Old National Bancorp (ONB) 2014 Q4 法說會逐字稿

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  • Operator

  • Welcome to the Old National Bancorp fourth-quarter and full-year 2014 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 the 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 1:00 PM Central Time on February 2 through February 16. To access the replay dial 855-859-2056, conference ID code 69616583.

  • Those participating today will be analysts and members of the financial community. (Operator Instructions)

  • At this time the call will be turned over to Lynell Walton for opening remarks. Lynell?

  • Lynell Walton - SVP IR

  • Thanks, Molly, and good morning, everyone. Joining me today on Old National Bancorp's fourth-quarter and full-year 2014 earnings conference call are Bob Jones, Chris Wolking, Daryl Moore, Jim Sandgren, 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 3 as well as our SEC filings for a full discussion of the Company's risk factors.

  • Additionally, as you review slide 4, certain non-GAAP financial measures will be discussed in this conference call today. 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 results. Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentations.

  • I will begin the analysis of our fourth-quarter earnings on slide 5, where you'll find highlights of our performance as they relate to our 2014 initiatives: increasing core revenue, reducing operating expenses, and transforming the franchise by moving into higher-growth markets.

  • With our focus on core revenue growth, I am pleased to report our organic loan growth of almost $52 million during the quarter or 3.4% on an annualized basis. Year-over-year we experienced organic loan growth of almost $340 million. This growth, net of loans acquired through acquisitions, excludes the change in covered loans.

  • In addition, we are pleased with the almost 12% increase in revenue. Banking, wealth management, and insurance all contributed to the improvement over prior year. We did see a 17 basis point decline in our core net interest margin during the quarter, and Chris will provide more clarity on this in his remarks.

  • We continue our focus on controlling noninterest expenses, specifically operational expense, which increased just $0.4 million over the third quarter of 2014. We also remain keenly aware of the cost saves we announced with our recent acquisitions. Looking specifically at our Tower and United acquisitions, I'm pleased to report that expected cost saves are tracking with what we anticipated at announcement date.

  • Consistent with our 2014 initiative of transforming our franchise by moving into higher-growth markets, the fourth quarter saw the successful closing of our acquisition of LSB Financial in Lafayette, Indiana. Conversion will actually be taking place this coming weekend.

  • On the first day of 2015, we closed on the acquisition of Founders Financial Corporation and officially entered the Grand Rapids, Michigan, market. We anticipate converting this acquisition early in the second quarter.

  • Moving to slide 6, you'll see we reported quarterly net income this morning of $29.3 million or $0.25 per share. This level of net income represents a nice increase over that which we reported in the fourth quarter of 2013. As we did last quarter, also listed on the slide are items which impacted our fourth-quarter earnings that resulted from the accounting of our acquisition activity.

  • Turning to slide 7, you'll see our full-year reported net income of $103.7 million or $0.95 per share. This level of net income represents the highest level of earnings by Old National since 2002.

  • With that, I'll turn the call over to Chris to provide more detail.

  • Chris Wolking - Senior EVP, CFO

  • Thank you, Lynell. The graph on slide 9 shows growth in our adjusted income annually since 2011, and the change from third-quarter 2014 to fourth-quarter 2014. Adjusted income is a pretax number without the amortization of the FDIC indemnification asset, purchase accounting accretion income, or merger and integration expenses.

  • From 2011 to 2014, adjusted income increased 13.5% annually. Strong loan growth, low net charge-offs, and well-managed expenses contributed to our income growth during the four-year period. Compared to the third quarter of 2014, fourth-quarter adjusted income increased 10.3%, due primarily to loan growth during the quarter.

  • Slide 10 shows the Company's revenue performance compared to fourth-quarter 2013 and third-quarter 2014. If you focus on the dark blue segments of the stacked bar graphs, which reflect revenue not including securities gains, accretion income, or the changes in the FDIC indemnification asset, revenue was up 11.9% from the fourth quarter of 2013 and up slightly from third quarter of 2014.

  • Fourth-quarter average loans increased $417.7 million from third quarter in 2014, but we did experience net margin compression in the quarter due to lower loan yields. In the following slides, I show the factors that contributed to lower reported and core net interest margin for the fourth quarter.

  • You should also note in slide 10 the significant decline in indemnification asset amortization expense in the fourth quarter of 2014. As we have discussed in previous calls, indemnification asset amortization results from better than anticipated recoveries on loans and other real estate owned that are covered by FDIC loss share.

  • For the full year 2014, we amortized approximately $43.2 million of the indemnification asset. And at 12/31/2014, we had $20.6 million of the IA remaining on the balance sheet. We expect to amortize approximately $9.7 million of the remaining IA, the majority of which should be expensed over the next 21 months.

  • The indemnification asset at the time we purchased the Integra assets in 2011 was $168 million, so we believe we largely have the workout of the Integra loans behind us. The commercial loss share period ends in the third quarter of 2016. I've included a chart in the appendix on slide 36 that shows the change in the IA since 2011.

  • Slide 11 shows the components of our net interest margin for the quarter. Fully taxable equivalent net interest margin declined to 3.83% from 4.78% last quarter.

  • Third-quarter 2014 included a large Integra loan recovery that contributed to the Integra accretion income. Integra accretion lifted net interest margin 105 basis points in Q3. The contribution to net interest margin from Integra-related loan accretion declined to 29 basis points in the fourth quarter.

  • Our net interest margin benefited from a full year's accretion of acquired United assets and a partial quarter's accretion of the assets of Lafayette Savings Bank. We closed on LSB on November 1, 2014. The purchase accounting mark on the Lafayette Savings Bank loans was 8.5% at closing, lower than the 9.5% mark we expected at the time the transaction was announced.

  • Founders Bank closed on January 1, 2015, and we are still finalizing the loan mark; but we expect it to be lower than the 6.1% we estimated when we announced the transaction.

  • As I noted in last quarter's call, third-quarter core margin of 3.32 benefited from unusually high collection and recognition into income of interest on nonaccrual loans. If you turn to slide 12, you will see a more complete analysis of the changes to core margin in the fourth quarter. For those of you who may not have values on that slide, the numbers are: negative 12 basis points, negative 3 basis points and negative 2 basis points, reading left to right.

  • Interest income recognized from non-accrual assets was down in the fourth quarter of 2014 compared to the third quarter. 12 basis points of our decline in core net interest margin was due to lower recognized interest on upgraded or otherwise remediated nonaccrual loans.

  • This can be a fairly volatile component of net interest margin. Approximately 8 basis points of the margin compression was due to the interest income we recognized in the third quarter, and 4 basis points was due to lower than expected interest recoveries in the fourth quarter.

  • Also contributing to lower core margin were higher funding costs due to our issuance in the third quarter of our 10-year senior Holding Company debt and the fact we extended the repricing of our Federal Home Loan Bank borrowings. Our investment portfolio yield declined from [280] in the third quarter to [273] in the fourth quarter and also contributed to the decline in core margin, as we purchased short-maturity and floating-rate securities and sold some of our long-maturity municipal bonds.

  • Slide 13 breaks down on interest expense for the fourth quarter and compares expenses to fourth-quarter 2013 and to the third quarter of 2014. I've broken expenses down into: merger and integration expenses; direct operating costs of Tower, United, and Lafayette Savings Bank; and the total remainder of our operating expenses. I also split out third- and fourth-quarter reversals of previously accrued expenses.

  • We saw a full quarter of expenses for United Bank and approximately two months of expenses for LSB in the fourth quarter of 2014. While the blue segment of the stacked bar graph is primarily operating costs for the legacy institution, it also includes increased information technology, branch operations, credit, and other expenses that we did not allocate to the acquisitions.

  • Merger and integration expenses were $3.1 million in the fourth-quarter 2014, slightly lower than expected. We expect to incur $4 million to $5 million in merger and integration expenses in the first quarter of 2015. Lafayette Savings Bank should be converted to our operating platform this week, and Founders should be converted early in the second quarter of 2015.

  • Our reported GAAP efficiency ratio for the fourth quarter was approximately 69.5%. Excluding our merger and integration costs for the quarter, the efficiency ratio was approximately 67.3%.

  • Moving to slide 14, I've provided information on our sensitivity to rising interest rates. The graph on the right-hand portion of the slide shows two of our modeled rate scenarios: the impact on net interest income if interest rates increase 100 basis points all along the yield curve; and the impact on net interest income if interest rates increase based on the forward rate yield curve.

  • As you can tell by the progression of the modeled results during 2014, we have taken action to increase our asset sensitivity, and net interest income should increase as rates increase. The bullet points on the left side of the slide reflect several important factors that influence our sensitivity to interest rates.

  • We believe we use conservative repricing assumptions for our transaction accounts. 21.6% of our non-interest-bearing checking accounts or approximately $513 million are considered rate-sensitive. And our total interest-bearing transaction accounts increase from 8 basis points to 39 basis points if rates increase 100 basis points immediately.

  • We believe our models accurately represent our current sensitivity to interest rates. We will likely maintain our current asset sensitivity, but may take actions to sell securities or extend the repricing of our funding if opportunities arise.

  • Slide 15 shows our tangible book value per share from 2011 through fourth-quarter 2014. Fourth quarter reflects the tangible book value per share after the closing of the acquisition of LSB and our stock repurchases in the quarter.

  • Each of our acquisitions in 2014 included 20% to 30% cash as a component of the purchase price, which contributed to the decline in tangible book value. The Founders Bank transaction included 40% cash component and closed on January 1, 2015.

  • Also likely to impact tangible book value per share in Q1 are the announced increase in our dividends, $0.12 per share quarterly, and our planned continued buyback of shares. With a pause in our acquisitions and successful execution, our planned sales and consolidations in 2015, the Company should begin to see an increase in our tangible book value per share.

  • Slide 16 shows the trend in our key capital ratios during 2014. While we show our capital beginning to track somewhat lower than our peer group, we believe our capital ratios accurately reflect our balance sheet risk and provide us maximum flexibility to deploy capital.

  • As you see in the bullet point on the slide, we repurchased 1.1 million shares under the 6 million share buyback authorization the Board approved in October. Additionally, as I noted, the Board approved a $0.01 per share increase to the quarterly dividend at its January meeting, raising the quarterly dividend to $0.12 per share.

  • I'll now turn the call over to Jim Sandgren.

  • Jim Sandgren - EVP, Chief Banking Officer

  • Thank you, Chris, and good morning, everyone. As we plotted a course for 2014, we recognized there were three things we needed to do well in order to experience success. We needed to move the needle on organic loan growth, continue to build a healthy and growing commercial loan pipeline for future production, and we needed to expand on a very strong 2013 for our fee-based businesses.

  • As we look back at 2014, I'm pleased to say we were able to accomplish all three. If you'll turn to slide 18, I'd like to start by focusing on our loan growth, excluding covered loans, for the fourth quarter and for the year.

  • Similar to the previous two quarters, we experienced meaningful growth both quarter-over-quarter and year-over-year, which was driven by a combination of partnership activity and good organic growth. For the year, we experienced $339.6 million in organic loan growth, with $51.9 million of that coming in the fourth quarter.

  • Driven by gains in both indirect and C&I lending, our Q4 organic loan growth numbers were impacted by some large unanticipated payoffs and slight reduction in commercial line utilization. Specifically regarding the payoffs, we had a couple of large borrowers that sold their company during the quarter; and we had a sizable CRE deal that was refinanced in the life insurance company due to nonrecourse lending and an aggressive long-term fixed rate.

  • The $339.6 million in organic loan growth that we enjoyed for the year was driven in large part due to the growth in indirect lending of nearly $200 million. Organic growth was also aided by both commercial lending, where we experienced a $69.4 million increase year-over-year, and commercial real estate category, where we enjoyed year-over-year gains of $46.1 million.

  • Moving to slide 19, I am happy to report that our total 2014 loan production exceeded $2 billion, which represented a 10.7% increase over 2013. The large increase was again driven by $909 million in C&I and CRE loan production, a 23.1% increase, and $484.7 million in indirect loan production, a 45.6% increase. The graph clearly predicts depicts the positive trend of quarterly loan production throughout 2014, specifically for commercial indirect and residential mortgage lending.

  • Turning to slide 20 I'd like to update you on our progress in some of our newer markets. As you can see, we experienced quarter-over-quarter loan growth in our Columbus, Indiana, and Michiana markets, along with robust commercial loan pipelines in Michiana, Ann Arbor, and Fort Wayne. We also enjoyed a meaningful increase in core deposits in Fort Wayne and growth in Michiana as well.

  • We did, however, see expected declines in our loan portfolios in Fort Wayne and Ann Arbor, as a result of working through some challenging credits. Overall, I believe these results illustrate that our strategy of moving our franchise into stronger growth markets is working well, and I also think it shows we have the right people in these key markets to continue to build.

  • Moving to slide 21, you can see that we continued to build upon strong Q2 and Q3 momentum in our commercial loan pipeline, with $713 million in the pipeline at quarter-end compared with $577 million at the end of Q3 and $423 million in Q4 of 2013. We have experienced a 68.4% increase in our pipeline since year-end 2013, and I believe the steady upward trend we experienced in 2014 bodes well for future growth this year.

  • While our line utilization was down slightly from Q3, 37.7% compared to 39.1%, it did represent a marked increase over Q4 2013. Similar to the organic loan growth we continue to enjoy, I believe the positive momentum we are witnessing in our commercial loan pipeline line utilization can be attributed to increased confidence of our commercial customers, directly related to our regional economy.

  • We believe this will continue to provide us with opportunities in all of our markets. And I continue to be extremely confident we have the right people and products in place to take full advantage of these opportunities.

  • Slide 22 illustrates the continued positive momentum of our fee-based businesses. As many of you know, 2013 was a strong year for us in insurance and a record-setting year for our wealth management and investments divisions.

  • I'm pleased to report that our investments division built on its strong performance in 2013 with a 6.9% increase in revenue, driven entirely by our Tower and United Bank partnerships. If you remember, we had a large portfolio of CDs that matured in mid 2013, and our retail teams did a great job of referring this business to our investment advisers, which ultimately helped generate rec-revenues in 2013. The fact that core investment revenue remained flat year-over-year was something we were pleased with.

  • Likewise, our wealth management division enjoyed another record year, with growth in the legacy business and acquisition-fueled growth from our Tower and United Bank partnerships. Of the organic growth, two-thirds was attributed to new sales and a third to market appreciation.

  • Finally, our insurance division also topped its outstanding 2013 performance with revenue growth of 7.8%. Nearly half of the growth was driven from the legacy book of business, with the balance as a result of the Wells Fargo acquisition in our Evansville and Louisville markets.

  • Similar to the loan growth we experienced in 2014, I believe these revenue gains in our fee-based businesses continue to illustrate that we are executing our plan very well, with strong leadership and experienced, motivated producers in place throughout our footprint.

  • I will now turn the call to Daryl Moore.

  • Daryl Moore - EVP, Chief Credit Officer

  • Thank you, Jim. In the top half of slide 24 we lay out the charge-off results not only for the current and prior quarters, but also present full-year 2013 and 2014 results.

  • Consolidated net charge-offs in the quarter were roughly $1.3 million or 8 basis points of average loans. This compares to charge-offs last quarter of $0.5 million or 3 basis points.

  • Even at the relatively low level of $1.3 million, charge-offs in the quarter were the highest posted for any quarter in 2014. While there were no significant charge-offs in the period, we did have write-downs in the $0.5 million range out of both our Indianapolis and Ann Arbor markets.

  • Consolidated net charge-offs for the full year were $2.4 million or 4 basis points of average loans. This compares to $5.3 million or 10 basis points in 2013.

  • In the bottom half of the slide we show provision expense information comparisons for the prior two quarters as well as for the last two full years. Provision expense for the non-covered portfolio was $700,000 in the period, lower than the $3 million level posted in the third quarter of this year.

  • On a consolidated basis, provision expense was $900,000 for the quarter, compared to $2.6 million for the third quarter. Full-year 2014 consolidated provision for loan losses was $3.1 million compared to a recapture of $2.3 million from the allowance in 2013.

  • On a consolidated basis, the allowance for loan loss as a percent of end-of-period loans stood at 0.76% at December 31, provision for the full year slightly higher than net charge-offs. As importantly, the combined allowance on loan marks as a percent of total pre-marked loan outstandings stood at 3.04% at year-end.

  • On slide 25 we show you trends in criticized and classified loans over the past year. We have displayed not only information for the consolidated portfolio but also trends reflecting what the portfolio would have looked like exclusive of the effect of our three most recent partnerships, being Tower in Fort Wayne, United Bank in Ann Arbor, and Lafayette Savings Bank in Lafayette, Indy.

  • As you can see at the top of the slide, our noncovered special mention loans increased $24.3 million in the quarter, from $170.5 million to $194.8 million. As the graph reflects, however, the growth was due to increases in this category associated with the three most recent mergers, as we actually saw a decline of special mention exposure in the quarter throughout the remainder of the portfolio.

  • In fact, $22.9 million of the $24.3 million increase in the quarter was associated with the closing of the Lafayette Savings Bank transaction. Exclusive of the Tower, United, and Lafayette portfolios, special mention loans decreased $5.3 million in the quarter.

  • Moving to the lower left quadrant, we see that substandard accruing loans rose by $7.2 million in the quarter to a level of $107.8 million. Most of the increase came in the legacy portfolio by the way of the addition of two relatively larger credits.

  • The remaining chart on this slide shows that noncovered and nonaccrual loans remained relatively constant in the quarter at a level of $125.7 million. Excluding the three most recently acquired portfolios, we had a nice decline in noncovered, non-accrual credits in the period, as they fell $7.2 million from $81.1 million to $73.9 million.

  • Overall we are pleased with the credit results for the year, especially in the net charge-off category. Last quarter we saw a rise in noncovered special mention loans and noted that we would be tracking this category to see if this was the beginning of a trend. While the fourth quarter did not reflect -- outside the addition of the Lafayette Savings Bank acquisition -- significant increases in this category, we will continue to watch this portfolio segment closely.

  • The not-for-profit, construction, and healthcare industry areas continue to draw significant attention as we assess current portfolio risk. With respect to the impact of falling oil prices, while many of our clients will benefit from the same in the way of reduced costs, we also understand that it does have the potential to create an incremental impact on a number of different industry segments.

  • In that regard, we have reviewed our portfolio of borrowers that we feel could be negatively impacted by the current dynamics of this industry and don't, at the present time, see any significant exposure loss. We will continue, however, to watch this area going forward.

  • As I mentioned last quarter, competition for good quality loans continues to be very stiff, and proper structuring of loans in the areas of term, guarantees, and covenants remains a challenge in the current environment. With those comments I'll turn the call over to Bob for concluding remarks.

  • Bob Jones - President, CEO

  • Great. Thank you, Daryl, and good morning, everyone. 2014 was a transformational year for Old National in many ways. We experienced good organic loan growth and, as evidenced by our pipeline, loan originations, and the feedback we've received from our clients and prospects, we have reason to believe this trend should continue.

  • Our $103.7 million in earnings represents our strongest year since 2002. While these earnings were impacted by a number of costs related to our merger activity, and the continued balance between accretion income and the amortization of our indemnification asset, what I am most pleased about is that we continue to fight through these headwinds and have posted strong growth in our core earnings.

  • In 2014, we continued our movement into new markets with stronger demographics and growth potential. With the four bank partnerships that we announced or closed on during the year, as well as the smaller partnerships in our insurance group, we also prudently invested in hiring additional talent in key markets like global, Indianapolis, and Fort Wayne. Our senior management changes enhanced our focus on organic revenue growth and have positioned us very well for 2015.

  • We also rolled out or enhanced a number of new products. As an example, our new checking product has reduced account attrition by over 50% since we introduced it.

  • Several of these changes were driven by what we felt were better products at our partner banks, with mortgage, health saving accounts, and small business being prime examples. In addition, our debt offering and corresponding capital strategies gave us the flexibility we needed to provide our shareholders with the value they deserve.

  • The graphs on slide 27 are a great summary of the financial results the prior speakers addressed. Clearly these slides show the progress we have made us an organization in moving towards our aspiration of being one of the top-quartile performers in our peer group.

  • They also reflect some of the missed opportunities that came about because of our 2014 focus on partnership integration. We made a conscious decision that the successful integration of these banks was a higher priority than some of the projects we had identified as keys to improving our operating efficiency.

  • This decision was based on our core belief that our shareholders are best served when we effectively balance short-term priorities with our commitment to provide long-term value. An unsuccessful bank integration is very difficult to recover from, and the negative effect on shareholders can be significant. Delaying projects which because of prioritization, while frustrating to all of us, has a very short-term impact, especially if we are able to move quickly towards implementation of those projects, which we believe we have, as evidenced on slide 28.

  • The headline on slide 28 reflects the theme for Old National in 2015: Execution is indeed key. We strongly believe that the actions that we have taken in the preceding years have positioned us very well and that we are a very different bank than we were in the past. The time is now to move beyond building a franchise and let our actions and results speak for themselves.

  • Slide 28 reflects a summary of the actions that we have taken to date. But I can promise you this: we will continue to be driven by the mantra that execution is key.

  • I have broken the summary of our actions into the three key strategic focuses our Board has approved for 2015. These focus areas all revolve around the key elements of our basic bank strategy.

  • Our first initiative is to continue to drive organic revenue. We are blessed with a strong banking platform and three strong fee-based businesses.

  • In the past, they've operated very well independently, and we've had good crossover referral business. For 2015, we believe that, given the current rate forecast, we need to further enhance our cross-sell culture and leverage our fee-based businesses even more.

  • With this in mind, our four business leaders have developed a cross-sell referral program that we believe will significantly enhance our culture of teamwork. Plus, to ensure that we are asking for is in fact happening, we have enhanced our balance score cards to put more focus on this cross-sell effort. We will continue to reinforce the need to work together at every opportunity.

  • We talk a great deal about leveraging the new markets we have entered over the past few years. We speak about the enhanced demographics and growth. But we also have an opportunity to leverage the expertise that we have gained through these partnerships.

  • A great example is our mortgage business, where we believe we may see an increase over 100% in originations because of the platform and expertise that United Bank brings to us. A similar product line is the small business expertise that United brought to Old National. Our current pipeline of over $40 million in SBA loans is equally divided among the former UBT markets and the balance of the legacy ONB markets.

  • Our health savings account platform that we acquired from Tower has seen a 30% increase in total accounts since the completion of our integration.

  • One area of focus for ONB over the years has been on improving our efficiency ratio. While we have made progress, we are not where we want to be; and again, that is why our focus on execution in 2015 is so important.

  • Our Board has set a target of 63% for our fourth-quarter 2015 efficiency ratio. In addition, we have increased the weighting in our short-term incentives from 15% to 25%, to reinforce the very importance of achieving the 2015 target.

  • Last week we announced a number of actions that, taken together, should reduce our annualized expense run rate by $23 million to $27 million. We estimate that all of these actions will be completed by the middle of the third quarter.

  • To a large extent these announced actions are a continuation of the transformation of our franchise. The sale of both our Southern Illinois offices and portions of our Eastern Indiana and our sole Ohio market reinforces our desire to be in locations with better demographics and stronger overall economies.

  • In addition, through our normal branch evaluation process, we have determined that the financial returns of 19 of our Banking Centers did not meet our hurdle rates. So we will consolidate those branches into other facilities within the trade area.

  • We believe these actions, when coupled with the announcement of an early retirement program, should allow us to achieve our targeted fourth-quarter efficiency ratio. I would mention that a number of these actions have been in the planning process for a while, and their implementation was delayed by our merger/integration activity. Our current estimates shows that the gain on the sale of the two markets I identified should be sufficient to offset the cost associated with the balance of our actions.

  • Finally, our third strategic focus is on the prudent use of capital and providing the best return for our shareholders. Last week, as Chris mentioned, our Board approved a 19% in our dividend -- a 9% increase in our dividend and reiterated our stock buyback program. Both of these actions show the Board's support for returning value to our investors.

  • Molly, at this time, we'll be happy to open the lines and take questions. Thank you very much.

  • Operator

  • (Operator Instructions) Scott Siefers, Sandler O'Neill.

  • Bob Jones - President, CEO

  • Scott, if nothing else, you are consistent.

  • Scott Siefers - Analyst

  • I try, I try. You see me pounding star-1 in here. Hope you guys are doing well. Let's see.

  • I guess the first question was on the cost-savings program, Bob. The $23 million to $27 million that you noted in your remarks here, will that all drop to the bottom line, or is some portion of that going to be reinvested? How are you thinking about that dynamic?

  • Bob Jones - President, CEO

  • Well, right now, I would just focus on that 63% efficiency ratio. I would say, Scott, the majority of that will just come to the bottom line in order for us to achieve the 63%.

  • As we go through the year and we see opportunities to invest in markets like Louisville or Indy or Fort Wayne, as I identified, we're certainly going to take advantage of that. But we are keenly focused on that 63% by the fourth quarter.

  • Scott Siefers - Analyst

  • Okay, perfect. Thank you. And then maybe for you, Bob, or Jim Sandgren, just the loan growth outlook. From what you're saying, I gather you feel pretty good about the organic growth trends. You had a little bit of a step back in the fourth quarter, but it sounds like it was largely those payoffs that were unexpected.

  • So just wanted to get a sense for -- I guess a little additional color for how you are thinking about things out as we look into 2015. Can you get back to that mid or even higher single-digit organic annualized growth rate?

  • Bob Jones - President, CEO

  • I believe we can. Obviously, the stars and the moon and everything have to align. As Jim noted in his remarks, we had a couple of businesses that sold. We can't predict that; those things tend to always happen in the fourth quarter.

  • And the other example Jim used, which was the insurance company on a CRE deal, I think it's a good example of the discipline that we've put in place. Which is it'd've been easy to try to compete with a nonrecourse very low-rate deal, just for the fact of keeping the outstandings. We chose to walk, just saying it just doesn't make sense.

  • But given the pipeline, given the markets, I'd be disappointed if we didn't get to the levels that you mentioned.

  • Scott Siefers - Analyst

  • Okay, great. That's perfect. Thank you very much.

  • Operator

  • Emlen Harmon, Jefferies.

  • Bob Jones - President, CEO

  • Morning, Emlen. How you doing?

  • Emlen Harmon - Analyst

  • Morning. Doing well, thanks.

  • Bob Jones - President, CEO

  • Good. You surviving the storm?

  • Emlen Harmon - Analyst

  • Yes. This one is not too bad. Everything has pretty much let up at this point, but --

  • Bob Jones - President, CEO

  • Low 50s and semi-sunny here in Evansville.

  • Emlen Harmon - Analyst

  • That's funny. Sunny, sunny Evansville, huh? Sunny, balmy Evansville.

  • Just going back to the branch closures, outside of profitability, is there anything thematic to those closures? It seems like they are scattered about geographically. I'd just be curious if there any shifts in strategy, or if this is just purely a profitability analysis.

  • Bob Jones - President, CEO

  • It's a little of both. Clearly it's driven by profitability, but it's also the market demographics. In a lot of cases, these are legacy branches where transactions have moved, or we've acquired other branches or other markets. So you weigh that.

  • We actually look at three different components as we look at this. We stack-rank our branches on a frequent basis, and Jim's always going to take a hard look at that bottom 10% to 15%.

  • Again, profitability is a large component. Market demographics, transactions, originations are another large component of it as well. But I think it's just the prudent thing to always not be wed to any particular branch or any particular market and do what's right for the long term.

  • Emlen Harmon - Analyst

  • Got it. Okay, thanks. Then just on the acquisitions that you've closed, could you actually quantify for us just what's in the run rate for cost saves and what's still on the come there?

  • Bob Jones - President, CEO

  • Yes, I might reference you back to Lynell's slide that shows where we are with each of those transactions. Chris, maybe you've got some documents there. Maybe you (multiple speakers)

  • Chris Wolking - Senior EVP, CFO

  • Yes, Bob. I'll pass that to you.

  • Bob Jones - President, CEO

  • That was called the bump and run. I bump it to Chris and he bumps that right back to me. So --

  • Chris Wolking - Senior EVP, CFO

  • And I would add, as Bob is looking through those numbers, we are on track and we've always been successful to the plus side on some of these expense saves. So our outlook certainly for 2015 is to see that same kind of expense reduction that we've seen with the other branches, both with Founders and LSB and everything tracking well.

  • And I might note that, as Bob noted, we added a really nice mortgage origination unit with the United transaction that we expect to contribute in 2015, too.

  • Bob Jones - President, CEO

  • Thanks for that, Chris. Emlen, Tower we announced 35% in cost saves. We closed that in April; the vast majority of those are already in our 2014 run rate.

  • You'll pick up just a little bit in the first quarter. But I would say for your purposes of modeling those are all included in our current fourth-quarter run rate. The changes will be negligible.

  • Closed on United in August. We committed to 32%. I would say we are probably three-quarters of the way through those; probably got 25% of those yet to come.

  • On the one slide we broke out what's there. Again, we had a full quarter of United this quarter versus the stub period last year.

  • Obviously, both LSB and Founders are yet to be had. Cost savings coming out at the Lafayette are 40% and Founders 30%, and we feel very, very comfortable with those.

  • Emlen Harmon - Analyst

  • Got it. Right. It was really two deals and not four; I mis-asked there. But thank you. That was very helpful. Thanks.

  • Operator

  • Chris McGratty, KBW.

  • Chris McGratty - Analyst

  • Hey, good morning, everybody. Bob, on the capital, you guys started repurchasing some stock. Can you speak to the outlook for buybacks, given your comments that you are a little bit below peer levels on tangible? Maybe remind us, Chris, what the targets are on tangible and how aggressive we should be thinking about the buyback for the next few quarters.

  • Chris Wolking - Senior EVP, CFO

  • Well, we've got the announced buyback that we talked about on the last call, 6 million shares. And we've got about -- a little over 1 million behind us in that buyback. That buyback is authorized by the Board through January of 2016.

  • Like I said, we were pretty successful in the first quarter. I don't expect that we'll see many changes to that going forward. It's a good capital plan.

  • Of course, the dividend increase -- in terms of targets for these numbers, Chris, I really choose to look at the risk on our balance sheet, particularly with credit. And as you can read between the lines from Daryl's presentation, the loan risk has been very well managed and even in the face of some pretty good growth.

  • And we also think in terms of the stress-testing results. We are working through our stress testing, and using that as an appropriate outlook to help the Board understand what the long-term risk is and how our bank would react to the various economic environment scenarios that the Fed puts out.

  • So I tend not to have a hard and fast target, but it tends to be a little bit more fluid on a quarterly, quarter-to-quarter basis as we look at loan growth and think about the portfolio and those kinds of things. With the new acquisitions and the growth that Jim talked about from loans, I think it's important for us to stay pretty nimble.

  • Bob Jones - President, CEO

  • Yes, Chris, I would just add, I think my -- Chris made a very relevant point, which is if you look at our balance sheet from a credit standpoint and you look at our history of charge-offs and the granularity of our portfolio, while we may be slightly below peers, we would argue that we are a less risky balance sheet than a number of our peers.

  • Then second, as far as the buyback, obviously a lot of that depends on the stock price, because we also look at the performance of the price to whether we're going to buy back stock or not. So a lot of it rests on your shoulders, on how well you write us up after this call.

  • Chris McGratty - Analyst

  • That's a lot of pressure.

  • Bob Jones - President, CEO

  • Trust me. You have no idea.

  • Chris McGratty - Analyst

  • Just one follow-up on the last bullet in the slide. I've got to ask, Bob: the "pause means pause." It's a new comment.

  • But help us get inside the thinking of the Board and the management. Does this meaning under no circumstances in 2015 would you do a deal? Or is it that's the base case, and if something comes along you'd considerate it?

  • Bob Jones - President, CEO

  • Well, I think what I have said all along -- you never say never. I think we've earned the right to be very selective in the markets and the partners that we would look at.

  • I would not anticipate any activity in the next few quarters. Obviously, I think given the platform we've built and our ability to get deals approved -- you know, our last deal got approved in 10 days -- and our ability to integrate, which is so important, we are going to have opportunities. But I think we've earned the right to be selective.

  • And we also know, painfully know, that we've got to execute, hit the numbers. That 63% efficiency target in the fourth quarter is very important. So to do a deal that would deviate me from doing -- achieving that isn't going to happen.

  • Do I want to be larger in certain markets? Sure.

  • But I don't wake up every day and worry about where I need to be. I worry now more about executing and driving up our share price.

  • Chris McGratty - Analyst

  • Understood. Maybe this is the last question for Jim. I think if I heard you right in your prepared remarks, Jim, you talked about -- I think the word was challenges in Fort Wayne and Ann Arbor. I noticed that the loan balances, to your point, were kind of flat.

  • But is there anything else to read into that comment? Has there been any talent either lost, or market share gains that you were planning on that didn't occur? Any kind of color from that comment would be great. Thanks.

  • Jim Sandgren - EVP, Chief Banking Officer

  • Sure. No, really everything in those two markets is going as expected. We've got our full team up at Tower and those guys are doing a great job working the markets and growing that pipeline, as we reflected on that slide.

  • The Ann Arbor team, they are just -- there are some structural challenges Daryl alluded to, the competitive nature. And sometimes we can get comfortable with structure; sometimes we can't. So we've had to walk away from a couple deals.

  • But, no, we're really pleased with both Fort Wayne and Ann Arbor and expect some great things in 2015.

  • Bob Jones - President, CEO

  • You know, Chris, what we don't do on those markets is we don't break apart what we would call legacy portfolio with the portfolio that -- there is identified credits from day one that we want to exit. Those are included in those numbers.

  • So we are, I would say, on both the growth of a legacy portfolio and the reduction of the exit portfolio, we are on track to where we thought we would be. So as good a job as Daryl does sometimes masks the good job that Jim and his team do.

  • Chris McGratty - Analyst

  • All right. That's helpful. Thanks.

  • Operator

  • Andy Stapp, Hilliard Lyons.

  • Bob Jones - President, CEO

  • Welcome, Andy; we're glad to have you.

  • Andy Stapp - Analyst

  • All right. Thanks; good morning. Do you have the -- what were you expecting for the effective tax rate in 2015?

  • Chris Wolking - Senior EVP, CFO

  • As we move into 2015 and as our mix of taxable income increases through the great loan growth we've had and that kind of thing, I'd expect it to march up just a little bit. GAAP tax rate probably over the 27%; maybe 28%.

  • And the fully taxable equivalent rate I think in the 36% range. One thing that we haven't seen is major declines in our tax bill, particularly as we move into a higher percentage of taxable income overall.

  • Andy Stapp - Analyst

  • Okay. How are you thinking about possible runoff with regard to the branch consolidations?

  • Bob Jones - President, CEO

  • I hate to say we're good at it, but we've had a long history, if you look at our transformation line graph. We estimate we will retain the vast majority of these deposits. The locations are close to very close.

  • We think the legacy that we've built with these clients -- and the fact we've seen where their behavior changes, so if you're modeling, I wouldn't build a whole lot of attrition in. In fact, given some of the new products, we're fairly optimistic we can retain the vast majority.

  • Andy Stapp - Analyst

  • Okay, thank you. That's -- the rest of my questions were asked and answered.

  • Operator

  • John Moran, Macquarie.

  • John Moran - Analyst

  • Hey, a quick question just on the longer-term efficiency ratio or operating leverage targets. Once we hit the 63% in the 4Q of this year, looking into 2015 if we get a little bit of help from rates, and assuming everything else stays the same -- that pause means pause on the M&A front and everything else -- what kind of operating leverage do you really think you could drive longer term? And where do you think the efficiency ratio (multiple speakers)?

  • Bob Jones - President, CEO

  • It's a great question, John. I would tell you, our Board asked me that question; our finance committee in particular is keenly focused.

  • I've often said, given the breadth of our franchise, we are not a sub 60%, but we should be very close to 60%. So I can guarantee that when -- I guess I can't say when. But should we hit our 63% efficiency in the fourth quarter, I know our Board will ratchet that number down and will agree, possibly. Because we think the run rate coming out of the fourth quarter really gives us momentum into the 2016.

  • So we'll be below 63% and then we'll get closer, and you go from there. But obviously, we've taken a longer approach to this, but we think it's a sustainable one.

  • John Moran - Analyst

  • Okay, that's helpful. Then the only other one that I had -- and you guys gave some of this in the prepared remarks. But just maybe if we could get a little bit of help on what's going on with respect to core loan yields.

  • I know -- I think Chris mentioned 12 basis points last quarter, help from some NPLs coming back in. But maybe if you could give us a sense of where new deals are being booked today.

  • Bob Jones - President, CEO

  • Yes. For the -- I'll give you it by category. Our commercial CRE was about 3.5% to 3.6% in terms of a yield in the fourth-quarter production. Commercial is slightly below that at just under 3%.

  • The consumer portfolio is about 2.60% in terms of yields and origination. The mortgage book is just a little different; our mortgage book is closer to 4%.

  • John Moran - Analyst

  • Can I ask a stupid one?

  • Bob Jones - President, CEO

  • Sure.

  • John Moran - Analyst

  • What drives your mortgage book higher than -- 4% in the quarter would be a little bit higher than I would guess.

  • Bob Jones - President, CEO

  • I think it's driven a lot by our markets and the competitive area that we are in, in certain places, and the fact that in certain markets we're a market leader.

  • Chris Wolking - Senior EVP, CFO

  • We don't retain a large percent of that portfolio.

  • Bob Jones - President, CEO

  • We don't retain a lot. So remember, John, the number I gave you is those ones that will sell. But again, we don't retain a lot of that; so it's driven there.

  • John Moran - Analyst

  • Got it. Got it, right. Okay, thanks very much. That's helpful.

  • Operator

  • Stephen Geyen, D.A. Davidson.

  • Stephen Geyen - Analyst

  • Jim, maybe I'll start with you. Maybe just -- I think I might have asked this question a quarter or two ago about the pull-through of loans in the pipeline. Now that you're a few more quarters into growing the pipeline, growing loans on the balance sheet, can you talk about the pipeline and the success there?

  • Jim Sandgren - EVP, Chief Banking Officer

  • Yes. We've actually done some research, and we are changing the way we do the pipeline going forward just from a reporting standpoint. But if we looked at 2014, it looks like the pull-through rate was between 35% and 40% of deals that actually hit the pipeline.

  • Stephen Geyen - Analyst

  • Okay, perfect. That's the -- I got to look at the chart here; but that is the -- let's see. The number -- there is a couple different buckets in the pipeline. I just want to make sure that we are talking about the same number.

  • Jim Sandgren - EVP, Chief Banking Officer

  • Yes. That would be the total pipeline. So you've got the three categories.

  • The dark blue is -- those are in a discussion phase; those are at the very beginning stages of a discussion with the borrower. But there is a deal there, and typically we put a deal on the pipeline if we think there is a 50-50 chance of getting a deal done. Obviously, a lot of components from structure, competitive nature, and then credit go into that.

  • The light blue shaded, the proposed stage, obviously we have provided a letter of intent or a proposal letter to our customers. And then the accepted bucket at each category there, those deals have been approved by credit and the borrower has accepted our terms.

  • Typically that last bucket, the majority of those deals, 90%, 95% of those deals get done. And then, obviously between discussion and proposed, obviously a little lower level. But the overall pull-through for the total pipeline is that number I gave you initially, kind of 35% to 40%.

  • Stephen Geyen - Analyst

  • Perfect, okay. Thank you. As far as the seasonality, first quarter is typically a little bit weaker than some other quarters. Do you expect that to be the same in 2015?

  • Jim Sandgren - EVP, Chief Banking Officer

  • Yes. I'm encouraged because we are coming out of the gates with just an incredibly strong pipeline, so I'm optimistic. Obviously you got weather, you got a lot of things that do impact that first quarter. But based on the direction of the pipeline and the fact that our guys are really out hitting the streets hard, I'm encouraged by what I see.

  • Stephen Geyen - Analyst

  • Okay. Daryl, you had mentioned some weakening in terms. Just curious how prevalent that is.

  • Daryl Moore - EVP, Chief Credit Officer

  • Stephen, it's pretty prevalent. We are seeing that pressures to limit guarantees, extend terms, covenants not as robust -- so I would say probably 50%, 60% of the deals we're looking at, our borrowers are sophisticated or in tune enough to know that the landscape has changed.

  • It's very different than it was four or five years ago. And we obviously take a look at the total risk and know that we're going to have to do some of that in the market. But it's virtually -- in many of the deals, we are running across those issues.

  • Stephen Geyen - Analyst

  • Okay. Any thoughts on the proverbial line in the sand? At what point does it become -- or is it in some cases impeding growth?

  • Bob Jones - President, CEO

  • I'll answer that, as kind of the arbitrator between Jim Sandgren and Daryl. (laughter) Obviously, Stephen, given our conservative credit culture, it does present challenges. And that's one of the biggest issues as we bring on our partner banks.

  • But we've always taken a view that you need to do originations based on the long term, and we are just not going to compete with stupidity. So I would prefer to walk than be stupid. It will slow us down a little bit, but I think you offset that with 8 basis points of charge-offs.

  • Stephen Geyen - Analyst

  • Yes, okay. Thank you. Chris, I apologize; I missed a couple of different comments on the NIM. If you could go over the numbers just real quickly again, the impact of the NIM this quarter related to the credits; and then -- okay, thank you.

  • Chris Wolking - Senior EVP, CFO

  • No, no, I'm sorry, Stephen; I didn't mean to jump in. There was obviously two impacts.

  • One was driven largely by the success or the difference in third-quarter and fourth-quarter impact from recoveries specifically around the Integra asset. If you think about the impact from recoveries on the Integra asset, that's largely offset by an increase in IA amortization. But that went from 4.78% to 3.38% (sic - see slide 11, "3.83%); so that was -- the reported margin was largely driven there.

  • On the core side, we had some -- in our core margin, we also had that which we had recovered for nonaccrual assets that had been fixed -- either remediated or moved out of the bank. That was a little bit lower both in the third quarter and what I had anticipated in the fourth quarter.

  • But that can move around a lot, and especially as you might see from -- understand from Daryl's comments, we're in the stages where some of those credits could be healed or could be moved out, given changes in collateral values and things of that sort.

  • Now the element that probably was more important from my standpoint are the decisions that we actually made in that fourth quarter around rate sensitivity. We did extend some of our wholesale funding, and we did make the decision to reinvest cash flows into shorter-maturity investments or sell some of our longer-duration investments, which is typically in our (technical difficulty).

  • You'll see in the appendix that the duration of our investment portfolio declined quite a bit in the fourth quarter; and, of course we also increased -- lengthened the refunding of our wholesale funding book. So purposeful transactions to give up some current build with the idea of positioning ourselves a little bit better for rising rates.

  • So that brought that core margin down to around the 3.15% range.

  • Stephen Geyen - Analyst

  • Okay. Just curious when those adjustments in the balance sheet and the mix of the assets changed in the quarter. Do you kind see that fully in, as far as what to expect for first quarter?

  • Chris Wolking - Senior EVP, CFO

  • Yes, spread out for the quarter. I'd expect that if we were just looking at, for example, the portfolio yield, that might have an impact of a couple of basis points on our first-quarter margin. But I feel very comfortable with our current rate position, sensitivity to rates.

  • And as Jim mentioned, the investment -- or pardon me, the loan portfolios, - we've got a nice pipeline. And, as Bob noted, the yields on those new assets are coming in pretty nicely. So we could have some offset from some of that portfolio decline, but I'm trying to take a fairly conservative approach to my outlook.

  • Stephen Geyen - Analyst

  • Okay, thank you. Maybe Bob, just one question. You had mentioned the United mortgage business, the platform, as being pretty attractive and potentially additive in 2015. What's different about that platform versus what you had had previously, and how does it help you?

  • Bob Jones - President, CEO

  • So when you say "pause means pause" you've got to give your head of Corporate Development something else to do. So we've actually moved the mortgage company under Jim Ryan; so I might just have him answer that question.

  • Stephen Geyen - Analyst

  • Okay, thank you.

  • Jim Ryan - EVP, Director Corporate Strategy

  • Stephen, I'll just add that both United -- and I would add the Founders team in the same respect -- clearly the origination staff really is really good in this kind of environment by pulling deals out in a more purchased world. Where I think our -- we tend to rely on the bank referral relationships historically, and had a lot of refinance activity; so we did well in those kinds of periods of time.

  • So really a more focused sales effort I think will help us. We retained the servicing book from United as well, and so we think the combination of strong origination group and the ability to service those loans I think will make a good combination going forward.

  • Stephen Geyen - Analyst

  • Great, okay. Thanks for your time today.

  • Lynell Walton - SVP IR

  • Stephen, since you brought up the net interest margins, just for those of you who grabbed the slides from the webcast, I just wanted to remind you and apologize: the values on a few of those columns were not there. They are negative 12 basis points, negative 3 basis points, and negative 2 basis points; so again I apologize for that posting on our webcast.

  • Operator

  • Eric Grubelich, Highlander Fund.

  • Eric Grubelich - Analyst

  • Hi, good morning. Just had a couple follow-up questions on the branch sale and the branch consolidation. Just how -- what's the total deposit size of the 19 centers that you plan on closing?

  • And then with regard to what you're going to sell, how do you plan on finding the mismatch between the deposit liabilities and the loans that are being sold? Is it just going to come out of the securities portfolio?

  • And maybe just as a third question, is there any kind of optical impact on the net interest margin we should consider in the next couple of quarters?

  • Bob Jones - President, CEO

  • The answer to your last question is really no from the sale or the consolidations. We don't see -- I think Chris will be able to match that pretty nicely through the investment portfolio on what we give up.

  • Our total deposits are about $360 million from the consolidations, spread out pretty evenly through markets. It's about -- we have about $19 million in average size per branch; and just through these consolidation we get very close to a $50 million per-branch average deposit.

  • Eric Grubelich - Analyst

  • Okay, great. Thanks very much. So you -- the funding of the branch sale, though?

  • Chris Wolking - Senior EVP, CFO

  • Eric, this is Chris. We have so many alternatives because we get $40 million, $50 million in retirements, the investment portfolio, plus we tend to have some very short investments out there in anticipation of needing to make those decisions. But we'll continue to manage that going forward in a way that makes sense from the current rate environment.

  • And in terms of when we expect these things to happen, midyear, we feel like we've got some time. And we will continue to do that.

  • But as Bob mentioned, at this juncture we'd probably anticipate maintaining the balance sheet the same size. We've got plenty of funding sources, of resource (multiple speakers)

  • Eric Grubelich - Analyst

  • Okay. Thanks very much.

  • Operator

  • Jon Arfstrom, RBC Capital Markets.

  • Jon Arfstrom - Analyst

  • Good morning. Couple questions here. In terms of the growth expectations for 2015, how much of it do you expect to come from consumer? Do you expect a similar type contribution? Or is this -- are you in a situation where you think the new markets are going to pull a little bit more in the coming year?

  • Bob Jones - President, CEO

  • Yes, I think they will, Jon. I'd be disappointed if they didn't. I think with the entry into the markets we've done with Fort Wayne, Lafayette, Ann Arbor, others, I think you'll see more commercial.

  • I think the growth was a little bit muted or affected in the fourth quarter by, as Jim said, some of those unique aspects. But I think indirect will more than likely stay fairly strong through the balance of the year; but I expect our commercial side to outpace the growth there.

  • In terms of direct consumer, that business is probably -- it is what it is. And then again the mortgage, - we sell most of those.

  • So I think you'll see a little more increase in the commercial side overall. The consumer is obviously going to be affected in a positive way by lower gas prices as well, so that's why I think the indirect business stays fairly strong through 2015.

  • Jon Arfstrom - Analyst

  • Okay, good. Couple more things. Slide 1 you talked -- you showed the Michigan/Northern Indiana pipeline up quite a bit. That's the BofA branches. That's just the factor of not having lending in the branches, and that's come into the branches; is that the way to look at it?

  • Bob Jones - President, CEO

  • Well, it's really -- I would also tell you we've hired some great commercial lenders up in those markets. Phil Harbert, who we hired, had been at his prior employer 30-plus years; had a great reputation. We hired three other RMs that have great reputations in those markets and came from banks that had -- so we are seeing some very, very good commercial activity.

  • In fact, I was helping them with a potential client just in the last couple weeks, and the client couldn't say enough great things about our team on the commercial side. So again, almost to the prior point, I think you'll see consumer do well in those branches; but I'm very, very optimistic on the commercial side with the leadership we've got up there now.

  • Quite frankly, that might be a market over time that we might invest in, much like Grand Rapids, Ann Arbor, add some additional RMs. Because we are seeing some volatility, given all the actions going on in Southwest Michigan now.

  • Jon Arfstrom - Analyst

  • Okay, a couple more. Just LSB and Founders, you talked about the marks coming in a little bit better. Is that a function of time has passed and the credit is a little bit better? Or is it just you thought you were too aggressive on the marks in the beginning -- or a combination?

  • Bob Jones - President, CEO

  • Remind everybody, the first mark comes from Daryl (laughter) and I have always encouraged Daryl to do what Daryl does great, which is to make sure that we are covered. So obviously as you deliver that first message, you continue to see economies change and other things happen, which improved the mark.

  • But that first mark is very accurate, based on our credit culture. You then work through a number of credits over a period of time, and the economy helps cure things.

  • But the original mark is accurate, and over time we're allowed to work out -- we have the ability to work through some of those.

  • Jon Arfstrom - Analyst

  • Okay, good. Then, Chris, just one small one for you, the indemnification asset down to $20 million. I'm assuming far less excitement in 2015 than 2014 in terms of that. Is it just a simple glide path on that and it slowly melts away? Or anything else to think about?

  • Chris Wolking - Senior EVP, CFO

  • I like your term excitement. Yes, it's been something obviously we watch very, very closely. We're very pleased that that number is where it is today, and we wouldn't expect, obviously, the same kind of volatility that we've had on a quarter-to-quarter basis related to those expenses.

  • And fortunately there's just not that much of it, only have $20 million with roughly $9.5 million of that expected to be amortized. So looks pretty good.

  • Jon Arfstrom - Analyst

  • Okay, good.

  • Bob Jones - President, CEO

  • Jon, only finance people would get excited with indemnification asset amortization. (laughter)

  • Jon Arfstrom - Analyst

  • Yes, it's a lot of fun. Okay. Good. Thanks for everything.

  • Bob Jones - President, CEO

  • It's the highlight of our Controller's life.

  • Jon Arfstrom - Analyst

  • Thank you.

  • Operator

  • Peyton Green, Sterne, Agee.

  • Peyton Green - Analyst

  • Good morning. I was wondering maybe if you could talk a little bit to the revenue associated with the branch closures and the divestitures.

  • Bob Jones - President, CEO

  • Yes, I think as you are building your models and you're looking at the revenue associated with the closures, I wouldn't adjust your models much. Given the size of these branches, the locations, I just don't see much impact.

  • Relative to those sales, given the timing of the sales, what I'd tell you for modeling is focus in on that 63% in the fourth quarter, and I don't think you'll see much change over that period of time.

  • Peyton Green - Analyst

  • As you look at the closures and add the divestitures, what was the -- was there a positive pretax contribution, or was it a loss?

  • Bob Jones - President, CEO

  • It's a positive, but (technical difficulty) fully allocated. Because I wouldn't say we are great at allocating everything against certain markets. I will tell you that the trend line in the markets we are selling was not positive, and I think that's one of the key points we looked at, and just the overall economic growth.

  • And quite frankly, in Southern Illinois, given our focus now in Indiana and Michigan, having them partner up with an Illinois bank will be very positive for them and for those markets.

  • Peyton Green - Analyst

  • Okay, great. Thank you very much. Appreciate the color.

  • Operator

  • Currently we have no further questions. I'll turn the conference back over to management for closing remarks.

  • Bob Jones - President, CEO

  • Well, great. As always, we appreciate everybody's interest and time. We realize we have a lot of information this quarter, though again that's kind of becoming the norm for us.

  • But follow-up questions, give Lynell a call at 812-464-1366, and we'll get right back to you. But again, we thank everybody for their time and attention.

  • 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, OldNational.com. A replay of the call will also be available by dialing 855-859-2056, conference ID code 69616583. This replay will be available through February 15.

  • If anyone has any additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation on today's call.