter.

Other credit-related costs, such as loan and collection expenses and net gain or loss on ORE, were also lower in the third quarter of 2014 compared to the year-ago quarter. Finally, the allowance for loan losses totaled $27.5 million or approximately 2% of portfolio loans at the end of September.

Page 18 provide some additional asset quality data, including information on new loan defaults and on classified assets, which declined by approximately $7.6 million in the third quarter of 2014.

Page 19 provides information on our TDR portfolio that totaled about $115 million at September 30, 2014, a decline of 9.7% on an annualized basis since the end of 2013. Specific reserves allocated to the TDR portfolio were $12.4 million or about 10.8% of the total balances at September 30. Importantly, over 89% of the TDR portfolio was current at the end of September.

Finally, on page 20, we provide some details on our outlook for the remainder of 2014. In January 2014, we outlined our expectation for low single-digit overall loan growth during the year.

Third-quarter 2014 actual results were consistent with our expectations. As we outlined in our July 2014 call, we expected continued growth in the consumer installment and commercial loan portfolios. Both of these occurred, leading to growth in net total portfolio loans of $21.3 million or 6.1% annualized in the third quarter of 2014 and we are now up $24.2 million since the end of 2013.

I discussed earlier that net interest income of $18.2 million in the third quarter of 2014 was below our expectations, as we anticipated less yield compression in the consumer installment loan and payment plan receivables portfolios than what actually occurred.

As you are aware, mid- and longer-term interest rates have moved lower since the end of the third quarter. This may place some additional near-term pressure on our net interest margin.

However, we remain optimistic that any downward movement in our net interest margin can be offset by growth in our average loans. Longer term, we remain positioned to benefit from rising interest rates.

We continue to expect generally steady improvement in asset quality. The performance of the TDR portfolio, where we have a significant amount of allocated specific reserves as well as low net charge-offs, loan default volumes, and watch credit levels, will be the primary factors impacting our 2014 provision level for the last quarter of the year.

Moving on to noninterest income, we anticipate for the last quarter of 2014 that the total level will remain between $10 million to $11 million, with a potential wildcard being mortgage loan servicing income and a possible impairment charge if the 10-year treasury yield remains well below 2.5%.

In January 2014, we forecast noninterest expenses to be in a range of $22.5 million to $23.5 million per quarter during the year. Actual third-quarter 2014 noninterest expenses of $22.1 million were below the low-end of that range. We continue to expect noninterest expenses to be at or near the low end of the aforementioned range for the last quarter of 2014.

Finally, we expect income taxes to equal 31% to 32% of pre-tax income during the last quarter of 2014, with the primary permanent differences being interest income on tax-exempt securities and earnings on our Bank-owned life insurance.

That concludes my prepared remarks and I would now like to turn the call back over to Brad.

Thanks, Rob. I would like to turn your attention to slide 21, titled strategic initiatives. As we look ahead, we continue to execute on strategies and initiatives to increase long-term shareholder total return.

This includes a balance sheet with high credit quality, diverse mix of lending, and a very granular makeup of credits. We continue to emphasize the gathering of core deposits in our 22 counties.

We are very conscious of our capital levels and the need to be good stewards of our capital. In the near term, we plan to manage tangible common equity in a 10% to 11% range and longer term in the 9% to 10% range.

Our capital retention is aimed at organic growth, followed by acquired growth where it makes sense. We believe it also important to have a strong and consistent dividend policy and we'll consider share repurchase in the context of our overall capital and cash levels as well as the trading level of our share price.

We continue to work to improve our core ROA and ROE. Our roadmap is geared towards revenue growth through a higher loan-to-deposit ratio, reduced level of securities, and continued focus on transaction-related and mortgage banking revenue. Concurrent with this effort is a continued emphasis on reducing noninterest expenses.

Finally, the continued development and integration of an enterprise-wide risk management and related best practices within our Company is viewed as a top priority to ensure we have achieved -- to ensure we achieve a balanced risk reward profile.

At this point, we would now like to open it up for questions.

(Operator Instructions) Matthew Forgotson, Sandler O'Neil and Partners.

Just as it relates to the margin, you reiterated again that it was kind of inching towards the bottom. Where do you expect the NIM to ultimately bottom out and has the pullback in long-term rates affected this outlook?

Well, I think it has affected it a bit. The pullback predominantly affects the term commercial loan rates and the consumer installment rates. We are not putting a lot of single-family mortgages in the portfolio.

And then the other area that has some impact is the investment side, although we are not really doing much with longer-term investments. The short-term rates really haven't moved that much, although some might argue that the projection of when the Fed may be moving short-term rates out has been pushed back into 2015.

So I think all those factors have some impact if we look at where new loan rates were in terms of where most of our growth has been. On the consumer side, new loan rates have been roughly in the 4% area and on the commercial side, it's been 3.75% to 4.25%, depending on whether it's term rate or a variable rate. Those both are below the average portfolio yields.

Commercial loans -- the average portfolio yield is 4.83% at the end of September. On consumer installment loans, it was even higher, at about 5.75%. So the two factors you have in -- that are affecting loan yields are that the new rates are below the portfolio yields. And probably the biggest single item in the third quarter was the level of prepayments.

We had a bit more -- the commercial side interest income was flat, so we were able to make up on most of the margin compression there with new volume. Similarly on the consumer side, actually, we were able to make up the compression.

But what we expected was we would actually have growth in interest income on the commercial and consumer installment side. That the growth would be -- the growth was where we expected, but we would not have as much prepayment activity and margin compression.

So that is somewhat difficult to project, so when you ask where might you bottom out if rates stay at this level, it's tough. We hope that it's not more than 10 to 15 more basis points, but I think you could model probably a bit more than that, depending on prepayment activities.

What our real goal is, regardless of the interest rate environment, is to get enough growth to offset that pressure on the margin. And again, the one good thing I would say is the payment plan portfolio -- we are almost two-thirds of the compression was in terms of dollars. That is becoming a smaller and smaller portion of the overall pie.

In addition to that, we feel that that portfolio is not far from flattening out, given where current production levels are. So hopefully, that would help stem the tide on the margin compression to some degree.

Okay. And then just -- pleased to see you reiterate your long-term 65% efficiency ratio target. Can you give us just a rough sense of how this ultimately might play out -- just broad brush strokes, say, percentage revenue versus percentage reduction in noninterest expense? Just a breakdown?

Sure. Matthew, I think that the majority of it will come on the income side. And again, looking at -- it starts with growing the margin and we do feel like we have momentum, at least on the loan growth side.

We -- I think we have actually added some staff here -- a little bit different than maybe some of our competitors, but on the mortgage banking side, we are up a little bit in staffing. And so I think the gains there should be at or a little bit better on a longer-term basis.

Rob mentioned our debit card agreement, that really the conversion was just completed here in the third quarter and we anticipate that to have a substantial impact on our noninterest income.

And -- so I think it starts with revenue and then we continue to look at the expense side. And we have made a very good progress on the credit cost piece in the -- or line items that go on to credit cost. I think there's still room to improve there, loan and collection in particular.

And then we are looking -- we continue to look real hard at the other categories. Our largest expense is compensation and benefits. We have engaged our third-party processor, FIS, in a project that we are now about 120 days into.

That's really looking at how we use their technology, trying to reduce the number of handoffs. Ultimately, I think we will be able to do -- to service our customer base with fewer people. And the other piece is [two-world] -- we continue to look at branch optimization and we have shared this in the past.

As you probably recall, at one point, we had 106 branch network. Today, we have 70. The lower amount was due to a sale of 21 branches and the consolidation of another 15. I think we still -- we have got a project underway and I could see a handful more there. So I would say probably two-thirds of the efficiency improvement will come from the revenue side and one-third from the expense side.

Okay. And then lastly and then I will hop out. In your strategic initiative slide, I was interested to see that you introduce the idea of share repurchases. Can you just talk to us a little bit about -- I know you are in a retained deficit position, but can you talk to us a little bit about the potential -- how this would ultimately play out?

Would you have to go to the regulators to request a return of capital to the holding company? How long might that take, and your appetite for increasing -- for doing share repurchases if you were able to secure that approval?

Sure, Matthew. A couple of comments and Rob, I will let you fill in the holes here. So Matthew, I would say near term, I don't see us necessarily doing a share repurchase. Maybe a little bit longer term, say, second half of next year possibly.

And as we put in the -- and it's really contingent upon a number of items -- continued view of us being able to put the capital to work first and foremost in lending in our markets, and then also in consideration of what other growth opportunities are out there. But as you referenced and probably many people that are listening understand that.

Today, we do have a technical obstacle to overcome, with a negative position in undivided profits at the Bank level. And it really relates to Michigan's statute where as long as you're in that negative position, you cannot dividend dollars up from the Bank to the holding company. Now -- without prior regulatory approval.

Now having said that, we have now made two requests for a return of capital to our regulators. The first revolved around when we did the capital offering in the third quarter of 2013 and then in the first quarter of this year, we also went back and made a second request for return of capital.

So today, we have roughly $22 million, $23 million in cash at the holding company and so that's the present position. What we would like to -- if we fast forward and look at how that undivided profit -- negative undivided profit position cures itself, it's really some time in 2016 is our estimate.

And -- so I think as we get into next year and have a better glimpse of what our actual results are and get closer to that 2016 curing of the technical exception, I could see us going back to our bank regulators and looking for -- or making another petition to return capital.

So in the end, I would say a share repurchase is a form of return of capital that our Board regularly discusses. It also is a function of -- of course, of where we are trading. Today, we are trading about 1.5 times tangible book and we think it is a good investment. But probably in the near term, we're going to hold off on executing on that.

Rob, I don't know if you had anything to add.

Just a couple. Matthew had asked about the timeframe it takes to get regulatory approval. It's been very short timeframe. So we -- as Brad said, submitted two requests. They approved a $7.5 million request in August 2013 and a $15 million request in March 2014. Their primary emphasis is the safety and soundness of the Bank and the capital levels, which they've been more than satisfied with.

In addition, we've already restored the Tier 1 capital levels at the Bank this year back to where they were prior to us paying the $15 million return of capital. So the Bank's capital levels are right back to where they were before that, which I think is a good sign.

The negative retained earnings at the Bank was $35 million at the end of September. That's been reduced from north of $55 million about a year ago. And just to make it clear, those returns of capital do not affect retained earnings or undivided profits. They come out of additional paid-in capital.

So what we have is the Bank's negative retained earnings getting reduced through its earnings. And then as Brad said, we project that to move back to a positive sometime in 2016.

And at that point, the Bank would then be able to kind of move back to a regular payment of dividends based on its earnings and not have to go through this process of regulatory approval on returns of capital.

But as Brad said, we anticipate probably doing something with that in early 2015. And at that point, we certainly would feel we would be in a position in terms of cash on hand at apparent -- at the parent, which is now roughly $22 million, $22 million. It would even be higher than that and provide support for, I think, a strong and consistent share repurchase, if the circumstances are such that that is the best use of capital at that particular time.

Great. Thank you very much.

John Rodis, FIG Partners.

I guess a number of my questions were asked and answered. Maybe just to clarify to make sure the debit interchange -- the new agreement. So that goes into effect on the fourth quarter, is that correct?

Well, it really went into effect in January of this year, but what was happening was from about May through September, we were actually converting our debit card base. So we got some benefit, but not the full benefit.

And I would say that when you're going through that process where you are sending out in excess of 100,000 cards, it can't do anything but have some impact on transaction volume. Your customers have to take their old card and substitute a new card. So we really think yes, the full impact of the conversion will really start to be felt in the fourth quarter of this year.

So I wouldn't say that none of it has been felt. We are up in interchange income versus a year ago, but I think the full impact will begin in the fourth quarter of this year, because we are now entirely through the conversion process.

Okay, so that makes sense. Rob, maybe just one other question on the securities portfolio. I guess it was up a little bit linked quarter. I would assume, all things equal and if you continue to see loan growth in your expected range, it doesn't go up much room here, the securities portfolio?

It would be disappointing if the securities portfolio was going up. It's -- now having said that, if we get great core deposit growth, I am all for that. But our real thrust is to -- even if total assets fell overall, we feel we have tremendous opportunity just by rotating dollars out of a securities portfolio, which has a yield of about 1.5%, into loans where we would be picking up 250 to 300 basis points.

So that's really what we're focused in on. And I did mention a lot of the commercial loan growth in the third quarter happened in the last two to three weeks of September. So we think that will be helpful as we move into the fourth quarter.

We didn't get as much benefit of that growth in the third quarter, as you might otherwise think, just because of where the closings fell. We also feel very good about where our pipeline is there.

We will get some seasonal slowdown in consumer installment lending, but I will say we saw sort of a pickup on the residential application side we had that that -- this period of time where mortgage rates have fallen. That seems to have spurred a bit of refinance activity -- not a tremendous amount, but certainly better seasonally than where we would otherwise think.

Now that's not going to necessarily grow permanent balances, but to the extent loans held for sale, that average balance moves up. That would be helpful on the margin or net interest income as well.

So that's really the focus. The theme is just really trying to get that rotation out of investments in the loans. I would say if anything, we probably looked at the drop in yield as an opportunity that maybe -- certainly not by in this market, but instead, maybe looked at some sales where there were some opportunities because of the drop in yield.

The growth in the commercial portfolio this quarter, was it fairly granular or were there any bigger credits?

No, I think, John, that in general, it was pretty granular. The average balance in our commercial portfolio is about $350,000. We have an in-house limit of $15 million and thinking back, I don't think we had anything this quarter.

I know we didn't have anything this quarter that came anywhere near the top end of that. So just a lot of blocking and tackling by our commercial teams, so.

Okay, fair. Just one other question, guys, on the loan portfolio. The Mepco was down to about $45 million. Could you just remind us where you expect to see that going forward?

Well, you know, that's obviously declined very significantly from when that was peaking back in 2009. We -- we still have a, I would say a decent handful of entities that are -- the direct marketing company is selling, the vehicle service contract, and then we are purchasing the payment plan receivables.

Based on where we are at today, we think it could bottom out right here in a $44 million level. We do have some existing clients that have new programs coming aboard that could drive volume higher.

I guess ultimately, we still feel like that's a segment of the business that we want to keep contained at this lower end level of 3% to 5% of loans and we will see where that plays out over time. But I would say in the near term that it would bottom out not far from where it is right now.

Okay, fair enough. Thanks, guys.

(Operator Instructions) Damon DelMonte, KBW.

My first question -- just kind of circling back to mortgage banking, how big is your mortgage banking operations? How many originators do you guys have?

We have 49 originators today.

And you said you guys had added four in this -- during this past quarter?

No, we started the year at 40 -- in the low 40s. Say 41. And for the year, we have added several loan centers. We have added 3 here in West Michigan, 1 in the south end of Grand Rapids, 1 in Kalamazoo, and then here very recently, 1 in Cadillac, Michigan.

At the start of the year, we added one in Southeast Michigan and are in West Bloomfield. So four loan centers new this year.

Okay. And then would you expect to continue to invest in this line of business and adding both loan centers and originators?

I think today -- I think we have a pretty good infrastructure in place. I think we have made some investments here, as I mentioned, and now it's really, I think, leveraging those investments. So I think what we have today is pretty good.

Okay. And then just quickly on the -- just to circle back on the debit card conversion. So did you guys actually change vendors or did you just change products within a vendor?

No, we changed -- we went from a long-term relationship with Visa to a new relationship with MasterCard. So that was a vendor change.

Okay, okay.

And actually, and sort of a sidebar on that, it's sort of -- knock on wood -- worked out well, as you are probably familiar with. All the national breaches at the retailer level and -- so having switched over many of the cards through the needed conversion, reduced the number of required reissues as a result of the national breaches.

Got you, okay. Was this just an opportunistic move on your part to -- you had better opportunity to get interchange income?

Absolutely. I think a couple [fold it] is -- I think we had an aggressive vendor with -- who desired our business and was willing to improve the interchange rates as well as the marketing offering for us.

Okay. And then I guess my last question is dealing with the provision outlook. Obviously, credit continues to trend quite well. How do we think about the provision going forward?

You have booked a negative provision in the last couple quarters. Well, aside from the first quarter of 2014, it's been a while, I guess, since you actually booked a provision, so how do we look at that going forward?

I still -- look, it's a great question. I think it's going to be -- if we do a peer group analysis of where we are at, relative to our peers, at roughly 2%, we're still above our peer group. Most of that above when we start to break it down by sector, most of that portion above peer group relates to the TDR portfolio, where we have about an 11% specific allowance relative to the balance.

So to the extent that the TDR portfolio continues to pay down and we have a low level of losses and recognize that nearly 90% of the portfolio is current, that's where I feel we have the greatest opportunity for continued releases of the allowance.

And then in addition to that, to the extent that we get recoveries that are larger than what we are expecting and we have new default rates lower than anticipated, that can also be a driver of a credit provision. And we continue to work every day on recoveries, whether they are small dollar recoveries related to the consumer portfolio or larger recoveries on the commercial side.

And finally, we didn't have sort of a steady level of recoveries related to -- and we will call them shadow notes -- but in many instances, related to the restructuring of a credit or what we accepted on a short sale or other type of workout, we may have put in place a repayment plan over time. And we don't recover -- we recover those dollars basically as they occur.

So that sort of gives us a starting recovery level every quarter and then it's what can we add on to that through further success on recoveries that may be larger dollars. So that -- those components are the three primary factors. And I still feel like we have some room to run before that turns the other direction.

Now certainly, you can have a default -- a larger dollar default that effects that, but absent that, I feel very optimistic that we could continue to see very low or credit provisions, at least in the near term.

Okay, that's helpful. Thank you very much.

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

Very good. In closing, 2014 is a very special year for us at Independent Bank as we mark 150 years of serving our Michigan communities. Our associates continue to execute on our 150 Ways and 150 Days community service campaign. And very proud of each of our associates and to be a part of a company that has such a long history.

On behalf of the Independent Bank team, I would like to thank you for joining us on today's call.

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