Independent Bank Corp (Michigan) (IBCP) 2017 Q3 法說會逐字稿

Good day, and welcome to the Independent Bank Corporation Third Quarter 2017 Earnings Conference Call and Webcast. (Operator Instructions)

I would now like to 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 Schuster, 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 along, 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 $0.02 per diluted share charge related to a decline in price of our capitalized mortgage servicing rights, our third quarter results were very much in line with our expectations.

Our efforts to grow both our earning asset base as well as move the 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 of $10.3 million was a little lower than we expected, principally due to lower gains on mortgage sales. Our non-interest expenses, 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 of 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 comments doc 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 a $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 month 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 0.05% 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 time frame, we opened a new loan office in Northwest Michigan, specifically Traverse City.

We also entered the Ohio market opening an office in Columbus and an office 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 CDs.

We are seeing some limited pressure in our markets on the deposit-pricing front, particularly in the public-fund sector. Our cost of deposits continues to be relatively low at 31 basis points, but did increase 5 basis points this past quarter.

On 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 head 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 $1.985 billion at September 30, 2017. This represents the fourteenth 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 continue 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 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 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% salable and 50% non-salable.

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 a 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 a 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-salable, 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 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 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 a 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 payoff 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 to Rob Shuster to share a few comments on our financials, (inaudible) equality 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 and brokered CDs 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 on new and renewal loan origination and 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, gains on 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. This 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 is 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 0.38% 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. At September 30, 2017, 30-to-89-day commercial loan delinquencies were just 0.06% and mortgage and consumer loan delinquencies were 0.48%.

Moving on to page 18, as Fred mentioned, we recorded a provision for loan losses, $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 and on classified 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 forecasted 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 would 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 in 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 and 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 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.

I was wondering -- hoping with could start high level with a strategic question. I guess, by my math, mortgage is now 43% of loans. It's up from 33% one year ago. Wondering if you could talk about the optimal level for mortgage as a percentage of loan, and, you know, I guess, beyond that, do 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, you know, a few years, we had two out of our three portfolios were in a growth mode, the commercial portfolio and the consumer portfolio. And, in fact, the mortgage portfolio, while we did a lot of mortgage lending, was really flat or in runoff.

And so, you know, several years back, we made a commitment to be in the mortgage business. We invested in a new mortgage origination platform encompassed by Ellie Mae. And then following that, you know, 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 -- you know, we've reversed that trend and we've had very strong mortgage production and, as I shared in my prepared remarks, the mix has been a little different than we originally anticipated. It's been more portfolio than salable. So it's working like we want it. In fact, maybe even a little better.

Now, to your question, in terms of sort of, you know, what's the optimum amount and what do we -- you know, for the mortgage portfolio? We're very cognizant of not putting all our eggs into one basket. And so when we talk internally, you know, we sort of believe that the commercial portfolio is sort of a gauge or a soft cap for us. And so, you know, we're watching very closely, you know, how the mortgage category tracks relative to commercial. So that's sort of one point.

And then, you know, secondly, how do you sort of manage to that? And, you know, what I'll just -- you know, shutting down the operation when you get to that, and, you know, some things we talked about internally is, you know, doing some bulk sales, so we can continue to produce, but, you know, 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'll let you jump in with anything additional.

Yeah, I guess the takeaway is we don't want mortgage loans moving by any significant amount above where commercial loans are. So that, as Brad said, kind of gives you, you know, an idea of where we see that, you know, capping out. And, you know, the strategy is 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 salable component move up a bit, and that largely reflects some of the programmatic changes we've made to try and change the mix a little bit more towards salable.

That's great color. Thank you.

I guess, Rob, to your comments on your asset sensitivity, can you give us the snapshot at 09-30, you know, 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'd make 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, you know, 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 at -- again, the expectation is plus 1.4% in 100 and plus 1.5% with 200.

And, finally, I'd 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 forecasting, 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'd say on what's occurred thus far in 2017.

I guess lastly for me, and then I'll 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 this year, is it -- You know, growing off of a 25%, you know, growth rate is quite challenging, I'd imagine. Are you signaling that we would 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 would envision is more high single-digit, maybe approaching the 10% level as we move through 2018. So if you're starting around $2 billion, you know, that gives you some idea of where we would anticipate going as we move through 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 in -- or the loan portfolio comprised as we would like between the commercial, the mortgage and the consumer.

Thanks for taking my question.

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

Good morning, gentlemen.

So just to follow up on 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're not seeing the deposit costs in your markets rise as much as it's safe to say, though, we should expect to see the NIM perform pretty similarly as we saw in the third quarter?

A couple of 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 of 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, you know, 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 to hiring of talent, are you pretty much done on that front or should we expect to see a couple of more additions going into the fourth quarter?

Well, so on hiring talent, I would say on the mortgage side, you know, we've built that out to how we want it. Now, is there some tweaking that's going on there? Yes. You know, in our business, and, actually, mortgage commercial, you know, we're constantly recruiting. So -- But I'd say from an FTE standpoint, we're where we want to be.

Over on the commercial side, you know, we continue to look. Today, we have approximately 25 relationship managers, and, you know, 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 and Scattergood. Please go ahead.

Hey, good morning, guys.

So I guess, you know, as we look at kind of the growth trajectory, you know, and it was discussed in some of the previous questions, but, you know, looking at what you've seen so far this year, other than the addition of some of the mortgage lenders that, you know, you're obviously portfolioing a little more than you set out to, you know, when you hired those guys, outside of that, though, what would you say, you know, is the biggest driver behind, you know, this growth that you're seeing so far this year? I mean, is it share? Are you seeing, you know, is it the activity in, you know, 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 a -- In the slide deck, there's a slide on the regional markets. So page 8, you could see in the portfolio loan total, you've got 72 million in Ohio. So, you know, 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 they're -- You know, because we weren't in those markets at all, we're capturing quite a bit more market share both salable and portfolio.

And then, in addition, we expanded in Southeast Michigan. As Brad mentioned, you know, 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, you know, 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 -- you know, 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, you know, to a very strong degree by the mortgage portfolio, but also by the consumer portfolio and the commercial portfolio, too.

Thank you. That is great color.

That kind of ties in to something else I was curious about. You know, when you look at some of these other -- these newer locations, some of the new LPOs, do you have any idea kind of longer term how you think about those newer markets, whether that has the capacity to, you know, become a full-service branch? And, if so, you know, what does that time line 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, you know, we see the growth. And so, as an example, Brighton, we do have a commercial lender there, in addition to our mortgage people.

So, you know, I would say, you know, 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're not starting from scratch. And longer term, we would like some of these to be full-service branches.

And I'd say the other piece, it gets us in these markets, you know, we learn them, we find out who the, you know, 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. No, that's -- that's very helpful.

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

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

Oh, yeah, yeah. Yes, yes.

Yeah. Well, I -- You know, whether . . .

I'm talking, yeah, the ALLL.

Yeah. I mean, it's at 1.1%, 1%. 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 a -- 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 on 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, you know, those new credits you're adding are coming in at lower allowance levels.

Now, you know, we've done some things to try and say, "Well, hey, things are really great right now, but, you know, looking long term, you know, 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's some trends out there, whether it's in multifamily or whether it's in retail that we think longer term, you know, 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've had net recoveries, you know, so far this year. We've had very little in new loan defaults. We've 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 drip down a bit, but not a whole bunch. So that's kind of the summary I'd say to walk away with on the ALLL.

Perfect. That's very helpful. Yes, right what I was looking for. Yeah, that's all I have for now, and nice quarter, guys. Thank you.

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

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

Very good, Damon. Thank you.

Good to hear.

So my first question, you know, the organic growth has been phenomenal, obviously -- right? -- and a lot of good discussion and color on that during this call.

You know, 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, you know, 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's a great question. And, you know, quarter after quarter, year after year, you know, we talk about capital and our priorities with capital, and, you know, starting with organic loan growth, consistent solid dividend, share repurchase where it makes sense. And we also talk about, you know, M&A where it makes sense and/or is complementary to the organic loan growth capital usage.

So I wouldn't rule out, you know, independent growing in that manner, but it's not our primary method. And -- Now, I would say this, you know, I feel very good about, you know, independent in, you know, in our performance, and as opportunities come along, you know, we try to position ourselves so that people aren't learning about us for the very first time. So --

And, Rob, I don't -- You have anything to add?

Yeah, the only thing I'd 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, you know, it's not something we're dependent on. You know, if an opportunity came up that was very compelling, I think anyone 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's 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 you kind of expect the margin to go higher in the next quarter, just given some dynamics in 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 a solid number?

Well, yeah, I mean, we have on -- it's on page 13 of the slide deck. Probably the only thing that, you know, is kind of something that you could never predict is, you know, 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, hey, next quarter it could be even higher. I mean, you just don't know on the interest recoveries. But absent that, there's really nothing in the 366 that you'd 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, you know, 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.

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.