Old National Bancorp (ONB) 2015 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Welcome to the Old National Bancorp second-quarter 2015 earnings conference call. This call is being recorded and has been made accessible to the public in accordance with the SECs 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 1 PM Central Time on July 27 through August 10. To access the replay dial 1-855-859-2056, conference ID code 81832621.

  • 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. Ms. Walton.

  • Lynell Walton - SVP & Director of IR

  • Thank you, Lori. Good morning and welcome to Old National Bancorp's second-quarter earnings conference call. Joining me today 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 on this 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 results. Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentation.

  • We are very pleased with our results in the second quarter. Please turn to slide 5 where I will begin at the discussion of our positive second-quarter performance. With the Founders integration completed in April we were able to turn our full attention to the business of banking. Our loan balances increased over $120 million or 7% annualized from the first quarter.

  • We did not acquire any loans during the quarter, so this growth is entirely attributable to new production in both our legacy and newly acquired markets.

  • We were also pleased with the improvement in our operating leverage. Our efficiency ratio, adjusted to exclude acquisition and divestiture charges, benefited from both improvement in our fee-based business revenue as well as a decline in our operational expenses.

  • We consolidated 19 branches in the first half of the year and are on track to close on the sales of an additional 17 branches in mid-August. These actions are a logical step in our transition to higher growth markets and, as Chris will explain, should result in significant cost savings.

  • The prudent use of capital remains a priority for us and we did repurchase 1.9 million shares during the second quarter. This completed our original 6 million stock authorization. Just last week our Board of Directors authorized the repurchase of an additional 1 million shares through January 2016.

  • Finally I'm pleased to report that Old National earned $26.2 million, or $0.22 per share, for the second quarter. These results represent a 22% increase in earnings per share over the first quarter of 2015.

  • As we move forward we will focus our comments on more recent periods as we believe they are relevant now that our integrations are behind us.

  • On slide 6 we have included a few other metrics that further demonstrate our positive momentum. Excluding acquisition and divestiture charges, our earnings per share showed a nice improvement over the second quarter of 2014. Our return on assets was 1% and our return on tangible common equity, a very respectable 15.7%.

  • With that overview I will now turn the call over to Jim Sandgren to provide more details.

  • Jim Sandgren - EVP & Chief Banking Officer

  • Thank you, Lynell, and good morning, everyone. As Lynell touched upon in her opening remarks, one of the major headlines for the second quarter was our success in producing solid learn growth and I will provide more detail about these results in my comments.

  • The quarter was also punctuated by continued strong commercial pipeline numbers and positive momentum in our fee-based businesses led once again by our Mortgage business.

  • If you will turn to slide 8, I would like to start by focusing on loan growth for the quarter. This slide depicts end of period balances and, you can see from the bar graph on the right, our associates generated $120.7 million in loan growth for the quarter.

  • These encouraging results are 100% attributable to the hard work of our motivated associates working with clients and prospects within our footprint as opposed to driving growth through partnership activity, syndicated deals, participations or the purchase of loan portfolios. Really just standard blocking and tackling per our basic bank strategy.

  • Commercial and industrial and commercial real estate lending accounted for $75.4 million of these gains, while consumer lending, primarily indirect, generated $56.5 million in new growth. A very strong June providing an excellent push to help us achieve the 7% annualized loan growth for the quarter.

  • While we enjoyed good loan growth in a number of our markets, a few that I would like to highlight are Indianapolis where we produced $25.3 million in total growth; Kalamazoo, Michigan with total growth of $22.7 million; and the Louisville region, which includes our new Lexington satellite office, where we experienced total loan growth of $21.1 million.

  • Bob will talk more about our early success and the great momentum that we currently have in Lexington in his comments later in the call.

  • Moving to slide 9, you can see on the graph on the left that commercial loan production was up $150 million from $227.8 million to $378 million or 66% over first quarter 2015. The average new loan originated in the quarter was less than $400,000 which is a reflection of the granularity of our commercial loan portfolio.

  • Also as indicated on the slide, you can see that approximately 45% of our quarterly production was to new loan customers, which is a direct result of the ongoing aggressive calling efforts by our commercial relationship managers.

  • The graph in the middle of slide 9 shows the continued positive movement of our commercial loan rates. Our second-quarter yield of 3.37% on new production is a 14 basis point increase over first-quarter 2015 yield of 3.23% and represents three straight quarters of yield growth.

  • We also experienced a reduction in payouts from Q1 to Q2 with $165.5 million in second-quarter payoffs compared to $176.5 million in quarter one.

  • Moving to the graph on the right, I would like to focus on the continued strength of our commercial loan pipeline. As depicted by the middle bar, our first-quarter 2015 pipeline numbers established a new high water mark for our organization, which was actually a continuation of strong momentum in our pipeline dating back to third quarter 2014.

  • I am pleased to say that our commercial team continues to do an outstanding job of producing new business opportunities and the cooperation and collaboration we have between our lending and credit teams is paying off as we've been able to move many of these loans from discussion into the proposed and accepted categories. This success is demonstrated in the bar on the right of the commercial loan pipeline graph.

  • As of July 3, 2015, our pipeline was at $740 million with $232 million of that in the accepted category and another $210 million classified as proposed. In these two most important categories we assume a 21% increase quarter over quarter and a 144% increase year over year.

  • Overall I believe the strong commercial pipeline results continue to illustrate that our growth market strategy is working with the right people in place in the right markets.

  • Slide 10 illustrates the continued positive momentum of our fee-based businesses. When you subtract first-quarter contingency revenues from our Insurance results you can see that we enjoyed quarterly gains on all four business lines.

  • Due to the continued growth in assets under management, now $8.029 billion, we saw our Wealth Management revenues increase over 10% from $8.5 million in Q1 to $9.4 million in Q2. We had some sizable new relationships that funded late in the first quarter and early second quarter, including the single largest account in our Wealth Management group's history.

  • Our Insurance division also continued on a positive course. If you back out first-quarter contingency income revenue grew slightly from quarter one to quarter two. We had a couple of nice wins from a new revenue perspective as a result of referrals from Retail Bank Associates.

  • Additionally, we had a large number of June 30 renewals and I'm pleased to report that we retain nearly 100% of these accounts in spite of fierce competition for these Insurance clients.

  • Our Investments line of business is up 14% year to date through June. A catalyst for this growth is the success of our recurring revenue or fee-based business which now accounts for over 40% of total Investments revenue.

  • We also ended the second quarter fully staffed with 50 full-time advisors and I'm very proud to report that our team now ranks number four for revenues produced out of over 700 banks and credit unions that utilize LPL as their broker-dealer.

  • The increase in second-quarter revenue in our Mortgage business reflected a strong increase in quarterly production. Mortgage loan production in the second quarter was up over 54% to $181 million compared with $126 million in first quarter 2015. And we continue to be very excited about the possibilities for future growth in cross sell opportunities in this important line of business.

  • All four business lines clearly are benefiting from the cross sell referral program for associates that we launched back in February. More than 22,000 referrals have been submitted and these results have our sales force and support associates highly energized and collaborating like never before.

  • In closing, the second quarter saw Old National deliver on promising first-quarter pipeline numbers with meaningful loan growth while also continuing to expand our fee-based business revenue. I think these strong results reinforce our plan to slow down on the acquisition front.

  • This defined pause has allowed our sales associates to place all their focus on taking care of their customers, calling on prospects and ultimately driving more revenue which we did in the second quarter and plan to do for the balance of 2015 and beyond. With that I will now turn the call over to Chris.

  • Chris Wolking - Senior EVP & CFO

  • Thank you, Jim. You know after 40 quarters of speaking after Bob and Lynell on these calls, it is nice to follow the Chief Banking Officer, and especially after a quarter of strong loan growth and strong revenue growth.

  • Jim and his team are doing a great job capitalizing on the investments we've made in new markets. Combined with the progress we made on our efficiency initiatives during the quarter I am pleased with the course we are on.

  • I will begin on slide 12 with the chart of our total revenue. Total revenue in the second quarter increased 18.5% from second quarter of last year. Net interest income was $7.6 million higher in the quarter compared to last year due largely to the $1.5 [billion] increase in average total loans from the second quarter of 2014.

  • Average total loans now represent 68% of our earning assets compared to only 61.5% in the second quarter of last year. Much of these loans came through our acquisitions, but the growth and the makeup of our earning assets is important as you consider the outlook for our net interest income.

  • Non-interest income increased by $15.3 million from the second quarter of last year. Key revenue areas showed significant improvement. Wealth Management revenue was up $1.9 million over last year, Mortgage revenue was up $3 million; Investment brokerage revenue was up $600,000; and Insurance was up $400,000.

  • We expect to be impacted by the Durbin Amendment beginning in July and believe Durbin will reduce our debit card revenue by $4 million to $6 million pretax in the second half of this year.

  • Moving to slide 13, I have shown second-quarter net interest margin compared to second quarter 2014 and first quarter of this year. Second-quarter net interest margin increased 5 basis points from the first quarter of this year to 3.75%. Core net interest margin was 3.15% in the second quarter, 1 basis point higher than the first quarter this year.

  • We expect next quarter's core net interest margin to be in the range of 3.08% to 3.10%. Continued low short-term rates and limited opportunities to invest our portfolio cash flows in assets with the risk maturity we want may continue to put pressure on net interest margin, but this may be offset by continued loan growth.

  • With the strong pipeline that Jim showed in his slides, we should see loan growth for the remainder of the year. Additionally, our outlook does not reflect any increase in short-term interest rates in the third quarter.

  • Note that in second quarter of 2014 accretion income contributed 81 basis points to our net interest margin compared to 60 basis points this quarter.

  • We expect the contribution from accretion income to decline gradually because most of our remaining accretion is related to noncredit impaired purchased loans. This discount should be recognized into income as the loans mature and are renewed.

  • Slide 14 shows the composition of our purchased loans as of June 30, 2015. The leftmost pie chart shows our purchased loans not covered by FDIC loss share.

  • Over $1.4 billion of our non-covered purchased loans are considered non-impaired and carry a remaining discount of approximately $77 million. Approximately $60 million of the non-covered loans are considered impaired and carry a remaining discount of $28 million.

  • The pie chart on the right side of the slide shows the remaining loans as of June 30 covered by FDIC loss share. Approximately $100 million of the remaining covered loans are considered purchased credit impaired assets and carry a $29 million discount.

  • We believe there are a couple important takeaways from this information. First, our remaining purchased credit impaired loans totaled $133 million but have a remaining discount of $57 million or 43% of the customer balance.

  • We believe that based on the historical success our credit workout team has had recovering discount on purchased credit impaired loans we should recognize a portion of this discount as interest income in the future as these loans are remediated.

  • Generally recoveries on purchased credit impaired assets contribute to the quarter-over-quarter volatility of accretion income. This is due to the relatively low number of purchased credit impaired loans and the acquisition discounts these loans carry.

  • This may contribute to higher-than-expected accretion income and will be more likely to impact accretion income in near-term quarters.

  • As of June 30, 2015, the largest component of our purchased loans by far is the purchased noncredit impaired portfolio. Over $1.5 billion of our purchased loan portfolio is non-impaired.

  • These loans carried a total of $80 million in acquisition discount as of June 30, 2015. This represents a total discount of approximately 5% from the customer balance. Because of the size of the non-impaired purchased portfolio the discounts on these loans represents 58% of the total remaining acquisition discount.

  • Perhaps the most important point from this information is that most of our total purchased portfolio of loans is non-impaired and of high quality. These loans are with very good new customers with whom we intend to expand our business relationships in the future.

  • We expect the acquisition discount on these loans to accrete into net interest margin consistently and somewhat gradually as these loans approach their renewal dates. These loans should renew in the future at market interest rates. The market interest rate and provision expense at the time of renewal should reflect the asset quality rating and the expected loss on the loan.

  • On slide 15 you will see that operational expenses without acquisition and divestiture charges were down 1% in the second quarter compared to first quarter of this year. Operational expenses for the second quarter without acquisition and divestiture costs were $104.2 million, declining from $105.2 million in the first quarter.

  • We completed the conversion of Founders Bank in April and consolidated 16 branches in April and May. Total full-time equivalent employees were down 118 FTE or about 4% compared to the first quarter this year. Without the acquisitions and divestiture costs our efficiency ratio for the quarter would have been 66.9% compared to an efficiency ratio without these costs last quarter of 68.9%.

  • As I noted, we completed our planned branch closings in the second quarter and are on track to sell 17 branches in August. The sale of the branches should generate net gains of $10 million to $12 million after-tax. We are still on track to bring operating expenses down into the mid-$90 [millions] range in the fourth quarter of 2015.

  • Moving to slide 16, I have updated our interest rate sensitivity as of June 30. The bullets on the left side of the slide reflect important factors that contribute to our rate sensitivity.

  • Most significant drivers of the impact on net interest income of interest rates in our models are the assumptions we use for the rate sensitivity of our transaction accounts.

  • The cost of total interest-bearing transaction accounts increases from 6 basis points to 38 basis points immediately if rates increase 100 basis points and 18.9% of our non-interest-bearing checking accounts are considered sensitive to rising interest rates as of June 30.

  • Our projected change in interest income with an immediate increase of 100 basis points all along the yield curve declined to approximately zero from an increase of approximately $2.5 million at March 31. This was due primarily to a decrease in transaction and other less rate sensitive liabilities during June.

  • Additionally, our Investment portfolio duration lengthened to 4.23 from 3.74 due to the increase in interest rates from March 31 and our decision to reinvest a portion of our portfolio cash flows into intermediate-term municipal bonds. This change does not represent a change in our outlook or strategy and we expect to maintain a balance sheet that should generate higher interest income with rising interest rates.

  • Slide 17 shows the change in tangible common equity since 3-31. We reduced TCE during the quarter from $851.6 million to $827.3 million at June 30. Most of the decline in the tangible equity was due to our stock buyback during the second quarter.

  • We repurchased 1.9 million shares during the quarter at an average price of $13.77 per share. Through June 30 of this year for the full year we have repurchased 5.2 million shares at an average of $13.85 per share.

  • We completed our authorized 6 million share buyback by June 30, but the Board increased the authorization to 7 million shares at its meeting last week. We now have the authorization to buy an additional 1 million shares between now and the end of January 2016.

  • Slide 18 shows the trend in our key capital ratio since second quarter of 2014. We believe our capital ratios continue to be appropriate for the risk on our balance sheet.

  • Because our total assets are now in excess of $10 billion we are subject to the Dodd Frank stress test requirements. We will file our first required DFAST results in July 2016. However, we did complete a voluntary filing in March 2015 and expect to be fully prepared for the required filing in 2016. I will now turn the call over to Daryl.

  • Daryl Moore - EVP & Chief Credit Officer

  • Thank you, Chris. On slide 20 we show provision expense and charge-off results for the two most recent quarters as well as the second quarter of 2014.

  • On a consolidated basis we posted net charge-offs in the quarter of $1 million or 6 basis points of average loans. This compares to a net recovery of $1 million last quarter and net charge-offs of $1 million or 7 basis points of average loans in the second quarter of last year.

  • Also on a consolidated basis we recorded a provision expense of $2.3 million for the second quarter. As you can see, this level of provisioning is higher than both last quarter when we did not book a provision expense, as well as in the second quarter of 2014 where we had a re-capture from the allowance of $400,000.

  • The increase in provision expense in the quarter was due to several factors, including the significant growth in the loan portfolio already discussed, as well as impairment associated with an increased level of nonperforming loans in the quarter which I will discuss shortly.

  • On a consolidated basis the allowance for loan losses as a percent of end-of-period pre-marked loan stood at 0.73% at June 30 compared to 0.72% at the end of last quarter.

  • The combined allowance in loan marks as a percent of total pre-marked loan outstandings stood at 2.71% at the end of the current quarter, marginally lower than the 2.97% level at March 31. Further details for the allowance on loan marks can be found in the appendix on slide 32.

  • In slide 21 we show you trends in criticized and classified loans over the past year which include all legacy, covered and acquired loans.

  • As you can see at the top of the slide, our special mention loans decreased $16.1 million in the quarter from $190 million to $173.9 million. The net decrease was a result of the magnitude of upgrades, pay downs and downgrades more than offsetting inflows.

  • Moving to the left quadrant, lower left quadrant, we see that substandard accruing loans also reflected a decline in the quarter falling by $8.5 million in the period to a level of $88.7 million.

  • While we were able to either upgrade or resolve a number of substandard credits in the quarter, a good share of the improvements in the category came from the movement of several credits to the non-accrual category.

  • The final chart on the slide shows that nonaccrual loans increased this quarter, rising $11.9 million from $155.9 million to $167.8 million. Four larger credits contributed to the majority of the increase and all three -- or all four were from diverse regions in our legacy footprint and in different industries.

  • While our net charge-offs were at a more normalized level in the current quarter, year-to-date charge-offs remain in a slight recovery position. We continue to be encouraged by the declining balances in our special mention loans where upgrades, pay downs and other outflows have outpaced inflows in a meaningful way in both of the past two quarters.

  • We did decide to move the larger commercial credits that I mentioned we were watching last quarter to nonaccrual status during the current quarter. We have active workout plans around each of these credits, which we hope will either help us remove them from this category in a reasonable amount of time or reduce the associated impairment.

  • A sector of our loan portfolio we continue to watch closely is our agricultural segment. Going into the year we knew that with relatively higher input costs and low commodity prices margins would be squeezed for this set of borrowers.

  • With the very wet weather we have seen here in the Midwest an added concern is the amount of crop damage associated with flooded fields. While crop insurance and rising commodity prices may serve to insulate many of our borrowers from any significant impact associated with flooding, it will be the fall before we are really able to get our hands around the 2015 performance of this portfolio.

  • With those comments, I will turn the call over to Bob for concluding remarks.

  • Bob Jones - President & CEO

  • Thank you, Daryl, and good morning, everyone. Thank you for joining us this morning. My remarks will be based on the information from slide 23. But before I begin those observations I thought I would share with you some inside information as it relates to our preparation for this quarter's call.

  • I don't think I have ever seen my team as excited as they were when Jamie Dimond made his comments about potentially not participating on Chase's quarterly calls in the future. Lynell and Chris sprinted into my office and showed me the newsflash with great anticipation of me following suit.

  • But I have met Jamie Dimond and I can guarantee that I am no Jamie Dimond. So much to my team's and your great disappointment I am still here.

  • As I was preparing my comments for this quarter I went back and reviewed the transcript from our first quarter's call. During that call I spoke of the solid foundation that I felt we had built for future growth.

  • I also highlighted the strong loan pipeline that was in place which, along with the early success of our referral program and the sales pipelines in our fee-based businesses, added the strength of our revenue foundation. At the same time I spoke of a few areas that I described as show me areas as it related to our performance, loan growth being one of those.

  • While one quarter may not be enough to negate any of the skepticism that may exist, we were pleased with the 7% annualized loan growth achieved and remain very encouraged by the pipelines that exist along with the level of activity.

  • Having recently spent the better part of last week in our Grand Rapids and Kalamazoo markets I can tell you that our investment that we have made in our new markets is even better than expected. Client reaction, associate morale and activity are all very positive and should allow us to even further build out our foundation for growth.

  • Another area that we mentioned as a show me was expense management. Last quarter we discussed a number of initiatives that were in process. Today the majority of those have been accomplished and we continue to build a pipeline of new ideas and actions to further reduce our operating expenses.

  • Chris mentioned that we should see this number decline by almost 10% from current levels by the fourth quarter, which would lower our operating expenses to a mid-90s range. This run rate can be achieved with the actions that we have already undertaken and, as I said, we will continue to look for other opportunities to further reduce operating expense without sacrificing our revenue growth or our credit quality.

  • Credit quality for the quarter remained strong. Daryl did his usual good job of giving you the overview of the quarter. And while our provision this quarter is outsized as you compare to prior quarters, this is probably most relevant for you as you do your quarterly comparisons, because as it stands today, we do not believe that this quarter's downgrades represent a trend.

  • But we do hope that in future quarters our loan growth will continue to necessitate a provision albeit at potentially lower levels than this quarter.

  • All in all as I reflect on the quarter I believe you are seeing the words of our past calls begin to turn into reality. For many quarters we have discussed the positive activities that we have been seeing and it is nice to show the results of our associates' hard work paying off by stronger performance and further strengthening the foundation for the future.

  • As part of the strengthening of that foundation last quarter we did highlight our referral program. As a reminder we kicked off this program in mid-January -- or mid-February and to date our Associates have generated over 20,000 referrals.

  • We also mentioned last quarter our expansion into Lexington, Kentucky, with the hiring of one of the premier bankers in the marketplace. At the time we had a pipeline of about [$35 million] in this market; today we have closed over $10 million in new loans and our pipeline today is close to $50 million.

  • We are also making progress in rounding out our team in this market along with establishing a physical presence in Lexington.

  • In addition to our expansion into Lexington we did announce two weeks ago that two of the better known capital market experts in the Michigan market have joined the Old National team. They will work closely with our commercial lending and community development teams to identify new business opportunities related to low income housing, historical and new market tax credits.

  • They are off to a great start as just last week we were notified that we won almost and $11 million piece of business in Michigan. This is the result of the great reputations that they have in the Michigan markets and we look forward to introducing them to the rest of our franchise.

  • We will continue to look for opportunities to expand our revenue production with hires like these, whether it be extended capabilities or the expansion of our sales force in existing markets. With those brief closing remarks, Lori, we will be glad to take your questions.

  • Operator

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

  • Scott Siefers - Analyst

  • Bob, enjoyed your introductory remarks there. But hope to hear you for a long time to come. Let's see, maybe first question is for Chris.

  • Just given all the moving parts in the expense number currently and then the need to bring them down into the second half, I wonder if you could spend a moment just discussing sort of where we are with cost savings to date both from mergers and the FTE reductions and branch closures from the first part of the year.

  • So I think between [LSDI] and Founders we will have $4 million or $5 million of annualized cost savings. And then ultimately about $23 million to $25 million from the branch closures and sales. So how much of that is already embedded in the run rate and then how much is left for the second half of the year?

  • Chris Wolking - Senior EVP & CFO

  • Of course I will annualize numbers there too, Scott.

  • Scott Siefers - Analyst

  • Right.

  • Chris Wolking - Senior EVP & CFO

  • Most of the activity around the branch closures happened mid to late in the quarter. So I think that to get a better handle on that we will have to see how the third-quarter numbers run. But I will tell you that everything has happened right along the lines as we expected way back in November when we were putting these numbers together.

  • So I have been pleased with the success of our early retirement program, our branch closures and our sale. And obviously the sale we have got yet to consummate, but that should be mid next month. So I believe we are on track and, as Bob said, mid-$90 millions in that fourth quarter. I knock on wood every time we talk about that, but it looks pretty good.

  • Scott Siefers - Analyst

  • Okay, perfect. Thank you. And then, maybe, Jim, if you could go over your thoughts on the kind of linked quarter differences in the loan growth projection. I think I missed what you might have said about the level of pay off last quarter versus this quarter.

  • I think you were specifically referencing that CRE payoffs that were a little more pronounced last quarter. Can you just kind of go over really briefly again your thoughts on momentum first quarter versus second quarter, please?

  • Jim Sandgren - EVP & Chief Banking Officer

  • Yes, sure, Scott. Yes we were up big from a production standpoint $150 million over the first quarter. And traditionally first-quarter production you've got some seasonality, weather, those kinds of things. And we knew that a lot of deals were going to be closed in the second quarter and I think that actually happened as we had expected.

  • We were happy to see payoffs at a lower level than we've seen in the last two quarters. So that combination I think is what really drove the growth in the balance sheet. And so, I continue to be encouraged by the pipeline.

  • We have obviously closed huge number of loans in the second quarter, but our accepted part of the pipeline in the discussion are as high as they have been. So good chances that most of those are going to hit the balance sheet. So really encouraged by the momentum.

  • I did allude to the collaboration and cooperation with Daryl and his credit team. So everyone is kind of moving in the same direction. And we are having the beneficiary of a lot of great referrals from all over the bank. I think we received over 1,000 referrals just in the commercial lending group. So a lot of great momentum. Does that answer your question, Scott?

  • Scott Siefers - Analyst

  • It does, it does. That is perfect. So, thank you, guys, very much.

  • Bob Jones - President & CEO

  • Hey, Scott, I would just reinforce Chris' point on expenses. To get to the mid-$90 millions we have really accomplished all of the tasks that need to get there. The branch closures, really you don't reflect much in the second quarter, you will see a full run rate in the third quarter followed by the sale and then other initiatives with the early retirements.

  • But I think for modeling purposes, if you point to that mid-$90 millions for the fourth quarter, and, again, we are going to continue to look to work through that, but it is pretty well baked into our run rate to get to that mid-$90 millions.

  • Scott Siefers - Analyst

  • Yes, okay, that is good color. Thank you again.

  • Operator

  • [Michael Pareto], KBW.

  • Bob Jones - President & CEO

  • Good morning, Michael, how are you?

  • Michael Pareto - Analyst

  • Good morning, good, how are you guys?

  • Bob Jones - President & CEO

  • Good. You got to working, McGratty is out playing, right?

  • Michael Pareto - Analyst

  • No comment.

  • Bob Jones - President & CEO

  • Let the transcript reflect.

  • Michael Pareto - Analyst

  • So, Bob, on the -- I saw on the capital, I guess how this 1 million buyback authorization that the Board kind of re-upped, I mean how active are you guys just trying to be with that? Any reason why just 1 million?

  • Is that kind of reflective of your going forward view of the buybacks that you guys are kind of after this 1 million going to be done? Or I guess how should we be thinking about that? I mean especially surrounding the comments that it seems like M&A is still generally on pause right now?

  • Bob Jones - President & CEO

  • It's a great question, Michael. I would say speaking for the Board that they would prefer to look at this on a quarterly basis and see what the activity is as we begin to think through -- a lot of it is dependent on share price. And lot of it is dependent upon the M&A market.

  • At this stage we don't see anything in the immediate near future in M&A. And obviously we will see what the share price does. But I think the Board is being very prudent. Rather than authorizing a larger buyback they prefer to look at it on a quarterly basis and continue to look.

  • I just might add to that just a reflect on our Board. As you may all have seen after the last quarter, insiders mostly composed of Board members bought 30,000 shares themselves. So I think that reinforces their commitment to what we are doing.

  • Michael Pareto - Analyst

  • So, is it fair to assume that that 1 million then, if what they are looking at a quarterly basis is for near-term use I guess just generally?

  • Bob Jones - President & CEO

  • Yes. Very fair.

  • Michael Pareto - Analyst

  • And then maybe a question for Daryl on the credit side. I guess can you guys speak maybe a little bit to where you are providing for new loan growth and what the expectation is there?

  • It sounds like the pipeline, the accepted part of the pipeline is pretty strong and the growth should be pretty good in the back half of the year. I mean, can you maybe just make some general comments about what the provision expectation is surrounding that?

  • Daryl Moore - EVP & Chief Credit Officer

  • Yes, Michael. I don't think that we have any firm dollars going forward, but we meet quarterly as a committee. And for each of those new loans that are added to the portfolio, we will assign obviously (inaudible) quality rating and are probably at fault and that will follow through with the amount of provision that we are going to add in the quarter.

  • As Bob said, I don't think that -- well, we won't -- if we have growth going forward in the next two quarters I don't think you will see zero provisions like we have over the past several quarters, so I think we need to build something into there.

  • But as Bob reiterated again, we do not today see any big loans that would lead to increased provisions. So it would all be really dependent upon the level and the rate of growth in the next two quarters.

  • Bob Jones - President & CEO

  • Daryl, it might be worthwhile just to talk about the shift in how we are looking at provision versus times past.

  • Daryl Moore - EVP & Chief Credit Officer

  • Yes. So over the past numbers of years as we tried to set our provision expense we looked at a historical loss basis and just went over the past 6, 7, 10 years to look at what our losses had been in a particular category and projected those forward.

  • In 2015 we have started with a probably default loss given the default model that most banks our size use, and I am sure you are all familiar with that. So it is a more prospective forward-looking view on provisioning as opposed to historic loss. And so, that will be part of that provisioning expense as we move forward in picking up those new loans.

  • Michael Pareto - Analyst

  • Okay, great. Thank you. And then one last quick one if I could just squeeze it in. The trust revenues, I appreciate the color on the one large client. So that $9.4 million, is that a relatively good number to work off of going forward then with that new client on board?

  • Bob Jones - President & CEO

  • Oh, yes, absolutely. The client funded mid quarter, so I think so. And the pipeline in our Wealth business is continuing to increase as well and we've picked up on another couple nice corporate accounts even in the latter half of this quarter. But I think that is a good number to work from, Michael.

  • Michael Pareto - Analyst

  • All right, great. Thanks for taking my questions, guys.

  • Bob Jones - President & CEO

  • Thank you. Tell McGratty to have fun.

  • Operator

  • Emlen Harmon, Jefferies.

  • Bob Jones - President & CEO

  • Congratulations, Emlen.

  • Emlen Harmon - Analyst

  • Thank you very much, Bob, appreciate it.

  • Bob Jones - President & CEO

  • We are waiting for our invitation as we speak.

  • Emlen Harmon - Analyst

  • Those are not quite in the mail yet. You know how long it took me to get engaged and so the wedding could be a while too, but --. A question for Chris on the NIM expectation. Because you said it was 3.08% to 3.10% on the core from 3.15% this quarter.

  • As I think about it there are a couple of ways to get there, right? It is either kind of investment of inbound liquidity at lower rates drives you down there or there is actually a -- anything in the securities book that is kind of like rolling over and refunding.

  • So like one is just a matter of the yield changing and then the other is actually lower interest income. So I would just be curious what the NIM guidance says about the kind of core interest income trajectory and whether that is actually -- there is a drag coming or that is just the investment yield that you are getting that is a little lower.

  • Chris Wolking - Senior EVP & CFO

  • Well, I think they go hand in glove in my opinion, Emlen, because as long as rates don't change and as long as we continue to maintain our rate sensitivity where it is we wouldn't expect to be reinvesting it at higher rate securities, which implies these would be -- new investments would be longer-term.

  • So as low as we continue to have low rates, the expectation that rates are going to increase, we will continue to reinvest those cash flows in short maturity securities largely and they will be at lower rates. I think clearly the marginal loan yield is better than that which I could reinvest securities in the securities portfolio.

  • So I am anxious to continue to see this nice loan growth that we had this quarter and that should help. But as long as rates stay the same, as long as we would be expected to reinvest cash flows and lower yielding securities, shorter duration, we would expect to see margin compression.

  • But as I mentioned in my points, I don't have anything for increased rates. Believe they are pending but couldn't tell you when. But we don't have that in our outlook. And again, just kind of a steady [grind] as those yields' investment opportunities are at lower rates.

  • Emlen Harmon - Analyst

  • Got you, okay. And then I did notice that the production yield increased this quarter. Were there particular categories that are improving and driving that or is it just a matter of mix in terms of what is coming onto the balance sheet that generated a better new production yield?

  • Chris Wolking - Senior EVP & CFO

  • Yes, as I look at the new loans that were put on the books, about 65% of those were C&I and commercial real estate was kind of 35%. And as I talked about, the average loan size was less than $400,000. So we are underwriting a lot of these deals through our small business scoring model and traditionally we have been able to get a little bit higher yield on those smaller deals.

  • Obviously the big deals, high-quality deals are extremely competitive. So we still had a few of those in the quarter, but maybe a little bit more in the second quarter from the small business portfolio, which allows us to get a little bit better yield.

  • Bob Jones - President & CEO

  • Yes, I think, Emlen, the other thing I would add onto that, if you noticed on the slide, about 45% of our commercial clients are new business to us, new clients to us, which also says a lot about the yield we are able to get on those clients.

  • Emlen Harmon - Analyst

  • Right, got it. Okay. And then just a quick one going back to expenses. I believe it was last quarter or a couple quarters ago you had kind of laid out that you wanted to get to an efficiency ratio of around 63% on the legacy bank, so kind of ex the acquisition effects.

  • Can you give me just an update on where you are on the progress toward reaching that? And ultimately it sounds like you guys are on pace in terms of expenses. So I guess ultimately it is about -- is the revenue there that helps you get to that target?

  • Bob Jones - President & CEO

  • Yes, at this stage, Emlen, I would say all things being equal that we think we are on pace. Obviously things can change. But the expense base is the one that if you take the mid-$90 millions with where we forecast our revenues to be we should be at or very close to that 63%.

  • Chris Wolking - Senior EVP & CFO

  • Yes, Emlen, I am going to add that we are really focused on the expense line. And as we talked, there are some opportunities in risks and margin. Loan growth is good. But, boy, as long as we stay focused on the expenses (technical difficulty) revenue will get there.

  • Emlen Harmon - Analyst

  • All right, that is great. Thank you very much for taking the questions.

  • Bob Jones - President & CEO

  • Thanks, Emlen, congratulations.

  • Operator

  • John Moran, Macquarie Securities.

  • John Moran - Analyst

  • Hey, I missed -- I caught I think in Jim's portion of the prepared remarks there the C&I and CRE production was pretty strong. The consumer -- was that direct or indirect that drove that and could you just repeat that dollar amount for me?

  • Jim Sandgren - EVP & Chief Banking Officer

  • Yes, absolutely. So C&I commercial accounted for about $75 million in gains during the quarter. And then $56.5 million was driven and that is primarily indirect.

  • Bob Jones - President & CEO

  • And just to remind you, John, all of our indirect is in franchise and it is really with dealers we have dealt with for a long time. Where we have had really good success in that business is up in our Michigan markets, particularly Kalamazoo and those areas.

  • John Moran - Analyst

  • Okay. That was just kind of a [ticky tack] that I missed in there. The other one was just on -- and I know somebody already asked about pay downs. But you guys, it seems like a lot of banks got hit with pay downs this quarter. You guys, it was down linked quarter actually, so maybe you saw them a little bit earlier. Do you have a look on kind of where that activity is running so far this quarter and does it still seem like it is kind of abating?

  • Jim Sandgren - EVP & Chief Banking Officer

  • Yes, at this point we are reviewing that on a weekly basis and at this point we would continue to see that move down a little bit. You never know for sure if there is a sale of a Company or a sale of real estate.

  • But what we anticipate going forward should be pretty consistent with where we were in the second quarter, save any big surprises that we hadn't anticipated. But it is something we look at and review on a weekly basis. And right now it kind of seems to be consistent with where we ran in the second quarter.

  • Bob Jones - President & CEO

  • Yes, John, I would just -- just an observation. The maturity of our partnerships allows us -- that number not to get as dramatic because at this point we are able to retain and growth those markets versus running off business.

  • John Moran - Analyst

  • Okay. And then the last one I had just the duration and the extension in the securities book. It sounds like you guys did some intermediate-term muni bonds. Could you give us a little more detail in terms of what exactly you bought and when that came on? And then sort of what your preference would be or thinking in terms of liquidity redeployment in the securities book for the balance of this year?

  • Chris Wolking - Senior EVP & CFO

  • You are stretching me a little bit here, John. But because of our movement up into Michigan, A, we wanted to own some Michigan municipal bonds. So we had the opportunity to do that in the quarter. That probably will continue. We will continue to take opportunities in the municipal book when we can.

  • As you know, we have always had a pretty big muni book and it has always had a bit of duration offset by a large percentage of short-term securities in short-term agencies, that kind of thing. So it has always been a little bit barbell. So we are not afraid to do that, it has been successful for us for years and years and years and will continue to.

  • And also when we move into new markets it is an opportunity for us to establish our presence in that market in a larger way frankly than some of our acquired banks have been able to do. So we will continue to do that.

  • We are still, generally speaking though, as portfolio cash flows come out of the portfolio we are looking at shorter-term stuff, some short callable agencies, very benign kind of short-term investments.

  • The fact that rates went up so much from the end of March to the end of June really caused a little bit of extension in that which we have in our Mortgage portfolio, just the more option driven investments. And that probably caused, I would guess, 25% or so of the duration extension that we had quarter over quarter, not something -- it just happens, right.

  • So I don't see that that change in the duration total really materially impacts our rate sensitivity, particularly as we have a larger percentage of our total assets now -- earning asset in loans.

  • John Moran - Analyst

  • Got you, thank you very much. That is helpful.

  • Operator

  • Andy Stapp, Hilliard Lyons.

  • Andy Stapp - Analyst

  • Are you still looking for a GAAP effective tax rate of 20% for the year?

  • Chris Wolking - Senior EVP & CFO

  • Let me look here -- Joan? 28? Roughly 28.5% for the year, Andy. And just again, as obviously with accretion income and that kind of thing our taxable income as a percentage of our total income has increased a bit from a few years back.

  • Andy Stapp - Analyst

  • Okay. And what was your refi purchase mix in your Q2 Mortgage Banking production?

  • Jim Ryan - EVP & Director of Corp. Strategy

  • Yes, I think for the second -- this is Jim Ryan, for the second quarter it was probably roughly half and half refi versus purchase in the production side.

  • Andy Stapp - Analyst

  • Okay, great. The rest of my questions have been answered.

  • Operator

  • Terry McEvoy, Stephens Inc.

  • Bob Jones - President & CEO

  • Welcome, Terry, we are glad to have you here.

  • Terry McEvoy - Analyst

  • Thank you very much, good morning. First question I guess for Jim. The 45% of the new loan production or the production coming from new clients. Could you talk about what else is coming with that relationship whether it is deposits, fees. It doesn't look like, given your production yields, you are really competing on price given the increase. But how should we think about that full relationship?

  • Jim Sandgren - EVP & Chief Banking Officer

  • Yes, and that is what we are all about. So when we bring on a new customer to the bank from a commercial loans standpoint we have our cash management folks involved so we are bringing in deposits. If there is an opportunity to sell insurance we are talking about that as well. But we really focus with our relationship managers that we are not transactional.

  • So we will start certainly with deposits and loans and then we really focus on other areas, whether it be Insurance, Wealth Management, 401(k), those kind of relationships. So I think having the referral plan, as we have alluded to a number of times on this call and prior calls, it has I think got us really focused on building and growing that entire relationship.

  • Terry McEvoy - Analyst

  • Great. And then as a follow up, the service charge is down about 4.6% year over year. I guess you closed two deals in the second half of last year, consolidated some branches. But it seemed to be down a little bit more than I had forecasted.

  • Could you talk about what is going on there? Whether you are changing some fee policies, overdraft policies and how should we think about the third and the fourth quarter in light of some of the moving pieces, branch sales, etc.

  • Bob Jones - President & CEO

  • Yes, some of that, Terry, is based on new products we have introduced. We went away from free checking, we led the pack and probably were a little too aggressive. So we've put in place a checking product that allows you to waive fees. So I think a portion of that is related to that.

  • The other thing, quite frankly, is the strength of the economy has reduced [presentments] on the overdraft side and we continue to see those numbers drop. And that has really been the largest impact to the decrease and, quite frankly, that is a good thing because you are seeing people be a little smarter about how they use their money.

  • So -- and as you bring on the new accounts, obviously as we change our fee structure it does present some challenges there, so --.

  • Terry McEvoy - Analyst

  • And then just lastly, the consumer indirect, the new production that yielded dup 18 basis points. Is that a function of mix shift, new markets, what was driving the increase?

  • Chris Wolking - Senior EVP & CFO

  • Yes, that was just a meaningful discussion with our group to say that we need to -- we needed to raise rates pretty much across the board. So we did I think it was a 25 basis point increase pretty early on in the quarter. And we were really happy to see that we were able to maintain pretty close to that same level of production at a higher spread.

  • So, we continually look at the market from a competitive pricing standpoint and we felt like we were able to take advantage of a little bit higher spread on that production. So it was certainly a nice boost in the second quarter.

  • Terry McEvoy - Analyst

  • Very helpful, thank you.

  • Bob Jones - President & CEO

  • Great, Terry. Glad to have you on the team.

  • Operator

  • Michael Pareto, KBW.

  • Bob Jones - President & CEO

  • Mike, you only get one follow-up (laughter).

  • Michael Pareto - Analyst

  • Actually I didn't hit the button, guys, so I am not sure what the error was there. But thanks anyway (laughter).

  • Operator

  • Will Curtiss, SunTrust Robinson Humphrey.

  • Will Curtiss - Analyst

  • Just really quickly back to the expenses, and I think the guidance has been pretty clear. But you did mention coming up with some other ideas for improving expenses and just thought I'd see if you could give us some insight as to some of the other ideas you guys are kicking around?

  • Bob Jones - President & CEO

  • Oh, it ranges from contract renegotiation as we become larger and it's programs in our IT world that get rid of some of the bureaucracy and multiple systems we have got. It is continuing to look at headcount and, as we become more efficient by technology, to reducing headcount.

  • So I would argue Chris has probably got 60 to 75 to 80 ideas at a time we are looking at. We have given targets to each of our business units that those targets we wouldn't be good leaders if we didn't have those targets to be lower than what is in our forecast. So everyone is keenly focused on that.

  • As Chris said, and you have heard me say in the past, revenue is great but if it comes it is there. You really have to focus on the expense. And quite frankly, I am tired of talking about expenses. And so whatever we can do to move that number down we are all going to work hard to do that.

  • Chris Wolking - Senior EVP & CFO

  • Bob has mentioned this in the past too that the more you work with expenses the more you work with individual business lines it becomes more just a way of life. And I have been encouraged by the ideas that our team has generated and it is consistent with what they did last year.

  • They just -- quarter after quarter they are looking at opportunities to be more efficient, to have harder conversations with our vendors about contract terms to look at facilities management opportunities, just one thing after the other. And it is really throughout the organization.

  • Will Curtiss - Analyst

  • Okay, thanks. That is it for me.

  • Operator

  • At this time there are no further questions. I will now return the call to management for any additional or closing remarks.

  • Bob Jones - President & CEO

  • Well, great. Thank you, everybody, for participating. As always any follow-up questions to Lynell and we will get right back to you. Hope everybody has a great day.

  • 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 1-855-859-2056, conference ID code 81832621. This replay will be available through August 10. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call.