Independent Bank Corporation (IBCP) Q4 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the Independent Bank Corporation's fourth quarter earnings conference call. All participants will be in 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 would now like to turn the conference over to Brad Kessel, President and CEO. Please go ahead.

Good morning. Thank you for joining Independent Bank Corporation's conference call and webcast to discuss the Company's 2016 fourth quarter and full-year results. I’m 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. We are pleased to report solid overall results for the fourth quarter of 2016. Net loan growth and strong mortgage loan originations and sales contributed to a 5.1% year-over-year increase in our quarterly net income. Quarterly earnings per share grew by 8% year-over-year reflecting both the increase in net income and the benefit of our share repurchase activity. Further, despite continued pressure from low interest rate environment, we did achieve growth in net interest income on both a year-over-year and sequential quarterly comparative basis. For the fourth quarter of 2016, we are reporting net income of $5.9 million or $0.27 per diluted share versus net income of $5.6 million or $0.25 per diluted share in the prior-year period. The fourth quarter results were driven by net interest income of $20.25 million up $897,000 or $4.6 from the year ago quarter and up $252,000 or 1.3% from the third quarter of 2016. The fourth quarter results were also very positively impacted by $2.8 million in gains and mortgage loans, up $1.1 million or 65.7% from the year ago quarter and $2.4 million recovery of previously recorded impairment charges on our mortgage servicing rights. Partial offsets to these results included $320,000 loss on the pending sales of our payment plan processing business and $2.3 million accrual for a litigation matter. In December of 2016, we signed an agreement to sell the majority of the assets in the payment plan processing business of Mepco Finance Corporation, our Chicago based subsidiary. Mepco had become a non-strategic asset during the last few years, and we believe this divestiture will allow us to completely focus on our core community banking business. Also in December of 2016 the Company’s wholly owned subsidiary, Independent Bank, reached to tentative settlement regarding litigation initiated against the bank. This litigation concerned the Bank’s checking account transaction sequencing during a period from February 2009 to June of 2011. Under the terms of the settlement, the Bank has agreed to pay $2.2 million and is also responsible for class notification costs and certain other expenses, which are estimated the total approximately $0.1 million. The settlement of this lawsuit against the Bank avoids ongoing legal expenses and allows us to finally resolve this matter. Similar claims were made against other financial institutions and, while we know our position concerning this matter had merit, we believe the settlement is in the best interest of the Company and our shareholders. For the full-year ended December 31, 2016 the company is reporting net income of $22.8 million, or $1.05 per diluted share, compared to net income of $20 million, or $0.86 per diluted share, in 2015. This positive year-over-year results were directly related to our annual loan growth of 8.6% excluding payment plan receivables and 6.7% increase in deposits for 2016. As we assess all of 2016, we are proud of many significant achievements including diversified loan growth, growth in our core deposit funding, clean asset quality, growth in revenues and double-digit growth in earnings and earnings per share. We are also excited about the future prospects for our expanded mortgage banking business as we extend our markets with new loan production offices in Ann Arbor, Brighton, Troy, and Traverse City, Michigan as well as a new LPL in Columbus, Ohio. Today Independent bank is the fourth largest bank headquarters initiative. The conditions in our markets continue to be good as measured by the labor, housing and commercial real estate markets. The Michigan jobless rate of 5.0% at December of 2016 was one tenth of a percentage point below the states’ December of 2015 rate of 5.1%. Michigan payroll jobs totaled $4.41 million in December of 2016, 90,000 higher than one year ago. According to the director of the Bureau of Labor Market information, Michigan's modest increase in jobless rate in December reflected continued entry into the stage work force. The second half of the year was marked by a robust labor force expansion, with 2016 displaying the strongest work force growth rate for the state since 1999. In 2016 payroll jobs rose in the state for the six consecutive years while Michigan's unemployment rate continued a downward frame falling for the seventh year in a row. Michigan housing conditions also continue to exhibit positive trends as measured by total housing in sales, housing starts and the medium sales price of single-family homes. The Detroit housing prices were up 6.04% year-over-year according to the Case-Shiller Home Price Index. Occupancy rates for multi-family, office, light industrial, and retail continue to trend positively or be stable in each of our markets. The favorable economic conditions are seen in our loan origination and deposit gathering results. Page8 contains a good summary of our loans and deposits by region. While our West Michigan loan growth has led all our markets, we have seen year-over-year loan and deposit growth in our core markets. Total deposits as seen on Page9 were $2.23 billion at the end of December 31, 2016, an increase of $139.8 million or 6.7% since December 31, 2015. The increase in deposits in addition to being spread across our markets has also been in our retail, commercial and public fund portfolios. The Company's deposit base is substantially all core funding with $1.74 billion or 78% in transaction accounts. Consistent with industry trends, we continue to see increases in usage of our digital platforms and call center while at the same time seeing declines in branch transactional traffic. Accordingly, we continue to invest in and expand our digital product offering and call center. We also continue to emphasize with all our associates the importance of growing our deposit base and related fee income services. I have mentioned on previous calls our efforts and results to improve the overall efficiency and productivity of our branch network. These efforts have included reducing our branch delivery channel from 106 locations to the present 63 through a combination of sales, consolidations, and closures. In doing so, we have improved the overall profitability of our branches and increased the average deposits per branch from $20 million at the end of 2011 to the current $35 million at the end of 2016. As seen on Page10, loans including loans held-for-sale increased to $1.68 billion at the end of December 31, 2011. This represents the 11th consecutive quarter of net loan growth for our Company. During the fourth quarter, total portfolio loans grew by $32.1 million or 8.1% annualized. For the year, loans grew by $127.8 million or 8.6% when excluding payment plan receivables. In fact, all three categories commercial, mortgage and installment loan balances were up for 2016. The commercial team generated $105 million in production during the fourth quarter, of which 50.5 million were new money committee members’ and 54.6 million notes. For all the 2016, the team generated $288.8 million of new commitments, growing our commercial category by $55.6 million or 7.4%. Overall, we continue to have a nice mix of new business by region, new business by segment and improved operating leverage for our commercial banking group. The commercial pipeline continues to be very healthy and supportive of our targeted annual growth rates. Our mortgage team originated $139.7 million and we sold $98.5 million during the fourth quarter of 2016. For the full our mortgage team originated $428.2 million and we sold $314 million. This compares favorably to 2015, when we originated $336.6 million and had sales of $281.5 million. This represents a 27.2% increase in originations and an 11.5% increase in sales. For all of 2016 portfolio mortgages increased by $40.6 million or 8.1%. I’m particularly pleased that two-thirds of our 2016 mortgage closings represented purchase money while one-third were refinances. Our retail banking channels originated $101.8 million in non real estate production for all of 2016, as compared to $90.5 million in 2015. This represents an $11.3 million increase in originations for 12.5%. For all of 2016, the installment loan category grew by $31.6 million or 13.5%. Page11 provides information on our capital as well as four quarter rolling averages for return on assets and return on equity. We are targeting tangible common equity to range between 8.5% and 9.5%. Our plan is to retain capital for organic loan growth and return capital through a consistent dividend payout plan and share re-purchase plan, tangible common equity totaled of 9.70% of tangible assets at December 31, 2016 as compared to 10.4% one year ago. Over the last year, we have deployed capital organically with $162.5 million or 10.9% growth in average loans and $186.9 million or 8.6% growth in average earnings assets. Over the same period, we have returned capital through dividends and share re-purchases. During 2016 we re-purchased 1.15 million shares and since the start of 2015 we have re-purchased 2.12 million shares if IBCP. At December 31, 2016, our tangible book value per share grew to $11.62 per share up from $11.18 per share at the end of 2015. On January 24, 2017, the Board of Directors of the company declared a quarterly cash dividend and our common stock of $0.10 per share payable on February 15 to shareholders of record on February 8. And on January 23 of this year the Board of Directors of the company authorized a new share re-purchase plan for 2017, under the terms of the share re-purchase plan the company is authorized to buyback up to 5% of its outstanding common stock. This plan is authorized to last through December 31, 2017. At this time, I would like to turn the presentation over to Rob Shuster to share a few comments on our financials, credit quality and managements outlook for 2017.

Thanks, Brad, and good morning, everyone. I’m starting at Page12 of our presentation. Brad discussed the increase in our net interest income during his remarks, so I will focus on your margin. Our tax equivalent net interest margin was 3.45% during the fourth quarter of 2016, which is down 11 basis points from the year ago period and down six basis points from the third quarter of 2016. I will have some more detailed comments on this topic in a moment. Average interest earning assets grew to $2.37 billion in the fourth quarter of 2016 compared to $2.18 billion in the year-ago quarter and $2.29 billion in the third quarter of 2016. For all of 2016, net interest income totaled $79.6 million an increase of $4.7 million or 6.2% over 2015. Page13 contains a more detailed analysis of the linked quarter increase in net interest income. This increase was primarily due to increases in interest income on loans and on securities and investments that was partially offset by an increase in interest expense on deposits and borrowings. Returning back to the topic of the net interest margin, the six basis points of linked quarter compression when in anticipated with I spoke last quarter. A few factors influence this. More than anticipated pre-payment activity particularly in the commercial loan portfolio, more than anticipated new loan growth but yield on the new loans were below the total loan portfolio average yield. The combination of these two items drove the average yield on a loan portfolio, down to 4.53% in the fourth quarter of 2016, from 4.59% in the third quarter of 2016. In addition, the cost of funds rose to 0.32% in the fourth quarter of 2016, from 0.3% in the third quarter of 2016. This was solely due to a $44.8 million increase in average time deposits. If you look at the cost of savings, money market and interest bearing checking accounts, it remained unchanged at 11 basis points. So the increase in cost to funds was due to mix in that higher rates and core deposits. A little more color on new and renewal loan production in yield is as follows. Portfolio loan production excluding mortgage loans originated for the sale in the fourth quarter totaled a $169 million of which 50.4% had variable or adjustable interest rates and 49.6% had fixed interest rates. The overall yield on this portfolio new and renewal loan production was approximately 4.03% or 50 basis points below the total loan portfolio yield of 4.53% in the fourth quarter of 2016. We will comment more specifically on our outlook for net interest income for 2017 later in our presentation. Moving on to Page14, non-interest income totaled $13.2 million in the fourth quarter of 2016 as compared to $10.1 million in the year-ago quarter and $11.7 million in the third quarter of 2016. Our mortgage banking operations caused most of the quarterly comparative year-over-year variability in non-interest income. As Brad mentioned, we had $2.4 million recovery of previously recorded impairment charges on capitalized mortgage servicing rates in the fourth quarter of 2016, compared to $0.8 million recovery in 2015. In addition gains on mortgage loans increased by $1.1 million or 66% year-over-year. For all of 2016 non-interest income totaled $42.3 million compared to $40.1 million in 2015. As detailed on Page15, our non-interest expenses totaled $24.9 million in the fourth quarter of 2016 as compared to $22.8 million in the year-ago quarter. Brad already commented about the two onetime expenses in the fourth quarter of 2016 that totaled $2.6 million, which related to the litigation settlement in sale of Mepco assets. Excluding these two items total non-interest expenses fall to $22.3 million lower on both the year-over-year and linked quarter basis. For all of 2016 non-interest expenses totaled $90.3 million and again excluding the above two onetime expenses this falls to $87.7 million which is 0.8% lower than 2015. Page 16 is a new slide. Over the past four to five months, we have been able to add approximately 50 new associates in our mortgage banking offices and opened five new loan production offices as Brad mentioned. As a result of this growth, we expect total mortgage loan originations to exceed $700 million in 2017, despite an expected industry wide decline in refinance volume. In addition, we expect to accelerate portfolio loan growth in mortgage loan servicing growth leading the higher long-term levels of interest income in loan servicing revenue. Page 17 is also a new slide. Brad already provided some high level comments on the sale of our payment plan processing business. As outlined on this slide, our intent is to close this sale by March 7, 2017. During 2016, Mepco recorded a net loss of $0.35 million with $3.59 million of net interest income and $4.25 million of non-interest expenses, which includes the $320,000 loss on the sale of assets. Although we expect it to take some time during the course of 2017 to reinvest the cash from this anticipated sale over the course of all of 2017, we expect the transaction to be slightly beneficial to net income. Moving on to Page 18, investment securities available for sale increased by approximately $25.1 million during 2016, primarily reflecting the deployment of a portion of the funds provided from the increase in deposits. Approximately 27% of the portfolio is very above way, in much of the fixed rate portion of the portfolio, is in maturity of five years or less. The estimated average duration of the portfolio is about two 2.25 years. A big topic in the fourth quarter of 2016 was the impact of significantly higher interest rates and the fair value of investment securities. During the two year, five year and ten-year treasury yields were up 43 basis points, 79 basis points and 85 basis points respectively. We swung from a net unrealized gain, unavailable for sales, securities, a $4.2 million at September 30, 2016 to a net unrealized loss of $5.1 million at December 31, 2016. This is a reduction in value of $9.4 million or approximately 1.54% of our average balance of securities held for sale. On an after tax basis this increased our accumulated other comprehensive loss by $6.1 million and reduced tangible book value by $0.29 per share. Because of the relatively short duration of our securities available for sale, we expect to recover much of this decline in value over a two to three year period. Page 19 provides data on non-performing loans, other real estate non-performing assets, and early stage delinquencies. Total non-performing assets were $18.4 million or 0.72% of total assets at December 31, 2016. Non-performing loans increased by $2.6 million during the fourth quarter 2016. The increase in non-performing loans was due to one commercial lending relationship and one mortgage lending relationship moving into non-accrual. Both of these credits had then watch list, so the defaults were not unexpected. The commercial loan relationship which had a balance of approximately $2.3 million at the end of the year after a $900,000 fourth quarter charge-off is in receivership and liquidation. We expect the liquidation process to be completed in the first half of 2017. The mortgage loan relationship which had a balance of approximately $700,000 at the end of the year after a $950,000 fourth quarter charge off will move through the normal foreclosure process. Despite these two developments, I remain optimistic about the credit quality for 2017. The aforementioned non-performing commercial loans relationship should be liquated in 2017 and our single largest ORE property with the balance of approximately $2.9 million is under contract for sale and should close in the first half of 2017. Commercial loan watch credits declined by 46.2% during 2016, to $22.1 million or just 2.7% of total commercial loans. Finally, at the year-end there were no 30 to 89 day commercial loan delinquencies and just $5.3 million or 0.66% in mortgage and consumer loan delinquencies. Moving on to Page 20, we recorded an expense provision for loan losses of $0.1 million in the fourth quarter of 2016 compared to a credit provision of $1.7 million in a year ago quarter. For all of 2016, we recorded a credit provision for loan losses of $1.3 million compared to a credit provision of $2.7 million in 2015. Loan net charge-offs, were about $970,000 or just 0.6% of average portfolio loans during 2016. This is up slightly from 2015. The allowance for loan losses totaled $22.2 million or 1.26% of portfolio loans at the end of 2016. Page 21, provides some additional asset quality data including information on new loan defaults and unclassified assets. Page 22, provides information on our trouble debt restructuring portfolio that totaled $77.9 million at the end of 2016 a decline of 12% since the end of 2015. This portfolio continues to perform very well with 90% of these loans performing and 88% of these loans being current as of the end of 2016. Page 23, is kind of our report card for 2016. We compare our actual performance during the year to the original outlook that we provided back in January 2016. Overall, we believe our actual performance was consistent with or slightly better than our original outlook. Page 24, provides a summary of our outlook for 2017. We are targeting 10% to 11% overall loan growth in 2017. We expect this growth to be supported by increases in commercial mortgage and consumer installment loans. The accelerated growth rate compared to 2016 is largely expected to be supported by our expanded mortgage loan origination capacity. This forecast assumes a stable Michigan economy. We expect approximately 3% growth in net interest income in 2017 due primarily to the aforementioned loan growth which is somewhat offset by the sale of our payment plan receivables, which have yields just above 12%. We recorded a credit provision for loan losses in 2016 that I discussed previously. As we look ahead to 2017 the level of loan net charge-offs, loan defaults, watch credits and the performance of the TDR portfolio will be the key factors influencing our provision levels. As I stated earlier we are optimistic that our asset quality matrix will generally be stable to slightly improving 2017. However, with the expected portfolio loan growth and a decline in recoveries of previously charged off loans and expense provision for loan losses of $500,000 to $600,000 average per quarter would not be unreasonable. We expect total non-interest income for 2017, to be within a range of $10.8 million to $11.7 million per quarter with the total for the year up by approximately $2.4 million versus 2016. Due to seasonal factors, non-interest income is typically lowest in the first quarter of the year. We expect total non-interest expense to range between $21.6 million and $22.6 million on a quarterly basis during 2017 and for the full-year expect non-interest expenses to be $2.8 million lower than our actual 2016 level. The expected elimination of $3.5 million of Mepco non-interest operating expenses, which assumes the first quarter 2017 sale and the elimination of $2.6 million of one-time expense incurred in 2016 are being partially offset by $3.3 million of additional expenses associated with growth initiatives, particularly in mortgage and commercial lending and related support functions. Finally, we expect in effective income tax rate of approximately 30% to 32.5% in 2017. This of course assumes no reduction in the statutory corporate income tax rate of 35%. That concludes my prepared remarks and I would now like to turn the call back to Brad.

Thanks, Rob. In summary, we are pleased to report solid results for 2016 with growth in earnings and earnings per share. The improvement is directly related to the successful execution of our strategy to migrate earning assets from lower yielding investments to higher yielding loans in order to grow our net interest income. Our quarterly return on average assets was 0.91% compared to 0.93% for the same quarter one year ago. And for the full-year return on assets improved to 0.92% from 0.86% one year ago. Our quarterly return on average common shareholders' equity was 9.29% compared to 8.80% for the same quarter one year ago and for the full-year our return on equity improved to 9.21% from 7.89% one year ago. Excluding the after-tax cost associated with our litigation settlement, our adjusted ROA and ROE for all of 2016 would have been 0.98% and 98.82% respectively. As we look ahead to 2017 and beyond, we are 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 a momentum generated the last several years. Our management team recognizes we need to continue to grow revenue, control expenses, stay disciplined in credit and leverage our teams risk management best practices. As we work toward sustaining high performance, including profitability of 1% of better return on assets and 10% to 12% of better return on equity. At this point, we would now like to open up the call for questions.

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Brian Zabora of Hovde Group. Please go ahead.

Hey guys good morning. A question on loan yields, have you seen any [indiscernible] in pricing in market with the post the Fed hike or just your just general trends on yields kind of again your asset of Fed rates getting into January?

I would say we have seen it most pronounce than the retail side of the business, so really on the mortgage side, I think on the commercial side probably as much do to competitive factors, we haven’t seen as much as lift there. But I do think the gap between our average portfolio yield and the average yield on new loans is going to continue to compress and with that along with the quarter point we got stabilize the margin.

Okay and then on the deposit side, are you seeing similar trends where you are really not seeing much movement and you think you certainly are in the marketplace you see people kind of hold the line on deposit rate. Do you think you can maybe continue that into a couple of more rate hikes?

I would say, well at least through this rate hike, I think we have seen people hold the line. Again, I pointed out that our cost to funds on transaction accounts remained at 11 basis points from third quarter to fourth quarter. But I would anticipate as we move forward in 2017 if there are additional rate hikes there are going to probably be competitive factors that are going to at least result in some lift in cost to funds. For example, we are seeing money market funds now return to paying interest with this last Fed move and prior to that there were lot of money funds that basically were paying little over or no interest. So I think beyond just banks, you may see competition from money market funds again which we haven’t seen in a number of years.

It’s helpful, and then lastly on the mortgage expansion, were the branches or the new locations and the staff pretty much on board in fourth quarter or were some of these hires in first quarter of 2017?

Most of the additions were late in the fourth quarter, so there wasn’t a significant impact on the fourth quarter, there was some additions that bled over into the early part of 2017 as well.

Great. Thanks for taking my questions.

Our next question comes from Matthew Forgotson with Sandler O'Neill. Please go ahead.

Hi good morning gentlemen. Can you give us a sense of how far along you are now in terms of building out the mortgage group relative to where you needed to be to generate the 700 million or so production that you are expecting this year?

Well I think with respect to that, we are substantially complete. I do think there may be some additional opportunities in Ohio for example we are looking at an office in Fairlawn, which is a north east suburb Akron. We are getting good traction with people wanting to join our organization in the Ohio market. I think in Michigan, beyond the Dearborn office, which really is just relocating some of our existing staff and Troy. We don’t have anything on the drawing board for further expansion in Michigan.

Okay, and then just digging into the fee guidance, 10.8 million to 11.7 million per quarter, can you give us a sense of, I guess at the low and the high end of the range, can you give us a little bit as a flavor of what your production expectations are at those levels and also your again on sale margin expectations?

Sure, most of that variability is caused by more - revenue, so and a lot of it is seasonal, so we would expect to be towards the lower end of that range in the first and fourth quarters and toward the higher end of the range in the second and third quarter. And as I said, a lot of variability is being produced by the mortgage banking revenues. Our assumption for margin on loan sale gains is much reduced in 2017, works assuming the net margin of about 2.65% and that compares to 3.25% for all 2016, when we kind of exclude any variability caused by fair value adjustments. So we are expecting a relatively sharp decline in margin and that is a really a function of increased competition, I think as you are aware, everyone is expecting mortgage loan refinance volume to be lower. I think the expectation is that purchase money mortgage by, I mean 2017 is the bit higher. And as Brad mentioned one of the fortunate elements of our mortgage banking operation is we are about two-thirds purchased and only a third refinanced. So it impacts us a little less on volume, but we are expecting margins to be lower.

Okay and then within that the fee guidance as well, are you baking in any further MSR recovery?

No, we would expect MSRs to kind of be at what we would call a normalized run rate, so really we are not expecting any significant gains or losses from fair value adjustments on servicing. So it's really just what we would call sort of the normal environment where we are making revenue from service fees.

And then lastly from me and then I will hop out. Can you just give us a sense of your current assets sensitivity profile and the mortgage loans that you are retaining today out of the mortgage unit and how that ultimately impacts on your assets sensitivity going forward?

Sure, the balance sheet is fairly asset sensitive about half of them - commercial portfolio is variable rate, half is fixed rate, but even within the fixed rate portfolio it has got a relatively short duration, because a lot of it is balloons that may have had a origination of five year period or under. The mortgage portfolio at least as of the end of the year was more skewed to adjustable rate loans, probably almost three quarters is adjustable rate versus fixed rate. Now those adjust overtime, so a lot of them are one year adjustable. So not the entire portfolio adjusts all at once. In addition within the mortgage portfolio we have the home equity loans, which are all variable rate. The one portfolio that’s predominantly fixed rate is the consumer installment portfolio, but again the cash flow from that portfolio is fairly significant. And then lastly and I spoke earlier about the investment portfolio 27% of its variable rate and the duration is 2.25 years so there is quite a bit of cash flow coming off that portfolio. So we would anticipate a lift in net interest income, in that 20 basis points a little bit under $1 million over the course of the year in net interest income and at 100 basis points it’s a bit over $3 million. And then years two and beyond builds more, because then you get the full benefit of all the adjustable rate loans having replaced. Now those assumptions in our model they take into account certain assumptions on the deposit cost side and for each different deposit product we have a different profile of how much the cost to funds changes for various changes in market rate. So I think for all banks what is going to be interesting is what happens within their deposit portfolio as rates rise.

Thank you very much.

[Operator Instructions] Our next question comes from Damon DelMonte with KBW. Please go ahead.

Hey good morning guys, how is it going? My question just deals with the build out of the mortgage platform. The compensation that these originators are being paid, is that more variable rate so it is going to be driven by the amount of volume that they have?

Yes, there is a period of time to bring people aboard, because typically they are leaving behind a pipeline. So there is a period of time usually that may be three to four months where we have provided a guarantee of a base level of compensation, but after that drops off, it moves essentially to a variable form of compensation. And those direct origination costs, which include much of the compensation expense for the loan originators, and a portion of expense for other people directly involved in the origination process. Its differed and netted against the gain. So there is a component of expense, which ends up not showing up in non-interest expense and instead its netted against gains.

Got you okay. And then, as you look at the forecasted quarterly range of 10.8 to 11.7, I mean if you are taking your production from close to 400 million to 700 million and I understand that the gain on sale would come down from this current year's level. But if you assume the 265 and the 700 million volume that’s like 4.6 million per quarter, which is substantially higher than obviously where you are this past year. So it seems like the range of 10.8 to 11.7 is understating the potential impact from the mortgage banking?

Well, yes your math is all correct. The issues is a chunk of the 700 million is assumed to be originated for portfolio loans and not for loans originated for sale. So we have quite a bit of that production included as portfolio production. I think that number is roughly, out of all the production it is about $229 million of the 700 million. Now the long-term benefit there is that will grow the balance sheet and net interest income. And that’s in part how were accelerating the expected growth of overall loans from where we were in 2016 to 10 % to 11% in 2017. So that’s why you are not seeing all that flow into gains Damon.

Okay. All right, that means a lot more sense. I think that number is, right I got that. And then with regards to the provision this quarter, I know you had the charge-offs on a one commercial loan in the mortgage loan. Had you previously reserved for those loans?

Yes, largely we had, that’s why you are getting the release on the allowances, because there was largely those reserves already set up. So it just moved to a charge offs and then reduced the allowance. So that’s why you didn’t see sort of a corresponding jump in provision expense, because they had already been largely reserved for.

Got it and then so going forward are you comfortable with the current loan loss reserves in the 125 range or should we expect it to be growing that just given the expected loan growth in the coming year?

I think the ratio is probably right around where we absent any significant changes in asset quality. I think that level is probably right in line with where we have expected, at least to see it in the near-term going forward.

Okay. All right, okay that’s all I had. Thank you very much.

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

Good morning guys. Most of my questions have already been answered particularly in the mortgage area. I guess just one fair, as what you had in your slide is you know the kind of position you are focusing on increasing your servicing assets to drive P revenue. And I’m curious of kind of how you think about it in terms of what the need for potential investments or expansions of personal and based on kind of what your capacity is in terms of how many loans you can service and kind of how are you thinking about that?

So Scott, today we service 1.6 billion, 1.7 billion, it is about 20,000 loans all together and we have been sort of flat for extended period of time at those levels, at the same time we have over the last several years put in place a lot of efficiency initiatives. Imaging is an example and improved work flow, we have actually been able to reduce the overall cost to service. The one exception would be - well actually even in this area would be the collection cost side, but I think bottom line to your question as we grow this I think we will have to add some staff, but I don’t believe that it’s going to be a material amount. I think one of our competencies as a company is the servicing side, we compare ourselves to the Mortgage Bankers Association and look at what the peer group is and we stack up pretty well against peer on cost to service. So there would probably be some adds, but I don’t think it's going to be a material amount.

Okay. Thank you. That’s helpful. That’s all I have.

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

I would like to thank each of you for your interest in Independent Bank Corporation and for joining us on today's call and we wish you a great day.

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