Old National Bancorp (ONB) 2016 Q3 法說會逐字稿

Welcome to the Old National Bancorp third-quarter earnings conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC, 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 1:00 PM Central Time on October 31 through November 14. To access the replay dial 1-855-859-2056, conference ID code 93788114. 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?

Thank you, Khalia, and good morning and welcome to Old National Bancorp's third-quarter earnings conference call. Joining me today are Bob Jones, Jim Sandgren, Jim Ryan, Daryl Moore, 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.

Slide 5 contains some of the positive financial highlights of our third quarter, including our reported net income of $34.7 million and earnings per share of $0.25. Included in these quarterly results were merger and integration charges of $5.5 million on a pre-tax basis. Our total loan growth was 4.1% on an annualized basis and our commercial portfolio grew 7.6% annualized.

Our core net interest margin remained stable and we continue to see a decline in our non-interest expenses. Later in the call Jim Ryan will be discussing actions taken subsequent to the third quarter, including our planned consolidation of 15 additional banking centers and the successful termination of our pension plan, both of which should contribute to additional expense reductions in 2017.

We also continue to see a nice increase in our tangible book value per share which grew 2.4% and we reported a return on tangible common equity of 13.3%. All of these highlights were achieved while at the same time completing the largest system conversion in our Company's history with our new Wisconsin region now fully converted to the Old National platform.

With that brief overview I'll now turn the call over to Jim Sandgren.

Thanks, Lynell. Good morning, everyone. As Lynell indicated in her overview, this was another very positive quarter for Old National, with gains that were largely driven by strong commercial loan production and a significant increase in our mortgage loan business.

If you'll turn to slide 7, I will start by focusing on total loan growth for the quarter. As you can see we achieved organic loan growth of $90.9 million or 4.1% annualized for the quarter which continues a growth trend that now dates back six quarters.

While we're certainly lease with this total loan growth trend the real story of the quarter was the 7.6% annualized growth in commercial loans that our producers generated. Leading the way was our new Wisconsin region followed by strong growth by both our Louisville, Lexington and Ann Arbor markets.

The continued meaningful growth in our commercial portfolio was even more impressive, given the fact that we saw heightened principal paydowns and payoffs in the quarter. This past quarter we experienced $171 million in paydowns and payoffs outside scheduled principal reductions versus $111 million in the second quarter of this year.

The reductions were a combination of lines of credit being paid down by our C&I borrowers, while many large CRE projects were refinanced in the secondary market or sold. During the quarter one of our commercial RMs in Wisconsin had a multifamily project that the borrower was planning to convert to nonrecourse financing in the secondary market.

The RM contacted our structured finance group in Ann Arbor, which was ultimately able to place the loan for the borrower and collect a nice fee in the process. This is a great example of how we continue to leverage expertise gained through our partnerships throughout our footprint.

The gap between our total growth and commercial growth reflects a reduction in our direct consumer portfolio and a very intentional strategic decision to stabilize and ultimately reduce our lower spread indirect portfolio over time. Over the prior four quarters we had generated $140 million in indirect loan growth. By contrast we experienced just a $1.8 million gain in the indirect category this past quarter. Chris Wolking has done a great job managing our indirect portfolio since moving into his new role.

You can find additional detail about our indirect trends on slide 29 in the appendix. Ultimately we would like to continue to replace indirect balances with higher yielding C&I and CRE balances, both which are much more relationship driven as well.

Slide 8 focuses more closely on our commercial results. Starting on the left with a new quarterly production graph you can see that new commercial and commercial real estate production for the quarter topped $410 million.

We continue to be extremely excited about the strong production we are seeing from our Wisconsin team. Considering we converted branches and systems less than two months ago, we couldn't be happier with momentum and incredible production we're getting from our newest region and we believe it bodes very well for the future.

We were also pleased to see strong production from some of our other new markets like Ann Arbor, Lexington and Fort Wayne, as well as our legacy markets of Louisville and Evansville. For the quarter 68% of our commercial loan production was in the CRE category with the remaining 32% classified as C&I. We believe there are continued opportunities to grow our commercial real estate portfolio in many of our markets, while remaining well within our moderately conservative risk appetite.

The middle graph highlights our production yield which was 3.52% and higher than both of the previous quarter and Q3 2015. This positive trend is a direct reflection of doing more longer term CRE deals which carry higher face rates.

Competition still remains fierce from a pricing perspective across most of our markets. We are starting to experience some rational pricing and structure in some of the larger CRE deals we are seeing.

The final graph on slide 8 depicts another record quarter for our commercial loan pipeline. You might recall that we surpassed the $1 billion mark for the first time last quarter. As of September 30, I'm pleased to report that our pipeline has topped $1.3 billion with $363 million of that total in the accepted category and another $370 million classified as proposed.

To put that in perspective our current commercial pipeline is virtually twice the size it was one year ago and there is more volume represented in just the accepted and proposed categories as there was in our entire Q3 2015 pipeline.

While strong pipeline figures are certainly very encouraging going forward, we are also encouraged by the fact that we still have over $360 million in construction loan advances to be made on existing CRE projects. This compares favorably to prior quarters, when this figure was running well below $200 million.

Overall these quarterly results continue to illustrate that our growth market strategy is working and working well. Throughout our franchise we now have the expertise, energy and leverage we need to continue building positive momentum into the fourth-quarter and 2017.

Slide 9 recaps our fee-based business results for the quarter. As you can see from the graph on the left, quarterly revenue for our wealth management division was up slightly on a year-over-year basis, but down a bit compared to Q2 2016.

The year-over-year gain is primarily attributable to an increase in market value and new business gained over this time period while the modest decrease in the second-quarter primarily reflects the fact that tax preparation fees are recognized every April and May, slightly elevating our second-quarter wealth management results.

Turning to investments we saw third quarter revenue grow to $5 million, a nearly 14% increase over Q3 2015 and a 6% increase over the second-quarter of this year. Our new Wisconsin advisors are now fully integrated into the Old National team and we have also made some excellent hires in Michigan and Indianapolis.

We remain optimistic about our investments division moving forward as these new advisors ramp up and really going to contribute. And finally, while regulatory issues are impacting the entire brokerage industry, we believe LPL's leadership in response to these regulations will allow our experienced advisors to continue to serve our client base effectively in future quarters.

As you can see from the graph on the right we experienced significant seasonally high gains in our mortgage business on both a quarter-over-quarter and year-over-year basis. When you exclude Wisconsin, revenue for the quarter was 50% above Q3 2015 and 20% higher than last quarter.

Factoring Wisconsin, our $7.7 million in quarterly revenue represents a very strong 140% year-over-year increase and a 48% quarter-over-quarter increase. Our mortgage pipeline as of September 30 stands at $150 million, which is down $30 million compared to our pipeline at the end of the second quarter.

Overall it was a solid quarter for our fee-based business, especially given the current rate environment and a very strong quarter from a commercial loan production standpoint. While we are definitely operating in a challenging environment for banks, I've never been more confident in the leadership and the frontline personnel representing Old National on a daily basis.

We have highly experienced and highly motivated producers in place throughout our footprint and everyone is pulling in the same direction as we continue to execute on our revenue growth strategy, while also working very hard to manage expenses.

With that I will now turn the call over to Jim Ryan.

Thank you, Jim. Starting on slide 11 adjusted pretax pre-provision income grew by 19.4% quarter over quarter as a result of strong underlying fundamentals in our banking business, our focus on expense reductions and the contribution from our newly acquired markets in Wisconsin.

The third quarter was the first full quarter without the contribution from our recently divested insurance agency. We're pleased with the results of growing pretax pre-provision and we remain vigilant on improving the operating leverage of the Company.

On slide 12 the graph depicts our year-over-year trend in total revenue. Total revenue was $155 million in the third quarter of 2016 compared to $156.8 million in the third quarter of 2015. Excluding the branch sale gains from the third quarter of last year total revenue was up 9.6% year-over-year despite having no contribution from the insurance agency this quarter.

Moving to slide 13, you'll see that trend of our GAAP net interest margin and our core net interest margin. Our reported GAAP net interest margin benefited from the organic loan growth we experienced in the quarter and the contribution from newly acquired markets in Wisconsin. As we have seen from past transaction, the margin contribution from purchase accounting can be more impactful in the early periods.

We are pleased that our core margin was stable at 3.09%. Our core margin benefited from fewer than anticipated calls and prepayments from agency and mortgage-backed securities.

Assuming no Fed fund rate increases in the fourth quarter, and assuming the yield curve remains where it's at today, we expect continued pressure on our core margin. We're estimating our core net interest margin could fall 2-4 basis points in the fourth quarter without additional actions. We're looking for ways to offset the impact by increasing new loan production and spreads and by slightly reducing our asset sensitivity when opportunities present themselves.

Shifting to non-interest expenses on slide 14, operational expenses, as defined on the slide, totaled $102.6 million in the third quarter. Operational expenses declined by 5.1% quarter over quarter. The second quarter includes two months of expenses from our insurance agency and two months of expenses from our Anchor acquisition.

We're pleased of the results this quarter and are already starting to receive the savings from the Anchor integration. We will continue to remain focused on reducing costs in this environment.

The table on slide 15 shows the notable items impacting earnings. We anticipate that we will have an additional $2.5 million of integration charges in the fourth quarter bringing our full cost to integrate Anchor to approximately $39 million versus the original due diligence estimate of a $46.5 million we stated with our partnership announcement.

As we previously discussed our intent to terminate our pension plan in the fourth quarter, we completed the termination in October which will result in a fourth-quarter charge of approximately $9.6 million. The termination of this plan should result in annualized savings of $2 million and reduce volatility going forward.

As a result of our decision to consolidate an additional 15 banking centers, we should incur charges of $5.8 million in the fourth quarter resulting in an estimated 2017 cost savings of approximately $4 million to $5 million. We will continue to evaluate our retail distribution network as demographics change and our clients' technology adoption increases.

Slide 16 shows the changes in our tangible common equity ratio and the 2.4% growth in the third quarter of our tangible book value per share.

I will now turn the call over to Daryl.

Thank you, Jim. Net charge-offs and provision expense trends are shown on slide 18. Provision expense for the quarter was $1.3 million, similar to last quarter's expense, but higher than the $200,000 expense in the third quarter of 2015.

This quarter's provision was driven in part not only by charge-offs of $1.6 million in the period, but also loan growth as outlined by Jim earlier in this call. While charge-offs in the current quarter were higher than recent quarters. They remain well-controlled at 7 basis points.

Although the allowance for loan losses to total end of period loans dropped slightly to 58 basis points at September 30, it is important to remember that we also have $144 million in marks on acquired loans. Total allowance on loan marks to total pre-marked end of period loans stood at 216 basis points at quarter's end.

Moving to slide 19, you can see that special mention loans increased significantly in the quarter moving up by $18.9 million. The addition of one material loan from the Wisconsin portfolio, combined with an upgrade of a $9.3 million loan from the substandard category into the special mention classification, contributed $16.2 million to this increase.

Substandard accruing loans fell $7.7 million in the quarter. There was a fair amount of movement in and out of this category in the quarter, the largest being the upgrade of the $9.3 million loan just mentioned.

This movement paired with assorted paydowns and grade changes helped to offset -- or more than offset -- the continued inflow of a number of agricultural credits into this category. While special mention loans were up in the quarter, nonperforming loans fell by $8.9 million and delinquencies remain well-controlled at 36 basis points.

As we look forward we continue to watch and manage our agricultural portfolio closely, as some are forecasting no significant improvement in results from this industry segment until 2018 at the earliest.

We have seen a fair amount of reduction in exposure to the segment as the appetite for risk by some of the smaller community banks in our markets seem to be higher than our risk tolerance, which has led some borrowers to refinance their exposure out of the bank.

As with most financial institutions the continuing search for loan outstandings has all of us reviewing our risk tolerances, underwriting standards, credit administration practices, and concentrations in order to make sure that during this point in the economic cycle we are thoughtful and prudent in our approach toward growth.

With those comments I'll turn the call over to Bob for concluding remarks.

Thank you Daryl and good morning. My remarks will begin on slide 21. I don't plan on covering what you've already heard from our prior presenters and the slides do a good job of covering my perspective on the quarter. I would just like to spend additional time spending some more detail around a few items then spend most my time giving you a sense of our outlook and focus for 2017.

It is safe to say that by all measurements our Wisconsin partnership has gone extraordinarily well. Jim Sandgren did a good job of covering the financial performance, which has been outstanding, especially given the distraction of our normal integration activities. Our operational integration was very successful this quarter and, as we stated before, we remain on track for our targeted cost savings.

In addition, while not in our models, we are seeing meaningful revenue synergies developing in many areas like capital markets, wealth and small business. Because we have been able to retain the vast majority of our client focused associates, our client attrition numbers have been below expectations at approximately 2%.

While it's way too early to declare victory, I am thrilled with the strong sales and retention efforts of our Wisconsin team. The team in Wisconsin has also added a great deal of expertise to the balance of our franchise.

We have established our commercial real estate center of excellence in Madison, led by Kevin O'Driscoll and Jim Saer, two former Anchor associates who have deep expertise and knowledge of commercial real estate. In the short time they have been on the team we have already been the benefactor of their knowledge, and we feel that we should be able to leverage this for prudent growth in this sector within our risk profile.

This center of excellence is similar to what we've established in Ann Arbor following the United transaction, with our mortgage operations and structured finance centers. As evidenced by our strong mortgage results this quarter, along with our commercial growth, our team has shown an ability to leverage these centers of excellence.

This quarter we also began to see our intended change in the mix of our balance sheet by shifting our focus away from indirect lending into the higher returning assets of commercial and commercial real estate. This shift in mix should continue into 2017.

We are able to accomplish this mix shift because of the opportunities we are seeing in our new markets and the aforementioned expertise. We also believe that indirect lending will continue to be one of the focuses of the regulators. Our ability to accomplish this has been a direct result of our utilization of our DFAST modeling, which we have aligned with our financial planning models.

The models show that we have the opportunity to move out of these lower earning, lower risk assets into higher-yielding and slightly riskier assets. This gives us great comfort that we can put more CRE on the balance sheet at a time when many banks are avoiding this asset class because of capital constraints.

As a reminder, we are currently at approximately 178% of capital in CRE. As a point of context our moderately conservative risk appetite will remain our driving force. And all originations will be developed with developers in franchise.

We will not deviate from these guideposts: Daryl is still Daryl, and he is intimately involved in the process. Even given this shift for 2017, we still believe our credit metrics will be below peer levels.

We may see some upward movement with our charge-offs and delinquency, moving from what we view as almost unsustainable low levels in 2016. At the same time we should see a continued downward trend in our nonperforming assets.

We will be presenting our final budget to our Board in a few weeks and establishing both one-year and three-year targets. As we prepared this budget we made a few key assumptions. We did not build any rate increases into the budget and while we believe we should see one yet this year with an outside possibility of another one next year, we did not want to rely upon rate increases to drive earnings to meet or exceed expectations.

Also while we may see some movement in the short end, we are not convinced that the long end has equilibrium. Pressures from Brexit, the slower global recovery and other issues may keep loan rates close to where they are today.

Regulatory pressures will not lessen and in fact, dependent upon next week's election, they may increase. Any progress that was made in reducing the burden was muted by the issues experienced by Wells Fargo.

We do believe our markets will exhibit comparable to better commercial loan growth than we have seen this year, particularly in Indianapolis, Fort Wayne, Louisville, Lexington, and our Michigan and Wisconsin markets.

It is these markets where we should be able to see the best growth potential in part because of the strengths of the markets. But also because we are able to mine these markets for market share gains, based upon the strength of our teams, our local focus against the regional players, and our ability to deliver a larger loan capacity than the smaller players.

Given our rate forecast, along with the potential for increased regulatory pressure and the cost commensurate with that, along with the headwinds of our declining accretion income, we will continue to focus on reducing costs. Along with the 15 branch closures that Jim Ryan referenced earlier we will have closed or sold 211 branches since 2004.

We see this trend continuing as we react to changing demographics, increased demand for digital banking, and the need for efficiencies. In addition we will continue to look for every opportunity to reduce ongoing sustainable costs.

While we acknowledge we have internal opportunities, it is also our belief that as an industry the winners will be defined by their ability to reduce overhead as we grapple with all of the headwinds of our industry.

While we will still be active in looking at merger possibilities, our focus will be less on strategic opportunities and more on financial opportunities within our current franchise. We believe that our investors will reward a more disciplined approach.

Before we take questions, let me also acknowledge something that was filed in our 8-K which is Joan Kissel's promotion to Chief Auditor and Ethics Officer. We are in the process of looking for Joan's replacement as she begins to assume her new role in May of next year.

With those comments, Kahlia, we will be happy to answer any questions.

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

The Corey Kluber of our analyst call.

I wish. We'll see how this goes the next few days. We're wishing him the best. I hope you guys are doing well.

I think Jim Ryan, first question is probably the most appropriate for you. The quarter was really good from a cost standpoint. Just curious, you'd given last quarter an outlook for the fourth quarter of $100 million to $102 million in core expenses in the fourth quarter. Is that something that you still feel is an appropriate assumption?

And then the follow on for that is I guess you'll have the $5 million to $6 million of annualized cost savings next year from a combination of the pension and the additional 15 branch consolidations. Just curious if there would be, in your mind, another leg down in the cost base from whatever the fourth quarter number is as those cost savings get baked in, or if those will just act as an offset to normal expense growth. Excuse me.

Scott, I think you understand this will. I think the original estimates we gave for the fourth quarter are still what we anticipate. And then all these additional actions are things we're working on to offset normal kinds of inflationary things and merit increases and things of those nature. So I think you understand the flow pretty well.

Okay, all right perfect. Thank you. And then if I can jump to one ticky-tack question for a second. The FTE tax rate came in lower than I had anticipated, so I guess was there anything in there that was unusual or anything? And then more importantly, I think you had said 35% FTE guidance would hold through the year. That was something you said I think last quarter. Is that still a good assumption as we look into the fourth quarter and beyond?

Obviously one-time charges and things like that can impact the tax rate. But as we look out in the future quarters we think that approximately 32% is probably a better rate, Scott, and just looking forward and taking all the benefits that we got from the Anchor acquisition.

Okay. That's I imagine FTE tax rate of 32%?

Right. Correct.

Perfect. That's great. Thank you guys very much.

Thanks, Scott.

(Operator instructions) Chris McGratty, KBW.

Good morning, Chris.

Maybe we could start on the margin. I think last quarter you guided to some compression this quarter which didn't happen. (technical difficulty) loan fees or loan prepayments, I think you alluded to something in the prepared remarks that may have popped up this quarter. And then looking ahead, it sounds like there's some repositioning of the balance sheet in terms of --.

Sure, Chris, we did have and every quarter we have a little bit of volatility around interest or nonaccruals. But I think this quarter was relatively normal. Maybe slightly ahead.

The real benefit in our core margin was the fact that we did not have as much calls out of our investment portfolio and [pre maintenance] we assumed in our modeling. So that's the really hard part is just anticipating when those things might occur. But I think for the most part we benefited from the fact that we just had a normal quarter and that we didn't lose any investments we thought we were going to lose.

Okay. And then just going forward if I could, the size of the investment portfolio -- should we be assuming status quo or will that grow given I think in your prepared remarks suggesting you might take down some of your assets (inaudible)?

I don't anticipate us making any major shifts in the investment portfolio. Obviously we'll continue to use it to help us manage our rate risk position. Ideally over time I think that number comes down as we just shift into higher yielding or better earning asset mix but I don't anticipate any major shifts in the near term.

Okay. Great. Thank you.

Thanks, Chris.

Jon Arfstrom, RBC Capital Markets.

Good morning, Mr. Arfstrom.

Good morning. A couple questions here. Jim, maybe a follow up for you on expenses. Obviously came in lower and Scott kind of alluded to it, but was it you just got there earlier? What drove the good expenses for the quarter? Was it just getting there quicker than you anticipated?

Yes. It's a focus not only for Anchor but everywhere else in our Company. It's just been an ongoing focus of ours and we were able to accrue some of the Anchor savings quicker than we anticipated originally.

Okay.

But I think, Jon, just pickup is not just Anchor, we're looking at all opportunities as evidenced by the branch closures. But throughout the franchise we're continuing to look for costs as we deal with this regulatory and interest rate environment.

Okay. And on the topic of the branches, Bob, where are they? Is this across the Company or is this primarily in the new region?

No. It's actually across the Company. And what Jim Sandgren does a great job with is ranking our branches and looking at all of our facilities' cost as well as the production of the branches and then just taking a hard look.

We acknowledge these are very difficult decisions because a lot of these are in markets we've been in for quite a while, but we're just seeing so much change in the way our customers behave and the opportunities to use our mobile banking platform. As I said, this will be an ongoing effort and we have 200 branches today and that number is probably at its high level.

Okay. Okay. And then Jim Sandgren, you alluded to some of the payoffs and paydowns in the quarter being pretty material. We are a month into the quarter, maybe this stuff occurs later in the quarter in general, but how are things looking quarter to date?

Certainly better but like you said, Jon, I think a lot of this stuff happens at the end of the quarter. And then as they're coming up to year-end a lot of our borrowers will be making decisions on some of their products -- or projects. We did see a lot of paydowns from the C&I book, again, I think we have little softening in that sector.

I think as the election is upon us we may see some changes, positive or negative, depending on how the election turns out. But then the CRE portfolio, you're always going to see the volatility and with the portfolio we brought on from Anchor that's something we're just going to have to keep an eye on. But the example I shared where we were able to place one of those deals in the secondary market and get a fee on that is a great opportunity for us to become a little vertically integrated.

I think one of the key things, Jon, is that these aren't loss of client -- our client relationships, these are just able making financial decisions and we maintain the opportunity. We're encouraged through the fourth quarter and beyond.

Okay. All right. Thank you.

Thanks, Jon.

David Long, Raymond James.

Good morning, David.

Good morning, guys. Bob, you mentioned the recent headlines that we've all seen and wanted to ask you if there's been any evidence of any overaggressive cross-selling, if you find anything there at Old National? And then secondly, as a follow-on to that, as a result of these headlines have you heard more from your regulators or what have you been hearing on that regard?

Yes, great question, David. I would tell you that the day that this became public, Candy Rickard, our Chief Risk Officer, along with Kendra Vanzo, our Head of Human Resources, did a pretty deep dive into our sales practices, looking at how we conduct, how we have governance. We looked at our ethics hot point call system. We looked at employee terminations and resignations, exit interviews.

And I can say that throughout that process, one, we don't sell the same manner. Ours is not a product push, it's really relationship-based. And you'll remember that our incentives are really based around the profitability of our branches so we don't have the same sales practices.

We had no ethics hot point calls related to sales practices and we had a number -- not a number, some issues in our exit but none of them related to this kind of practice. So we reported to our Board last week we're comfortable with where we are but you continue to look at better governance and making sure that you don't have these issues going forward.

Obviously the regulators are also, as has been made public, I think all banks are in a horizontal review of their sales practices and we've complied and sent all the information in and we'll see where they go from there.

Got it. And then maybe just changing gears here, the M&A backdrop. Can you talk about, one, your appetite for additional transactions and then, two, just overall do you feel like there ?- some of the smaller banks that you may be talking to are more -- are they more willing sellers at this point or do they think we're getting closer rate hike and maybe want to wait a little bit longer?

That's a great question, David. I think that while everyone expects some form of rate hike either in the fourth quarter or the first quarter given the regulatory challenges that offsets any euphoria that comes from a rate hike.

As we talk to banks that are even $1 billion or less or $5 billion or less, they are beginning to see more and more regulatory pressure and costs associated with that as stuff flows down and we're starting to see that happen. I'm not sure that changes the tenor and I would tell you that there's a lot of discussion going on with M&A. I think the volume is about consistent over the last four, five, or six quarters.

I think the shift for us is and I've said it before and I probably didn't articulate as well as I should have that we really want to move into more of a financial view in acquisitions than strategic. It is our belief we're in all the markets we want to be in within the Midwest in the areas we are. And now we have the opportunity to remodel inside those markets but we don't feel compelled to have to do a deal and I think part of that will be driven by adhering to some rigorous financial metrics.

Excellent. Thanks for the color, Bob. Appreciate it.

Thanks.

Andy Stapp, Hilliard Lyons.

Good morning, nice quarter. How much were MSR valuation gains during the quarter?

I'm going to defer to Jim who is patiently looking for a piece of paper.

The net MSR capitalization was really unchanged quarter over quarter, Andy, so we did not have huge valuation changes there that would've caused us. It was kind of normal and then obviously we benefited from just higher gains on sale throughout the quarter.

Okay. And I may have missed this but other non-interest expenses, the last catch all category, came in below expectations. Anything unusual going on in this line item?

No. I suspect it's the volatility around the one-time charges. If you're looking at the consolidated numbers, just the classification and volatility around some of the one-time charge numbers.

Okay. All right. Thanks.

Great. Thanks, Andy.

(Operator instructions) John Rodis, FIG Partners.

Good morning, everybody. Good luck to the Indians. (laughter)

I was trying to be somewhat -- it is Cleveland. I have Daryl and Sandgren who are diehard Cubs fans. So it's a little tense on the management level right now. But we will see. It's been an exciting series so far.

As somebody that's in St. Louis, it's nice to see somebody else win every once in a while. So I guess every 100 years or whatever it's been -- (laughter).

You can't have two cities that need it more than Cleveland and Chicago at this stage.

Exactly. Hey Jim, just a follow-up question on Scott's earlier question on the tax rate. This quarter on a GAAP basis it was 24% and I think last quarter you said sort of 24% for the second half of the year. Is that still the case? And then on a GAAP basis how should we look at 2017?

I think both on a GAAP basis 24% feels like a good number, kind of a normalized run rate for us including 2017 and then that translates roughly to a 32% on an FTE basis.

Okay. Just wanted to make sure. Thanks, guys.

Thanks, John.

Chris McGratty, KBW.

You're only allowed one question, particularly since you're from Chicago, Chris.

Even worse, Detroit. Quick question on the loan growth guidance. I just want to make sure -- for the outlook just want to make sure I'm understanding.

If you a net the de-emphasis in indirect and more the C&I, CRE, is that a push relative to your thinking maybe a few months ago? Or is it somewhat a little bit lower -- lower growth rate as we look to the next few quarters but maybe at a little bit better margin?

I think it's a little bit lower, Chris -- or David -- Chris, jeeze. Just as you think about reducing that dependency on the indirect and really the shift as you saw with a little over 7% commercial growth this quarter, that offsets. So I think that 4% to 5% is probably not unrealistic.

We're optimistic, obviously, but I want to continue to de-emphasize that indirect portfolio. So I think you'll get better spread and we'll be able to move from there.

I might add -- I'm sorry -- I might add at the same time, we're trying to improve the profitability of the remaining indirect portfolio. Chris Wolking has done a great job of getting in there and optimizing the spread and the cost to the dealer relationship. So it's really both let's limit the growth but let's also make it more profitable, the stuff that remains.

Just so I'm clear, the 4%, 5% is on that piece of the portfolio. That's about where it needs to go, not consolidated (multiple speakers).

That would be total, Chris. We would expect that the 7% that we experienced this quarter would be more what we'd see for the balance of 2017.

Okay. Thank you.

Thanks, Chris.

Peyton Green, Piper Jaffray.

Good morning. Doing fine. I just want to make sure I have that right. Are you still going to originate indirect auto but at a slower pace?

Yes. Much slower pace. We will continue to be in the business. But obviously with the changes that Chris is making to improve the profitability, our belief that the regulatory pressure on this portfolio is going to be -- you will see us continue to originate but at a much slower pace and then continue to -- that portfolio will wind down. And then fill that bucket up with commercial and commercial real estate given the markets we are in and the strength of the teams we have now.

And so what's the expected cash flow from the portfolio just if you didn't originate anything over the next year?

I don't have that number in front of me. I can tell you it turns over pretty quickly. There's a lot of refinance activity in that portfolio. If we stopped originating you'd see it shift down pretty quickly.

Okay. Okay. That's not the goal right now. The goal is really just to improve the overall profitability of that line and use some of the cash flow to fund CRE and C&I growth. Is that correct?

Exactly. And stay where we are and maybe a slight decrease in outstandings, but really to build the balance of the portfolio through the other buckets.

Got it. Thank you very much.

Thanks, Peyton.

I will now turn the floor back to our presenters for any closing remarks.

Great. Thank you all for your questions. Again, as always, if you have follow up questions let Lynell know and we will talk to you soon.

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 -- 93788114. This replay will be available through November 14.

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