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Operator
Welcome to the Old National Bancorp third-quarter 2013 earnings conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC's regulation FD. The call, along with corresponding presentation slides, will be archived for 12 months on the investor relations page at OldNational.com. A replay of the call will also be available beginning at 8 o'clock AM central time on October 29 through November 11. To access the replay, dial 1-855-859-2056. Conference ID code 85826718.
Those participating today will be analysts and members of the financial community. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a question-and-answer session. At this time, the call will be turned over to Lynell Walton for opening remarks. Ms. Walton?
Lynell Walton - SVP of IR
Thank you, Jasmine, and good morning everyone. I apologize for the technical difficulties we've experienced. Hopefully, you're all able to join us at this time. Joining me today in the room on Old National Bancorp third-quarter 2013 earnings conference call are Bob Jones, Chris Wolking, Barbara Murphy, Daryl Moore, Jim Ryan, and Joan Kissel.
Some comments today may contain forward-looking statements that are subject to certain risks and uncertainties that could cause the Company's actual future results to materially differ from those discussed. Please refer to the forward-looking statement disclosure contained on slide 4 as well as our SEC filings for a full discussion of the Company's risk factors.
Additionally, as you review slide 5, certain non-GAAP financial measures will be discussed on this conference call. References to non-GAAP measures are only provided to assist you in understanding Old National's results and performance trends and should not be relied upon as a financial measure of actual result. Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentation. At the conclusion of the prepared remarks, we'll open the line to take your questions.
I'm happy to begin the discussion of our financial performance on slide 6, which highlights recent successes or initiatives that resulted from the execution of our basic bank community banking strategy. This morning, we reported earnings of $23.9 million, or $0.23 per share, in the third quarter. Contributing to this performance on the balance sheet side was our year-over-year strong commercial loan production along with the repricing of a large book of CDs, which aided in the increase of 4 basis points in our core net interest margin.
We did consolidate 18 branches during the third quarter and anticipate 4 more consolidations and the sale of 3 additional branches, all to occur in the fourth quarter.
Jim remains busy on the M&A front as we closed on the purchase of 24 banking centers in Michigan and northern Indiana and just recently announced the pending acquisition of Tower Financial Corporation located in Fort Wayne and Warsaw, Indiana. Obviously, a very busy and productive quarter for Old National.
Moving to slide 7, you'll see a chart of other items impacting our third-quarter results. Looking to the positive items on the left, our continued strong credit position allowed us to record a recapture of provision for loan losses of $1.7 million. We did receive a $1.6 million benefit as a result of the great work done by our procurement area in the renegotiation renewal of a large contract. Also included in the quarter was a benefit of BOLI proceeds of $1.1 million.
The two largest negative items on this slide represent charges taken as part of our branch consolidation process and the acquisition and integration of the 24 banking centers. We were also able to fund our foundation with $1.2 million during the quarter. For more details, I'll now turn the call over to Chris.
Chris Wolking - SEVP and CFO
Thank you, Lynell. I'll begin my presentation on slide 9. Without securities gains and merger and integration expenses, pre-tax pre-provision income was $31.2 million for the third quarter 2013. Third-quarter 2013 pre-tax pre-provision income was $6.4 million lower than the second quarter but $3 million higher than third-quarter 2012. Compared to third-quarter 2012, pre-tax pre-provision income is up 10.6% in the third quarter of this year.
As you can see from the bar chart, we have maintained a fairly steady increase in quarterly pre-tax pre-provision income since third-quarter 2012. In Lynell's slide 7, she noted several other items in addition to merger costs. If I subtract the income and expense items she noted, I estimate pre-tax pre-provision income was $33.2 million for the quarter.
Also reducing pre-tax, pre-provision income in the third quarter was the operating expense for our new Michigan and northern Indiana branches. Operating expenses exceeded income for these branches by about $900,000 for the quarter. Lynell also noted the $1.7 million previously charged as loan-loss provision, which we recaptured in the quarter. Daryl will discuss credit much more detail, but continued low net charge-offs and lower criticized and classified loans in the quarter contributed to our ability to release these reserves.
The graphs on slide 10 show the success we've had managing impaired assets acquired in our recent acquisitions. In all three acquisitions, we've recognized more loan interest income than we originally expected at the time of the purchase. Monroe loan interest income from impaired assets was $900,000 for the quarter, and the non-accretable discount has remained relatively stable from $14.4 million to $14.5 million over the last four quarters. Integra impaired assets generated $9.2 million of income in the third quarter, and the expected non-accretable discount declined from $146.5 million in the second quarter to $139 million.
Indiana Community impaired assets generated $1.8 million in income for the quarter, and expected non-accretable discount declined an additional $8.6 million to $14.2 million in the quarter. Due to our successful workout efforts, the non-accretable loan discount for IBT loans is less than half of what it was originally expected to be last year at acquisition.
On slide 11, I'll highlight the change in average loan balances during recent quarters. Because we are still working out of impaired assets we acquired in these transactions, total Integra and Indiana Community loans declined again this quarter. Average core loans increased $59.7 million from the second quarter of 2013 and are up $332.3 million from third quarter last year. Year over year, core loans are up 7.9%.
This year in the third quarter, we sold $11.6 million of commercial leases and $96.9 million of portfolioed residential mortgages. Slide 12 shows trends in commercial loan growth and production.
The first chart on slide 12 shows C&I loan balances excluding FDIC covered assets at period end. End-of-period C&I loans declined by approximately $29 million compared to period-end second quarter due in part to the $11.6 million lease sale. I would note, however, that so far in Q4, C&I balances are higher than September 30. As you can see from the chart, we've seen a steady increase in C&I loans over the past year.
The second graph on this slide shows the trend in an internal performance metric used by our banking business unit. Commercial and commercial real estate loan production was $191 million in the third quarter, down approximately $10 million from the second quarter of this year but up from the third quarter 2012. On a year-to-date basis, production is $98 million higher than for the same period in 2012.
Moving to slide 13, the commercial loan pipeline declined to $444 million in Q3 from the very strong $507 million at the end of the second quarter. You can also see that our commercial line of credit utilization declined in the third quarter compared to the second quarter of this year. Line utilization declined to 35.8% to 36.5% in Q2.
We'll continue to watch these statistics for evidence of significant slowing in loan demand, but, as I noted earlier, our C&I balances have increased since September 30.
Slide 14 breaks down our non-interest income for the third quarter. Total non-interest income was $47.5 million. Starting at the bottom of the bar chart, indemnification asset expense was $2.1 million in the quarter. Our remaining FDIC indemnification asset was $81.6 million at the end of the third quarter, and we expect continued quarterly expense until this asset is fully amortized.
Service charges on deposits were $13.9 million in the quarter, $1.7 million of which was generated by the deposit accounts for our newly acquired Michigan and northern Indiana branches. Service charge income stabilized in the third quarter, but we expect downward pressure on service charge income due to continuing decline in overdraft presentments.
Fees from our investment and insurance businesses were $18.9 million in the third quarter, up over 9% compared to third quarter last year. Investment brokerage continues to have a strong year. Brokerage revenue is up 33.2% compared to third quarter of 2012.
Other income of $7 million included $1.6 million -- included a $1.6 million credit related to the renewal of a large processing contract. This contract is a multi-year renewal and should show benefit over the next several years.
Mortgage banking, BOLI, and ATM income for the quarter was $9.9 million and included a large single life insurance benefit of $1.1 million.
On slide 15, I've broken down non-interest expenses for the third quarter. As expected, we experienced charges related to our branch acquisitions and divestitures in the quarter. Of the total $96.7 million expense for the quarter, $5 million was due to either the acquisition of the Michigan and northern Indiana branches from BofA or the disposition of the 18 branches we closed in the third quarter.
We announced the 18 branch consolidations earlier this year, and the branches were closed in August. We also announced the sale of three branches and the planned consolidation of four branches. Two of the sales should close in November, and one should close in December. The 4 branches we plan to consolidate should be closed before the end of 2013.
We expect to see final expenses of $1.6 million related to the northern Indiana and Michigan branches in the fourth quarter. Core expenses were $85.5 million in Q3, plus we incurred operating expenses of $3 million from the new branches. Core expenses were higher due to an additional salary day in the quarter, several miscellaneous costs.
The 18 branches we closed in August should generate $3.5 million to $4.5 million of savings annually, and the benefit should be fully phased in by the end of first-quarter 2014. We experienced some operational expense savings from these closures in Q3, however.
Also, we should have savings in Q1 of 2014 from the additional seven branch consolidations and sales in Q4. I expect the personnel expense for the Michigan and northern Indiana branches us to grow as we add customer contact personnel in this market.
Slide 16 takes our reported efficiency ratio and brings it back to an adjusted non-GAAP third-quarter efficiency ratio. By subtracting the other income and expenses and the acquisition divestiture expenses listed in slides 14 and 15, I estimate an efficiency ratio of 69.1% for the third quarter. If I subtract the income and expense directly attributable to the newly acquired branches, the adjusted efficiency ratio declines to 67.9%.
When we embarked on our mission to attain a 65% efficiency ratio, we didn't envision having the opportunity to acquire the northern Indiana and Michigan branches and will take us several quarters to generate the new income we expect from this market. The 67.9% efficiency ratio is still short of our 65% target. We know that we have additional work to do, and we remain committed to attaining the 65% target efficiency ratio.
Slide 17 tracks our acquisitions and asset growth against the changes in our full-time equivalent employees. Full-time equivalent employees increased to 2658 in Q3 from 2578 Q2 due primarily to the increased FTE employees in our new branches in northern Indiana and Michigan. We expect FTE employees to decline by 10 to 15 FTE by the end of the year due to the additional branches sales and consolidations.
Slide 18 breaks down our net interest margin in the third quarter and the trends in net interest margin during the year. Net interest margin on a fully taxable equivalent basis was 3.96% in Q3, down from 3.97% in the second quarter. Core interest margin was up 4 basis points in the quarter from 3.29% to 3.33%. Certificate of deposit costs declined from 1.44% in the second quarter to 1.20% in the third quarter and was a major driver of the improved core margin.
Additionally, non-interest-bearing demand deposits increased approximately $34 million on average during the quarter, which also helped the core margin. Much of the total increase in non-interest-bearing demand deposits came from our new branches. For the month of September, core deposits of the acquired northern Indiana and Michigan branches averaged approximately $515 million.
Accretion income from the acquired loan portfolios declined to $13 million in Q3 from $14.3 million in the second quarter. In the third quarter, accretion from acquired loans accounted for 63 basis points of our net interest margin. Accretion income should decline over the next several quarters as acquired loans mature or are paid off in other ways.
$188.2 million certificates of deposit should reprice in the fourth quarter. On average, these deposits cost 0.99%, and we expect that they will repriced no more than 0.30%. The sale of $96.9 million of portfolioed residential mortgages with a weighted average coupon of 4.24% late in the quarter will likely lower the margin.
Due to these and other factors like loan growth or investment portfolio investments, we expect fourth-quarter core margin to decline 3 to 4 basis points.
Slides 19 and 20 provide information on our current sensitivity to rising interest rates. Slide 19 shows the sensitivity of our net interest income to rising rates in tow scenarios of the several we model. The first scenario models the impact on two years of net interest income from a 200-basis-point immediate increase in rates along the entire yield curve. In this scenario, we estimate that cumulative net interest income would decline 2.55% compared to a decline of 5.18% at June 30, 2013.
The second scenario models a more likely outcome, which uses a series of implied forward yield curves over two years. In this scenario, we estimate net interest income would increase 1.68% compared to an increase of 1.67% at June 30. Compared to June 2013, the September forward curves showed a slower pace of federal funds rate increases and a steeper yield curve. These changes in the forward yield curves offset the impact of our actions in the quarter, and our model output in the scenario was unchanged from June.
I added the results of economic value of equity model in an up-200-basis-points scenario. This model captures the impact of repricing beyond our two-year net interest income model. Two items are worth mentioning regarding our EVE model. One, the economic value of the firm increased approximately $275 million from June 30 this year due to the acquisition of the deposits from Bank of America. This underscores our belief in the value of non-maturity deposits particularly in a rising rate environment. And two, the projected change in economic value of the Company, when modeled in up-200-basis-points scenario, declined to minus 10.35% in September compared to minus 12.28% in June.
The most material assumptions driving our rate risk models are related to the repricing our non-maturity deposits, and we believe we treat the repricing of non-maturity deposits in a conservative fashion. 40% of our total non-maturity deposits reprice immediately at 62% to 100% of the increase in the federal funds rate in our models.
Slide 20 lists the actions we took during the quarter to reduce our exposure to rising rates. The most impactful decision, other than closing on the deposit acquisition, was the sale of $96.9 million of residential mortgage loans. The loans had an average yield of 4.24% and a weighted average maturity of 281 months.
Also during the quarter, we discontinued originating long-duration mortgage paper for our balance sheet and executed $300 million in forward-starting pay fixed-rate, interest rate swaps.
Overall, we are comfortable with our current exposure to interest rates, but we continue to pay close attention to our balance sheet and the output of our rate risk models. We will continue to evaluate our rate risk and may execute more transactions to maintain or reduce our sensitivity to rising interest rates.
I'll finish my portion of the presentation with our capital ratios on slides 21 and 22. Because our investment portfolio is primarily accounted for as available for sale, the increase in interest rates between June 30 and September 30 had an impact on the market value of our investments and other comprehensive income. Slide 21 shows that common tangible equity declined by $18.8 million due to the change in investment portfolio OCI. We also repurchased 250,000 shares of stock in the open market in August at an average price of $13.72 per share, which reduced tangible equity by about $3.4 million. As of the second quarter, our TCE to tangible assets ratio was higher than the average ratio of our peer group. For the past several quarters, the Company has been focused on tangible common equity in part because we assumed Basel III would disallow trust preferred and include accumulated other comprehensive income and regulatory capital. Now that the capital rules are finalized with the more traditional view of trust preferred and AOCI, we included a slide with Tier 1 risk-based capital ratios.
With $28 million of trust preferred on our balance sheet, high common equity, and low risk-weighted total assets, the chart shows we are well above the average Tier 1 capital ratio of our peers.
A good capital base gives us the latitude to grow organically and acquire additional banks or businesses using cash or continue to return capital to shareholders. As I noted, we repurchased 250,000 shares of stock last quarter and have repurchased 750,000 shares through third quarter of this year. We have 1,250,000 shares available in the $2 million share buyback the board authorized for 2013, should we decide to repurchase additional shares.
Also, the acquisition of Tower Bancorp, which should close in the first quarter of 2014, will be paid with approximately 30% cash and 70% common equity. I'll now turn the call over to Daryl Moore for his credit presentation.
Daryl Moore - EVP and Chief Credit Officer
Great. Thank you, Chris. Slide 24 is where I will begin my remarks this morning. On this slide, we show a trailing five-quarter summary of net charge-offs for our full portfolio as well as for our 3 most recent purchased portfolios.
In the period, we posted consolidated net losses of roughly $300,000, representing an annualized net charge-off rate for the quarter of 2 basis points. Consolidated annualized net charge-offs stand at 7 basis points for the nine months ended September 30. As you can see from the chart, the Old National core portfolio continues to perform very well, with losses in the current quarter of roughly $200,000.
Year-to-date net losses in the core portfolio stand at $1.4 million, representing approximately 4 basis points of net charge-offs on an annualized basis. Performance in the Monroe and Integra portfolios was also strong in the current quarter, with small net recovery being recognized in each of these portfolios in the period. Year to date, the Monroe portfolio has reflected a net recovery of roughly $900,000, while the Integra portfolio has produced approximately $1.4 million in net losses prior to FDIC reimbursements.
Year-to-date losses in the Indiana Community Bank portfolio have been approximately $1 million.
We continue to monitor the impact that recoveries are having on our net charge-off results, not wanting to dismiss the influence that this important dynamic has on our current results. Year-to-date recoveries represent approximately 77% of gross charge-offs, compared to 66% for the same period last year. The trailing six-year average of recoveries as a percent of gross charge-offs at Old National is 31%.
As we look forward with respect to provision expense and appropriate allowance levels, this dynamic will certainly enter into our decision-making process. Slide 25 shows our trends in the allowance for loan loss coverage of non-covered, non-performing assets. On a consolidated basis, we continued our modest improving trend, increasing our coverage of non-covered, non-portfolio assets slightly from 30% to 32%. The improvement came as a result of a reduction in non-performing loans of $16.9 million in the quarter, offset in part by the reduction in the allowance for loan losses of $1.6 million. While this level typically might be of concern, I would remind you that this coverage number does not include the $12.8 million currently outstanding mark on the Monroe portfolio or the $45.6 million mark on the Indiana Community Bank portfolio.
As we move to slide 26, you can see that we have displayed the combined allowance for loan losses and loan marks as a percentage of the pre-marked loan portfolio for each of our differently tracked portfolios. Similar to past quarters, the combined ALLL and marked to pre-marked loan balance percentages appear to appropriately rank and reserve the risk levels in each of these portfolios, with the Integra portfolio remaining the most troubled, followed by the most recently acquired Indiana Community Bank portfolio.
You can see the combined allowance and marks represent roughly 6% of the pre-marked Monroe portfolio, 13% of the Indiana Community Bank portfolio, and almost 29% of the Integra portfolio. Keep in mind that the majority of the Integra portfolio is also subject to our loss share agreement with the FDIC.
On a combined basis, the allowance for loan losses and loan marks as a percent of the pre-marked loan portfolio is now 4.05% as compared to 4.31% at the end of last quarter.
On slide 27, we've displayed trends in third-quarter results with respect to portfolio delinquency levels. At 51 basis points, 30-day or greater non-covered delinquencies showed some deterioration from last quarter's level of 42 basis points, but continued to compare very favorably to peer results of over 100 basis points for the trailing quarter. 90-plus-day non-covered loan delinquencies fell back down below $1 million in the current quarter to remain roughly at 2 basis points of period-end loans.
As in prior quarters, Old National results continue to be at level considerably lower than that of our peers even in light of improving peer trends, whose average trailing quarter results stand at 44 basis points.
Moving to slide 28, you can see that we have shown trends in our criticized, classified, and nonaccrual loans. Non-covered criticized loans fell $23.3 million in the quarter. Virtually all of the improvement in this category was as a result of the reduction in line of credit outstandings within several of the larger relationships in the category. While this reduction might be viewed by some as a potentially temporary change, as these borrowers do have the ability to the advance on their lines of credit, it also indicates to degree that the borrowers are in a healthy enough state with respect to cash flow to be able to reduce leverage within their respective business operating cycles.
Consolidated classified loans remained relatively flat in the quarter, increasing by $1.7 million. Non-accrual loans continued their downward trend in the quarter, falling by $21.9 million. This quarter's improvement came as a result of minimal downgrades into the category, compared with good movement of non-accrual credits out of the bank, most notably within the Indiana Community Bank portfolio.
We continue to be pleased with the overall trends in our credit quality metrics, especially with respect to our net loss results year to date. Generating new loan volume and appropriate returns while at the same time assuring only acceptable risk is taken and appropriate structuring is in place remain a challenge. As it has always been, as we move out of a downturn and into a period where loan demand has not yet picked up to any meaningful degree. In this regard, we continue to focus on proper loan underwriting and administration.
At the same time, we continue to review ways as a management team to take on incremental measured and managed risk in an attempt to serve our clients.
With those comments, I'll turn the call over to Bob for concluding remarks.
Bob Jones - President and CEO
Great. Thank you, Daryl. Before I begin my remarks relative to the quarter, I would like to thank all of you who reached out to Lynell following her family's fire. Your support and concern means a great deal to all of us at the Old National family and is very much appreciated.
Our team did its usual job of providing you with an overview of our quarter -- their usual good job. From my perspective, it was a good quarter, one that was consistent with our forecast and also one that allowed us to take additional steps towards ensuring that positive trend continues in the face of a still-challenging environment for banks.
Let me close our remarks with a brief synopsis of that environment that all banks are facing. While the economy continues to demonstrate a slow and somewhat erratic recovery, we are seeing more pockets of strength versus weakening.
In conversations with our clients and our prospects, we are hearing more discussion about capital expansion and potential inventory builds, some of which is related to prior plan delays by our clients and some of which is related to business expansion based on the improving volumes that they are seeing.
Indiana is seeing a broad-based strengthening as are Louisville and Michigan. The Illinois markets are still hampered by the state budget challenges, but we have seen some strengthening there as well, though not nearly as strong as the other markets. The strength of the economy is not such that it can withstand any significant challenges to that growth.
The most obvious is the continued challenges in Washington. You could almost hear the steam coming out of the recovery as our leaders in Washington debated the debt ceiling and the continuing resolutions.
This uncertainty has the potential to derail any positive momentum in the economy if these issues are not dealt with over the next few months in a more proactive manner.
As a side note, if you have not read Dallas Federal Reserve president Richard Fisher's speech on certainty matters, which he delivered in Dallas on October 3, I might suggest that you do so. President Fisher does an excellent job of discussing the impact that this lack of clarity on our fiscal policy can have on our economy.
Another potential slowdown challenge to the recovery will be the anticipated easing of quantitative easing by the Federal Reserve. It is been some time since borrowers have seen rising rates. The current low-rate environment may be masking some of the cash flow indicators of our borrowers and may have been slightly lulled by the historically low-rate environment. While tapering will affect the long end of the yield curve, any time you have rising rates you can have an impact on potential borrowings.
The regulatory environment also presents potential challenges to banks in 2014. I will start with the caveat that we do view our regulators as adding value and greatly appreciate the role that they play, and we also understand the role that they have been put into with the continued implementation of Dodd Frank. Many of you have seen our visual, [flat Tony], which we have included in the appendix for these slides. This visual shows the number of regulations that OMB dealt with in 2012 alone. Today, we estimate the regulations may be as tall or taller than flat Tony.
The emphasis that we will are hearing from our regulators seems to continue to be on BSA, AML, compliance, and cyber security. But there is an intense focus on all areas of risk. In fact, regulators are now advising banks that they should be prepared to move to a strong risk profile, which they define as a bank having a very strong risk culture with an articulated risk appetite that is Board-approved and delivered through an independent and highly effective risk management group. While this is the essence of what banking is all about, achieving this comes with additional costs.
The external challenges above have created a very competitive environment for revenue growth. We are seeing extremely competitive pricing and structure on loans in all of our markets. Let me give you just a few examples. We recently lost a loan to a competitor who priced their loan at a 30-day LIBOR plus 130. In addition, another market lost a loan to a competitor who priced a fixed-rate loan at 2% for 10 years. We are also beginning to see the waiver of personal guarantees on CRE loans more of a norm than an exception. This is driven mostly by the large regionals, but smaller community banks have been quick to follow suit.
Of course, I'm sure that as you ask the question, everyone will say that it is the other guy. Truth is, we are all probably as guilty to some degree as others. But I can assure you that we have a disciplined pricing structure in place that requires exception pricing approval at the most senior levels in our Company. We are also less likely to give on structure because of our focus on credit quality.
Finally, let me update you on our recent -- most recent partnerships. Before I do, I am pleased to announce that our Bloomington, Indiana market was just named the Large Business of the Year by the Bloomington Chamber of Commerce. You might ask why do I mention this. It has only been two years since we completed our partnership with Monroe Bank. And many times, there's an extended period when integration activities and other changes reflect poorly on a bank in the market. Because of the great leadership of our market team and our disciplined integration process, this has not been the case in Bloomington.
I also believe this is indicative of how well our process works and our focus on doing what's right for the market. In Michigan, we acquired a senior commercial banker with over 20 years experience at a regional bank in Kalamazoo as well as another commercial banker to join the team. In the first 45 days, they have been able to build an approximate $10 million loan pipeline, and they have been very well received by the market. We are looking at hiring an additional RM.
We have also hired two mortgage bankers to join our indirect lender in the consumer space. We have generated $1.2 million in consumer loans and an additional $5 million in indirect loans in the quarter. Also joining the Michigan team is one investment representative, with plans to hire one more. We are also getting very close to building out our wealth management team. But, as Chris noted, there is a cost of building this team, but we are very happy with the response in the market and are thrilled with the attitude of the Michigan team.
With our most recent partnership, Tower, we are very pleased with the market reception, and the teams in Fort Wayne and Warsaw are just outstanding. Our integration activities are moving very fast, with 20 project teams in place that are populated with representatives from both banks. They are having weekly meetings and continue to make great progress.
We have two mock conversions scheduled already, and we still anticipate closing in the first quarter of 2014.
Last week, Tower did announce quarterly earnings of $2.1 million and year-to-date earnings of $5.7 million, both of which represent record performances for Tower. Total assets stood at $701.9 million at quarter end, and I would note trust and brokerage fees were $1.1 million, which also represented a record.
While assets under management in the trust group were $719 million, this is a great reflection of the quality of the Tower Associates and their leadership team and why we are so enthused with this partnership.
In closing, I would like to remind all of you that we are having our analyst investor day on November 19 and 20. I promise you Lynell has a great day and a half planned for you, and we look forward to seeing you.
Jasmine, you can now open the line for questions.
Operator
(Operator Instructions) Scott Siefers, Sandler O'Neill.
Scott Siefers - Analyst
I wanted to make sure I'm hearing you guys correctly on the 65% efficiency ratio target. Chris, you mentioned it's still a goal, but I couldn't tell if I was supposed to read between the lines and figure out whether or not it's still a fourth-quarter goal specifically; which you mentioned a few quarters still to get the Bank of America branch is up to necessary -- or requisite level of profitability, etcetera. Is that still a goal for the fourth quarter specifically?
And then I guess within the context of the way things are trending now, what would be the main levers to get you there?
Bob Jones - President and CEO
Great question, Scott. And if we had done a pool here, we're going to guess the first question was going to be on the efficiency ratio. So we appreciate that. It is still absolutely a goal for the fourth quarter.
We have a number of initiatives still in place. In all frankness, it's going to be tight whether we hit it in the fourth quarter. But I can tell you we've got a lot of things going on. I'll remind you of the branch closures also -- we get a full-quarter effect for those the fourth quarter. But it is still a goal for the fourth quarter. It's still a very, very important part of our incentives.
Now, to your second part, the levers -- given the rate environment and some of the other challenges coming out of Washington at all, really the levers, Scott, we have to look at as expenses.
If we get a boost in revenue, that's great; it's gravy on top of the turkey. But all of our initiatives, and we've got well over 20, are all expense-focused. Bottom line is it is our goal, it is our target, it is our aspiration. It is everything you can think about. The Board is keenly focused on it, I am keenly focused on it. Are we going to hit it in the fourth quarter? Boy, I sure to hell help hope so. But, you know, it's going to be close.
Scott Siefers - Analyst
Yes, okay. That's perfect. I appreciate the color and, I guess, the objectivity as well. And then second question, Bob, I was hoping that you could maybe talk a little bit about -- I guess a little bit more about some of the factors affecting you guys specifically as it relates to loan balances. I guess with the second quarter, just given the size of the pipeline, the increase you had in utilization rate at that time -- I guess I sensed there was maybe a little bit more enthusiasm this quarter, maybe a little more guarded given that the flatter utilization and the down but still strong pipeline. So, you know, what kind of puts and takes do you out there as you look at overall loan momentum?
Bob Jones - President and CEO
Great question, Scott. There's a couple of factors. One, as you look at our quarter-end C&I balances, there's some internal factors. We had two large credits that we lost. One was a company that we had taken almost from birth to -- well, exceeding our capacity that actually went to the capital markets through an acquisition. They acquired a company and used the capital markets to do their financing. And, quite frankly, they appreciate our relationship so much they asked us to join the syndicated pool. But, quite frankly, the margins were so slim that we walked away, and that was $19 million of outstandings.
In addition, we lost another $12 million credit. That really was a structure issue. It was a credit that we've enjoyed with good relationship. But as we said, it is competitive, and somebody came in with a structure that we just couldn't get comfortable with. So that's $12 million, and as you know we sold that lease portfolio. So that really is somewhat of an indicator of why we had a little bit of a drop in our outstandings at quarter end; that's why we put this slide in there.
I would tell you, as you look at moving to an external factors, you look at the pipeline, you look at our utilization -- and I used the phrase in my comments; you could almost hear the steam come out when all the crap was going on in Washington.
You literally -- our clients, our volumes, our applications, people just didn't know what to do, and it just really slowed things down. As Chris said, we've seen our balances through the fourth-quarter hit above where they were in the third quarter. Activities picked up in the pipeline, activities picked up on the consumer side. So I'm hoping it's a brief blip based on the circus that was Washington. Now, we've only got another month and a half until we get back to that circus, but it was -- you know, I think everybody just got very frustrated. I hope that helps, Scott.
Scott Siefers - Analyst
Yes. No, that's perfect. So I appreciate the color and time. Thanks a lot, guys.
Bob Jones - President and CEO
Great. Thanks, Scott.
Operator
Emlen Harmon, Jefferies.
Emlen Harmon - Analyst
I was hoping that you could talk a little bit about the shifts in mortgage products and -- so how was that -- how do you expect that to end up affecting your production volumes generally? And I guess does that affect mortgage banking equally as it does just kind of what's coming on the balance sheet?
Bob Jones - President and CEO
I think first and foremost, we did it at a rate issue. We wanted to get the duration shrunk. We had the opportune time, one, to do the sale plus to back off as we've seen some slowing of activity and mortgage to back off some of the longer-term product. I think it's going to have a little bit of slight downward pressure, but I don't know that is going to be significant on a go-forward basis. Clearly, refis are not nearly as robust, but our purchase activity has been fairly good.
Emlen Harmon - Analyst
Got it. Thanks. And then I did want to hop back to the expense question quickly. I hear -- I guess you guys are talking about some additional savings that come in in the fourth quarter from (inaudible) closings, but then also you do have kind of some RM hires and some of the other investments that you're making wealth management, for example. How do we think about just kind of the directionally which way the personnel line is headed as we go out the next couple of quarters here?
Bob Jones - President and CEO
I would say personnel lines would be flat to maybe slightly up based on timing. There's other areas that we can reduce costs and will be reducing costs. But as we build the revenue positions in the Michigan market, clearly we've had reductions in staff. And the average salaries are going to be a little different.
But, for modeling purposes, I would be -- second to third quarter is not that of an indicator to use.
Emlen Harmon - Analyst
Got it. Okay, thanks. And one more quick one, if I could, So how are you guys thinking about the kind of incremental yield on the BofA deposit base at this point? You know, obviously you guys are kind of pre-invested to some degree coming into this. How do we think about what you pick up as you start to get some loan production out of those new branches?
Chris Wolking - SEVP and CFO
Emlen, this is Chris. I don't have all the numbers right at my fingertips, but the mix was not that dramatically different than ours. In fact, their CD rates were a little bit lower than ours, given our high CDs.
So we really focused on the non-interest bearing deposits, and that's a good, gosh, 10% or 12% of their total -- of the total deposits. So the deposit base, from our perspective, is an excellent deposit base with pretty low cost dynamics.
Bob Jones - President and CEO
Yes, just to give you a perspective, Emlen, total deposits at the end of the quarter for BofA -- or that northern Indiana Michigan markets; we're trying not to use that BofA word too much. But we are a little over $500 million, and $71.5 million of that was in non-interest. And another $88.9 million was in now with slightly over $50 million in savings and $166 million in money markets. So you can see that it models a little bit -- pretty closely to where we are with probably a little slightly higher balances in the noninterest DDA, and fortunately those deposits have stabilized and we're actually starting to see some growth in the Michigan markets.
Emlen Harmon - Analyst
Got you. So I noticed that you guys were trying to head toward that new moniker there. Sorry, it was stuck in the back of my brain. (laughter)
Unidentified Company Representative
(multiple speakers) fines from the government so (inaudible) the call.
Emlen Harmon - Analyst
Fair, fair. I'd also be kind of curious in terms of what you are doing on the asset side there. Because presumably the proceeds of that funding have been invested in shorter duration -- something shorter duration in the securities book. So I'm just kind of curious what you feel like the gap between what you're getting on yields for the securities invested their versus what you could expect to get longer term.
Chris Wolking - SEVP and CFO
The loans -- again, given our -- the people we've hired and our overall credit philosophy, I don't expect that our loans will look that much different at BofA than they are currently with Old National at the core bank.
So, 100 to 200 basis points probably on average as we move into higher quality assets that have a little better spread. I think repricing -- I think we have to assume that those are going to be relatively short repricing assets -- floating-rate assets. So we're somewhat beholden to how quickly short-term rates rise before we see an absolute increase in youth relative to that which we are taking off the investment portfolio.
Bob Jones - President and CEO
You know, I might just mention, Emlen, on the loan side -- now it's not significant, but when we acquired those branches, we had just under $8 million in loan outstandings. At quarter end, we were up to $12.5 million and pretty well balanced in between commercial as well as consumer. So, you know, in 45 days, they have been able to add outstandings that were 50% above where they were now. We've got a lot of 50%'s to go to make up the deposits, but I think it's a good indicator of the quality of the team, and we're going to obviously get a little better spread on that.
Emlen Harmon - Analyst
Got it, perfect. That's what I was trying to get at. Thanks, guys.
Bob Jones - President and CEO
Thanks, Emlen.
Operator
Stephen Geyen, D.A. Davidson.
Stephen Geyen - Analyst
Thank you. Maybe just a couple of questions here. Starting off, the $1.6 million. I'm looking at the chart -- or table on page 7, the renegotiated contract $1.6 million. Is there anything likely to continue with that, or is that kind of a one-time benefit in the third quarter?
Bob Jones - President and CEO
Yes, that one-time benefit is there. Obviously, the benefits of the renegotiated contract will continue, but that's why we highlighted that in that slide, just because that is a unique item that -- but we shouldn't get any more unique items other than the benefit savings over the duration of the contract.
Stephen Geyen - Analyst
Okay, got it, got it. And -- let me see -- the wealth management trust, you had some nice growth there. I'm just curious if there's anything in particular you can point to. Is it kind of a cross footprint; are you seeing some areas, some regions doing a little bit better than others with some adds?
Bob Jones - President and CEO
Yes, it's -- the sales factors across all regions -- in total transparency, we did have a large estate mature, and that fee comes into our Evansville region. But we've had good sales, but a pretty good portion of that is that we did have a large estate mature in our Evansville region. And you get to see a corresponding fee for that.
Stephen Geyen - Analyst
Sure, got it. Okay. And maybe a question for Chris, looking at the balance sheet with the changes in the mix change in earning assets, can you kind of talk a little bit more about what the expectation or where you might be going over the course of next couple of quarters?
Bob Jones - President and CEO
Well, I think, Stephen, if we look at it purely from a rate sensitivity standpoint, we'd expect fewer long-duration assets, whether they are coming to us in the mortgage loan book or the investment portfolio. So -- and from a quality asset standpoint, I'd like to make room for more growth in consumer and commercial loans. So that's strategically the direction. Obviously, quarter to quarter, there's some things that can impact whether or not that happens. But you can be assured that our reinvestment objectives in the investment portfolio are to be in shorter duration assets, which implies lower yields, given the steep yield curve. So I'd expect that to continue.
As we mentioned, the invest -- or the sale of the portfolio of residential mortgages was a big deal for us, and we would continue to do that if we thought that it was appropriate. But right now we're feeling pretty good about our rate risk position and certainly our capacity to absorb additional commercial loans and consumer loans.
Stephen Geyen - Analyst
And so maybe just focusing on loans and the investment securities, kind of that mix. So certainly when I add the loan growth, as you can -- but as far as any repricing and where the runoff might be going, where you might be reinvesting and also -- okay.
Bob Jones - President and CEO
Short and lower yields. I think -- when I look back at the last quarter, our average yields were somewhere -- the re-investments were somewhere between 1.5% and 2%. And on an average basis, you know, the investment portfolio currently significantly higher than that. We are doing some munis when we have the opportunity, but for the most part it's floating rate stuff and, you know, very structured agency and mortgage-backed product.
Unidentified Company Representative
Stephen, I noticed this is your first call back, but the direction I've given Chris is strength of duration, reduce the risk, and increase the yield (laughter). He's done well on two of the three, but that third one he's still struggling with. I'd rather get the first two.
Stephen Geyen - Analyst
(laughter) Okay. Thanks for your time.
Bob Jones - President and CEO
Thanks, Stephen. Welcome back.
Operator
Jon Arfstrom, RBC Capital Markets.
Jon Arfstrom - Analyst
A couple of questions here. Just following up on Emlen's line of questioning. We'll call them the new Michigan branches. Anything other than hiring -- finding and hiring the right people, anything that prevents that -- those branches longer-term from having a similar loan-to-deposit ratio as maybe the rest of the bank? Is that (inaudible)?
Bob Jones - President and CEO
Not at all. It's a matter of -- I've got to be honest with you. I've said this to Barbara that our Michigan markets have all the potential to look a lot like Bloomington over time. They're just good markets with just phenomenal people. When I'm having a really bad day, I just call our Michigan president, who I don't think has ever had a bad day. But he's building a heck of a team, and we are really encouraged, if you can't tell. So I think that's going to look a lot like Bloomington or some of our other markets.
Jon Arfstrom - Analyst
Could I get that number, Bob, for when I have bad days?
Bob Jones - President and CEO
Sure. 1-800-Phil [Harbour]. (laughter)
Bob Jones - President and CEO
Could use that periodically.
Bob Jones - President and CEO
Just be prepared, it's a long conversation, but it's all upbeat. (laughter)
Jon Arfstrom - Analyst
Chris, for you on regulatory costs, I know it's a lot of work and somewhat of a pain. But is there more needed, or do you think you have most of it captured in the run rate?
Chris Wolking - SEVP and CFO
We've got most of it captured in the run rate, given the investment that we've made in our [BSA ML work]. In fact, I think the number probably comes down as we get into a steady state and begin to amortize the cost of the systems work that we did.
As Bob said, though, you don't know where the next regulation or where the next cost is going to come from. We're focused on stress testing and those kinds of things. So it feels like it's going to be kind of a regular event as we have to look harder at responding to some of the requirements coming out of Washington.
Bob Jones - President and CEO
You know, John, I think the only wild card there is that this desire to move banks to what they call strong, there's probably a cost for that. I'm not sure that any of us know what that is because when you ask what is strong, they give you the statements that I just gave. But sometimes I think after the exam, you're going to have a better sense of what strong is; and there may be some investment for all banks, quite frankly.
Fortunately, we spent a full day with our Board looking at what strong meant to us, and we're comfortable; we've got the people in place, and should not be much incremental costs. But obviously our history is that we're going to do that we have to do to maintain that strong risk profile.
Jon Arfstrom - Analyst
Okay. And then maybe just one more, if I can, question for Daryl.
Bob Jones - President and CEO
He was getting lonely, Jon.
Jon Arfstrom - Analyst
I figured that.
Bob Jones - President and CEO
He's the Maytag salesman of Old National.
Jon Arfstrom - Analyst
(laughter) So Daryl, the non-accrual relationships, $2 million or greater, you have a slide in the very back. And in terms of the number of credits and the dollar amount, it's down materially. Just wondering if there's anything specific that happened there, that's just the natural course of things as credit mends.
Daryl Moore - EVP and Chief Credit Officer
Yes, Jon, it is a natural (inaudible) beginning to work on these, and it's just as (inaudible) we work our way through this tough economic environment, the larger credits have (inaudible), we've done a nice job of moving those out. But there's nothing really unusual, just the hard work that our guys are doing.
Jon Arfstrom - Analyst
Okay, that's a great trend. Thanks, everyone.
Bob Jones - President and CEO
Thanks, Jon.
Operator
John Moran, Macquarie.
John Moran - Anayst
John Moran, actually.
Bob Jones - President and CEO
(laughter) Well, you know, we bluffed our way through that pretty well didn't we, John?
John Moran - Anayst
Who's this guy -- (multiple speakers).
Bob Jones - President and CEO
Oh, no, John, we knew who you were.
John Moran - Anayst
(laughter) Say, just a real quick one circling back on the operating expenses. The full run rate (inaudible) from the 18 consolidations, that was $3.5 million to $4 million; you expect that in the first quarter. Did you ever quantify what the run rate saves would be out of the four conversions and the three additional sales in fourth quarter, or is that -- or am I at risk of double counting?
Bob Jones - President and CEO
No, you are not at risk of double counting. It's separate, but we never really quantified it because while it's meaningful, it's not significant. I think if you take the number that we gave you for the fourth quarter and divide it by the number of branches, that will give you a good indication of what it should be. Because our average cost is about the same per branch.
John Moran - Anayst
Okay, that's helpful. And then, Chris, I think in your prepared remarks, you said, hey look there was an extra day on comp and several miscellaneous costs that contributed on the OpEx line item. Several miscellaneous costs that are expected to hang around, or is there an aggregate number that you can kind of tease out that might drop?
Chris Wolking - SEVP and CFO
No, I don't have an aggregate number. But these were onesies, twosies, small deals that just seem to be there in the third quarter. My guess implied there is that those I wouldn't expect to see them again in the fourth quarter but not particularly material.
Bob Jones - President and CEO
I think the bigger effect was the extra day on payroll.
Chris Wolking - SEVP and CFO
Extra day on payroll, which is a big -- not a small number.
Bob Jones - President and CEO
And just -- yes, for modeling, that extra day is about $0.5 million, so we don't -- you know, you are always going to have onesies and twosies.
John Moran - Anayst
Yes, got you.
Bob Jones - President and CEO
I'm not sure my controller likes to wear onesies and twosies. (laughter)
John Moran - Anayst
All right, and then the last one for me, kind of nitty-gritty, but tax rate came in kind of well below where you guys were running the first half of the year. Any thoughts there in terms of what we ought to be looking for going forward? And was there anything unique this quarter about that?
Chris Wolking - SEVP and CFO
I think at a full-year, the GAAP number we expect to be is around 28%, which I think is a number we've talked about in the previous quarters. It's an important number for us. It's just an expense, and we continue to work really hard to make sure we're doing the right thing. But as our taxable income continues to increase through the acquisitions and things of that sort, that number is just naturally is going to rise.
John Moran - Anayst
Got you. Thank you very much, that's helpful.
Bob Jones - President and CEO
Thanks, John.
Operator
Christopher McGratty, Keefe, Bruyette & Woods.
Unidentified Participant - Analyst
It's actually John (inaudible) filling in for Chris. Just wondering, how do you expect the Tower acquisition to impact your interest rate sensitivity?
Unidentified Company Representative
It's a little early to tell yet. I think we always like to see what those final deposits are and how the marks are treated, but not materially different. And it's not a huge number, really, in terms of total as a percent of the balance sheet. So we'll wait and see and watch that.
We are certainly running the balance sheet with an eye towards what happens next year, but it doesn't really change my strategy any.
Unidentified Participant - Analyst
Okay, thanks. And, Bob, I know you mentioned that loan pricing is competitive across the footprint, but are you seeing any differentiation in pricing in Michigan or northwest Indiana -- some of the newer markets?
Bob Jones - President and CEO
You know, Michigan, not so bad. The cesspool of pricing is really Indianapolis right now. It is unbelievable. We're seeing a little bit in other markets, but Indianapolis is where we've seen it. And actually we've been pleased with what we've seen so far in Michigan and up in that part of the world. (inaudible) Indianapolis.
Unidentified Participant - Analyst
Okay, thanks for that color. And just the last one I had, you talked about how we have some clarity finally on Basel III. Any update to your long-term capital target. I think the last I remember is that you just targeted TC of 6%, Tier 1 common of 9%, and total capital 13%.
Chris Wolking - SEVP and CFO
Yes, I think as we watch those numbers, we're a little more sensitive to the peer group numbers than we are to any targets that we've got only because we're trying to respond to what the regulators expect and those kinds of things. So we'll just continue to work our stress testing very hard and try to do the very best we can with capital that we've got.
Bob Jones - President and CEO
I just might note, John, you mentioned that we still talk about TC at 6%, that number has probably crept up above that at this level given Basel and the buffers at all. And it's probably closer to 7%. But absent that, we still believe that we're going to be very deliberate in our capital strategies and look to do what's right for the shareholders.
Unidentified Participant - Analyst
Great. Thank you.
Bob Jones - President and CEO
Great. Thanks, John. Nice to have you back for a day.
Operator
Taylor Brodarick, Guggenheim Securities.
Taylor Brodarick - Analyst
Hey, Daryl, question about I guess how long we can expect under-provisioning/provision recapture. Kind of how are we thinking about the reserve plus the marks? And is there a target you want to move it down towards?
Daryl Moore - EVP and Chief Credit Officer
There is no target that we're looking at right now. When charge-offs are low, our loss rates continue to come down, and our trends were good in the quarter. All of those enter into that mix. Add it's so difficult in today's environment to know where all of those things are going.
So in -- Taylor, and the short answer to you, we don't have a target that we're trying to get to, and it's just a quarter-by-quarter evaluation.
Bob Jones - President and CEO
What I would say, Taylor, is you think about your 2014, I would just make an assumption that whatever you have in your models for charge-offs for modeling purposes, I would just have you at least matching our charge-offs. That's not what we're going to do, but I think for your modeling it's probably the safest. We may or may not to that. But for your purpose for modeling, that's right would go.
Taylor Brodarick - Analyst
Okay, great. Thank you both. Appreciate it.
Operator
Peyton Green, Sterne, Agee.
Peyton Green - Analyst
Yes, good morning. Just a question with regard to the interest rate sensitivity, maybe Chris if you could just talk about where you are ultimately trying to go with it and what sacrifices you'll make. Is it as simple as using the derivatives market with more swaps? Would that do it, or would you look for more balance sheet shrinkage from the investment portfolio?
Chris Wolking - SEVP and CFO
All of the above. I don't -- like I said in my comments, I feel good about where we are right now. I think we just want to be in a position to respond. We were pleased to be able to get the sale of the mortgages done. I mean, that's those are sometimes difficult trades logistically to put together. It went very well. I would prefer to not do those things again; I hate giving up 4.25% revenues. So I think we'll continue to try to do what we've done, which is reinvest the investment portfolio in a fairly conservative fashion and continue to expect that loan growth will continue to offset some of that in higher spread product.
But, you know, as long as we've got this strong deposit base that we've got, a lot of non-maturity deposits, that gives us a lot of latitude, I believe, to take advantage of opportunities wherever they might be on the asset side.
Peyton Green - Analyst
I guess what were the terms of the swap that you executed?
Chris Wolking - SEVP and CFO
We did several. Most of them -- as I said, they are pay fixed rate swaps and they start anywhere from late this year to 2016 probably, Peyton. I think we've got a full breakdown of that in the Q, so you'll be able to see that when we release the Q.
But generally speaking, nothing immediate, and it's a great tool for us. We feel like it helps with our economic value of equity without impacting our current net interest income too dramatically.
Bob Jones - President and CEO
Our queue will be filed on Friday, it's got pretty -- it's got a very good disclosure in there that (multiple speakers).
Chris Wolking - SEVP and CFO
I think they are all listed in there.
Peyton Green - Analyst
No, I was just curious if that would be a better tool to use now that spreads have come in a good bit more than they were for on -- at least on average compared to the third quarter. Is that something you're more likely to use going forward, or really just you're going to use it in combination?
Chris Wolking - SEVP and CFO
Again, I think we'll take advantage of things as they happen, you know? If we get a nice run in a fixed income market and we have the opportunity to sell some paper, we'll probably do that. I mean, it's just a -- it's whatever makes sense at the time. This has been a good product. It's accounting-friendly for us. But, again, with a relatively small wholesale -- portfolio of wholesale funding, it's kind of difficult to do these things and still stay in good graces with the accountants. But we'll do what we can.
Peyton Green - Analyst
Okay, great. Thank you.
Bob Jones - President and CEO
Thanks, Peyton.
Operator
And there are no further audio questions at this time.
Bob Jones - President and CEO
Great. As always, if you have follow-up questions, please give Lynell a call. And, again, for anybody that's still on the phone, from all of us at Old National, thank you so much for your prayers, kind words, and support of Lynell during her family's challenges. It's reflective of the quality the people that are on the phone and reflective of all of our caring attitude towards Lynell. So have a great day, and we look forward to talking to you.
Operator
This concludes old national's call. Once again, a replay along with the presentation slides will be available for 12 months on the investor relations page of Old National's website, Old National.com. A replay of the call will also be available by dialing 1-855-859-2056. Conference ID code 858 26718. This replay will be available through November 11. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call.