Old National Bancorp (ONB) 2017 Q1 法說會逐字稿

Welcome to the Old National Bancorp First Quarter 2017 Earnings Conference Call.

This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD.

The call, along with corresponding presentation slides, will be archived for 12 months on the Investor Relations page at oldnational.com.

A replay of the call will also be available beginning at 1:00 p.m.

Central time on April 25 through May 9. To access the replay, dial 1 (855) 859-2056.

Conference ID code 3913117.

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, Kristen.

Good morning, everyone.

Welcome to Old National Bancorp's conference call to discuss our first quarter 2017 earnings.

Joining me today are Bob Jones, Jim Sandgren, Jim Ryan, Daryl Moore and Joan Kissel.

And I'd like to give a special welcome to our newest attendee, our Corporate Controller, Mike Woods.

I would like to remind you that 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 statements disclosure contained on Slide 3 as well as our SEC filings for a full discussion of the company's risk factors.

In addition, certain non-GAAP financial measures will be discussed on this call as referenced on Slide 4. 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.

Please turn to Slide 5, where we'll begin the review of our first quarter performance.

Our first quarter net income of $36 million or $0.27 per share, represents 33.4% and 12.5% increases, respectively, over the first quarter of 2016.

Contributing significantly to this year-over-year increase was the successful redeployment of the proceeds from the sale of our insurance subsidiary into the more profitable banking business with our AnchorBank partnership.

During the quarter, our portfolio of commercial and commercial real estate loans grew 6.8% on an annualized basis.

And as Jim Sandgren will discuss, our pipeline remains strong.

Our focus on improving efficiencies was evident with our 6.9% decline in operational expenses from the fourth quarter.

And we are pleased with our continued upward trend in our tangible book value, which increased 9.5% from a year ago.

To provide more detail, I'll now turn the call over to Jim Sandgren.

Thank you, Lynell, and good morning, everyone.

From a bank perspective, the first quarter saw the continuation of a very positive trend for Old National, 8 consecutive quarters of steady organic loan growth.

If you'll turn to Slide 7, I'll begin by taking a closer look at loan growth for the quarter.

As you can see, our $48 million in growth was once again driven by commercial lending.

We saw commercial balances increase over $85 million in the quarter, or 6.8% annualized, driven exclusively by growth on our commercial real estate portfolio as C&I customers paid down line balances during the quarter, and new production was seasonally down.

Indirect balances increased slightly at $32 million, while direct consumer and residential mortgage balances dropped due to our typical first quarter seasonality.

It's also worth noting that total loan growth for the quarter was impacted by the large decrease in residential mortgage loans held for sale as outlined on the slide.

As I've mentioned during recent calls, we continue to focus intently on driving more commercial lending and we were able to execute on that strategy again in the first quarter.

While some (inaudible) of our regions generated commercial growth, I'd like to draw specific attention to the following markets that led the way: Milwaukee, Louisville, Lexington, Evansville and Grand Rapids.

I think these positive results again validate our transformational growth strategy.

Turning to Slide 8, I'll begin by focusing on the new production graph on the left.

As you can see, commercial production was basically flat compared to fourth quarter '16, but was up nearly 45% year-over-year.

Of the 40 -- $455.5 million produced in the quarter, 63% was CRE and 37% was C&I.

While C&I as a percentage of total production fell, by comparison it represented 46% of our total commercial production in fourth quarter '16.

We are seeing accelerated C&I growth in our current commercial pipeline and we believe that bodes well for future quarters.

The middle graph depicts a 65 basis point increase in our production yield compared to fourth quarter '16.

In addition to the upward movement of the LIBOR and prime rates, this increase could be attributed to the fact that our fourth quarter 2016 yield was negatively impacted by a couple of large tax-exempt loans.

Also noteworthy is that 74% of our Q1 commercial production were variable rate loans, which puts us in a nice position should rates continue to rise during the year as anticipated.

The final graph on Slide 8 reflects another quarter for our commercial -- another record quarter for our commercial loan pipeline.

As of March 31, our pipeline is now $1.6 billion with $362 million of that total in the accepted category and another $401 million in the proposed category.

As you can see from the graph, we have virtually doubled our first quarter 2016 pipeline numbers and grown $213 million compared to fourth quarter 2016.

Of the $213 million of pipeline growth over the last quarter, over $170 million is in the C&I category as optimism continues to grow among our small business and middle-market customers.

Clearly, this gives us great optimism for C&I growth for the remainder of 2017.

Before we move to our fee-based businesses on Slide 9, I'd like to provide some color on our overall noninterest income in Q1.

Our noninterest income was negatively impacted by a combination of lower-than-anticipated service charges due, in large part, to lower overdraft presentments, a lower level of Anchor recoveries as compared to fourth quarter 2016, plus we experienced some seasonality in our mortgage business.

That being said, I'm happy to report that all 3 of our fee-based businesses saw increases compared to first quarter of 2016.

Focusing first on wealth management, revenue of $9 million in the first quarter represented a 5% increase over fourth quarter 2016.

While we received a slight boost from equity market gains during the quarter, much of the quarter-over-quarter increase in revenue relates to a fee connected to a large trust settlement, along with success in our retirement plan services group.

While our investments division experienced a slight decline compared to fourth quarter '16, we were up 28% on a year-over-year basis.

Our investments team finished the quarter strong with a good March, and we anticipate that positive momentum continuing in future quarters.

Our investment advisers continue to focus on financial planning and insurance sales and always doing what's in the best interest of our clients.

Turning to mortgage.

You can see that revenue was down slightly for the quarter on lower production, due primarily to seasonality and higher rates.

Production picked up in March and again in April, and our pipeline has grown to $130 million as of March 31, up over $40 million from our December 31 pipeline of just over $90 million.

As anticipated, refinancings have slowed and our mix of new production has flipped from 60-40 refi to purchase, now to 60-40 purchase to refi as we experienced in March.

We continue to make extensive investments on our mortgage business with the new origination system in 2016 and a new servicing platform anticipated later in 2017.

We also continue to add quality producers on our larger-growth markets.

Overall, I believe the best word that describes our first quarter from a bank perspective is consistent, as we continue to demonstrate that we are a franchise ideally positioned to consistently produce organic loan growth and fee-based revenue throughout our footprint.

Given the growing optimism of our customers, increasing pipelines and positive momentum in our fee-based businesses, we fully expect that we can continue to execute our growth plan in the coming quarters.

With that, I'll turn the call over to Jim Ryan.

Thank you, Jim.

Starting on Slide 11, adjusted pretax pre-provision income grew by more than 24% year-over-year.

The growth in net interest income reflects the contribution from our newly acquired markets in Wisconsin and strong underlying fundamentals in our banking business.

Just as a reminder, the decline in our fee income year-over-year is a result of reduction in revenue from the sale of our insurance business that occurred in the second quarter of 2016.

We are pleased with our pretax pre-provision income growth as we remain focused on improving the operating leverage of the company.

Moving to Slide 12.

You will see the trend of our reported net interest margin and our core net interest margin.

Our reported first quarter net interest margin was down 13 basis points to 3.50% as a result of lower accretion income quarter-over-quarter, which was consistent with our accretion forecast.

Our core margin was stable at 3.10% and was in the range of the guidance we gave in our fourth quarter call.

Our core margin did benefit from higher prime and LIBOR resets on loans and higher reinvestment rates in our securities portfolio during the quarter.

However, those benefits were offset by 2 fewer days in the first quarter when compared with the fourth quarter, the higher repricing of our wholesale funding and the intentional lengthening of the repricing of our wholesale funding to improve our net interest margin sensitivity to future rate increases.

We expect that our core margin will be stable to slightly increasing in the second quarter, depending on our mix of loans and reinvestment rates for loans and securities.

Shifting to Slide 13, noninterest expenses -- on 13, operational expenses as defined on the slide totaled $100.5 million in the first quarter.

Operational expenses benefited quarter-over-quarter from intentional actions taken in 2016 to improve our operating leverage, like the branch rationalization project completed in 2017 and the repurchases of certain bank properties out of sale-leaseback transactions.

While we were pleased with the improvement in our first quarter expenses, we remain focused on further improvements during the quarter.

Slide 14 shows the changes in our tangible common equity ratio and tangible book value per share.

Our focus on consistent growth of tangible book value per share led to a 9.5% increase year-over-year of this important metric.

Moving to my final slide on Page 15, I will review the anticipated impact from our historic tax credit business.

As a reminder, we entered this business more than 1.5 years ago and have originated tax credit projects over that period.

The first of those tax credit projects we expect will go into service in 2017.

As a result of the tax credits that are included in our effective tax rate over the course of the year, we now expect our full year 2017 effective tax rate to be 31% on a fully taxable-equivalent basis and our GAAP tax rate to be 23%.

As a part of the accounting for these projects, we also anticipate recording impairment charges of $4.4 million and $5.5 million in the third and fourth quarters of this year, respectively.

The impairment charges are recorded in full when a project is placed in service.

These charges will be booked in the other expense line item on our income statement.

The tax benefits of these charges are already factored into our projected tax rates.

Netting the tax benefit with the impairment charges, we anticipate a net benefit to full year 2017 net income to be approximately $2 million.

Additionally, these community projects provide CRA credit, loan, deposit and investment opportunities to the bank.

Given our strong first quarter expense number and including the impact of the impairment charges I just mentioned, we anticipate our full year 2017 noninterest expenses to be in the range of $405 million to $410 million.

Future originations can affect the 2017 tax benefits and expense projections.

I will now turn the call over to Daryl.

Thank you, Jim.

As we move to Slide 17, we've laid out for you net charge-off and provision results comparing the current quarter's net charge-offs and provision expense for both the prior quarter as well as to the first quarter of 2016.

For the current quarter, we recognized a provision expense of $300,000 compared to provision recapture of $1.8 million last quarter and provision expense of $100,000 for the first quarter of 2016.

With respect to net charge-offs, we posted net losses of $300,000, representing 1 basis point of average loans in the current quarter compared to no net losses last quarter and net charge-offs of $1.6 million or 9 basis points of average loans in the first quarter of 2016.

As you remember, full year 2016 -- provision was $1 million with net charge-offs of $3.4 million or 4 basis points of average loans.

While gross charge-offs in the quarter were relatively controlled, we benefited greatly from recoveries of $2.9 million, which were 91% of the gross charge-off amount of $3.2 million.

Because the ending allowance for loan losses was equal to the period beginning balance, the allowance to total end-of-period loan ratio remained at 55 basis points.

However, the allowance to nonperforming loans improved from 34% to 38% in the period due to a decrease in nonperforming loans, which I will review shortly.

As I remind you, each quarter, it's important to remember that we also have marks on acquired loans, which at the end of the current quarter totaled $117.1 million.

Total allowance on loan marks to total premarked end-of-period loans stood at 180 basis points at quarter's end.

As we move to Slide 18, you can see that special mentioned loans showed very little change in the quarter, remaining at roughly $96 million.

Substandard accruing loans increased $15.5 million in the quarter.

Growth in this category can be attributed to the addition of 2 large credits, one an assisted living commercial real estate relationship of approximately $17.7 million from our Wisconsin portfolio; and the other an agriculture loan relationship in the amount of $7.9 million.

While the agricultural credit is believed to be stable at this time, we are watching the assisted living relationship very closely as we are concerned additional deterioration may occur over time.

Nonaccrual loan showed improvement in the quarter, falling $16 million or 12%.

The improvement in this classification came mainly from payoffs and paydown on a number of loans with very little dollar inflow in the period.

Overall credit results in the quarter continued at acceptable levels, much as it has over the most recent reporting periods.

I mentioned last quarter that we were beginning to watch our consumer delinquencies and we continue to do so.

While we've seen some slight improvement in the delinquency levels in many of our customer product types, March 2017 delinquencies continue to remain somewhat higher than March 2016 levels in many areas.

This movement has not manifested itself in higher losses to this point, but we will continue our review and make any changes we feel necessary if credit tolerances are breached.

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

Thank you, Daryl, and good morning to everyone on the line.

My comments will begin on Slide 20 with a slight peek inside our board room as we think about the first quarter.

Approximately a week to 10 days before every board meeting, I send a letter to our board that summarizes our financial performance for the quarter, reviews any issues that we are having and highlights significant client opportunities, et cetera.

The letter is intended to provide a platform to provoke additional discussion and interaction at the board meeting versus just an exercise in management presentations.

This quarter, in that letter, I used the analogy of eating oatmeal as the headline for our financial performance.

Oatmeal is not the most exciting breakfast I eat.

In fact, it is rather boring.

But I know that it's good for me, and eating it more often allows me to eat a more substantial and exciting breakfast on occasion, like eggs benedict.

Like that oatmeal breakfast, our first quarter was, for the most part, boring.

Absent the preannounced charges associated with our branch closures, there were no unusual items, and we delivered on the commitments that we made you last quarter.

Overall, unlike eating boring oatmeal, we were very pleased with our results.

We had good loan growth, we maintained our strong credit performance and our expenses were well maintained; and fee income was steady.

Most importantly, the platform for optimism remains in place for the future quarters, driven by the continued growth in our loan pipeline, the excellent performance in our new markets and the sales opportunities in our fee-based businesses and our continued focus on improving our expense base.

In all honesty, there were some areas that could have been better, which, if they had -- would have occurred this quarter, it would have made for, wait for it, eggs benedict.

While we were pleased with our overall growth of commercial loans, our C&I loan performance was not where we would like it to be, even when you factor in the normal seasonality of the first quarter.

I believe that this should rectify itself in future quarters given that positive momentum was already seen in the second quarter.

Direct lending should also pick up with spring and summer borrowing, and as Jim mentioned, we've already seen good improvement in our mortgage loan pipeline.

Our fee-based businesses performed as expected for the quarter, and our sales activity remains good.

One area of concern for us would be service charge revenue.

We continue to see less presentments and decreasing returned check fees, some of which we could -- can be attributed to the improving economy as well as tax refund checks, but also by our more client-focused approach.

I would expect in this line item to be under pressure for the balance of the year, but offset by improved mortgage and capital market revenue as well as other areas of fee-based business.

Even with our adjusted efficiency ratio of 63.8%, expenses will remain a strong focus for us.

My college football coach had a saying, "You make hay when the sun shines." For an overweight kid from Cleveland, I truly had no idea what he was talking about.

But after 4 years of hearing that statement, I finally got it.

You need to work even harder when times are good and not become complacent.

That sums up our approach to expenses.

While it'd be very easy to jump on the revenue train with rising rates and lose sight of efficiencies, we will not take that approach and, in fact, we have doubled down on our expense focus.

And we'll continue to look for ways to reduce costs within our back rooms through contract renegotiations, process improvements and, quite frankly, in all areas of the company.

Our mantra has not changed, our cost reductions must be sustainable, not temporary and, for the most part, they must be driven with the goal of improving the customer experience.

The bottom line for our financial performance this quarter is that we remain optimistic about our ability to meet or exceed the (inaudible) that are in place for the balance of the year.

A couple of closing thoughts.

Last quarter, I said we did not feel any compulsion to do another partnership and that remains true today, but if the right deal with the right price and the right market comes along, we are fully prepared to move forward.

Wisconsin is fully integrated and our ability to execute is strong.

We continue to see several books and none of them have hit our right criteria.

As you all know, pricing has seen upward movement, and median deals done today would have been on the upper end of pricing in prior years.

Finally, last quarter we discussed the potential for regulatory reform, and I commented that while there was a great deal of discussion, ultimate success depended upon the ability to get bipartisan cooperation in D.C. and not continuing the rancor we have seen in the past.

Fast forward to today, the tenor has not changed much.

There is still a great deal of discussion about regulatory relief.

The House Financial Services Committee is beginning to discuss the CHOICE Act.

And the members of the comparable Senate committee are asking for input as to what changes we would like to see.

This is good, but I remain cautious given the priority seems to be health care followed by tax reform, then potential infrastructure investments and then finally, regulatory relief.

I hope they will see some new movement in near term, but given the magnitude of other areas, we are not counting on it.

In other words, much like the vintage Alka-Seltzer ad, "Pop, pop, fizz, fizz, what a relief it is," there may not be any reliefs anytime soon.

As a reminder, we have been very public with the saying that we -- while we support -- absolutely support regulatory relief, we do not see it as an immediate reduction in cost.

But these changes to the regulatory structure will allow us to serve our clients better and improve our ability to drive economic growth in our communities and, over time, reduce costs.

With that political statement, Kristen, we're now open for questions.

(Operator Instructions) Our first question comes from Scott Siefers with Sandler O'Neill.

So a few quick questions.

First though, the other fee line item, it came down kind of substantially from the fourth quarter, which, I think, is just the delta in the Anchor-related recoveries.

Is that -- I wondered if that's correct.

And then, two, what would be the outlook there?

I know it can be extraordinarily volatile and tough to (inaudible).

Yes, Scott, that's a great question and thank you for asking.

It is the volatility of the Anchor recoveries.

I think -- let me just clarify.

On the preceding quarter, we talked about a number, somewhere in that mid-40s range for fee income.

That would be with normalized recoveries and with our fee-based businesses.

Our total fee-based business would be in the mid-40-ish range on an ongoing basis.

Then you get the volatility of the recoveries.

So -- and first quarter is always a little soft for us.

Jim, you go ahead.

No, I think you answered the question.

It's just hard to predict what recoveries we're going to see in any given quarter.

But we still feel good about the year.

Okay.

So mid-40 is still -- even though we're starting with the softer 1Q, presumably some sort of rebound overall, so that mid-40s is still kind of the number.

Yes, we're still comfortable there.

Yes.

Okay.

All right.

And then, Jim -- Jim Ryan, that is, would you mind going into little more detail on the tax credit-related impairments that you expect in the fourth quarter and beyond?

So I imagine the updated expense guidance, that's inclusive of those impairments.

Is that correct?

And then I guess, the other question is will those continue -- will those simply be an ongoing part of the expense base?

It's just that they sort of start in a material fashion in the second half of the year, but then they -- do they continue since that's part of the ongoing business, I guess?

Yes, it's definitely part of our ongoing business.

We've got a group that specializes in this.

And it's an important line of business for us.

These are great community projects as we talked about.

It gives us CRA credit and brings other loan and deposit opportunities.

So I would expect this to be a continuing part of our business going forward.

It's just accounting is a little bit unique, especially for these historic tax credits, where you have to realize the tax benefit over the full year the project goes into service, but you don't impair right off your investment until the quarter the project actually goes into service.

So there's just a timing mismatch, which is a little bit unusual versus other kind of tax credit projects.

And the fact that the expense for the investment is actually in the operating expenses where the benefits are all in the tax provision.

So it's a little bit unique.

We wanted to highlight it.

This the first year we're actually seeing any of this type of business actually projected to go into service.

We want to spend a little bit of time just highlight the impact for your models.

Scott, if I might just add.

The tail on these projects is extremely long.

Just to put it in perspective, the one that we're getting the benefit for now, Chris Wolking and I actually called on that project when we were up in Ann Arbor for our Investor Day.

It is a long window to get -- when tax credit's approved and they get projects completed because these tend not to be the most beautiful buildings in the communities that we're serving.

So while we're deeply committed to the business, we think it makes great sense to our markets, is a long track, so that's going to be lumpy.

Our commitment is to let you know when the lumpiness has occurred.

Okay.

All right.

That makes sense.

And then, Jim, just final ticky-tacky question on that.

So with the 31% FTE tax rate expectation for the full year, with the way the accounting works, so will the FTE tax rate then step down in 3Q at the same time that the impairments come into the income statement?

No, that's kind of the average for the full year, Scott.

I mean, you'll see a little bit of movement throughout each quarter.

But that's really kind of the long term -- or the, excuse me, the full 2017 year impact.

There will be a little bit of movement into quarter.

Our next question comes from Chris McGratty with KBW.

Maybe a question for Daryl, on the assisted living credit.

Wondering -- seems like a little bit of a larger credit for you guys.

Couple of questions.

Number one, I assume this is a self-originated loan.

And I'm curious if there's any reserve against it currently.

And your outlook sound a little bit cautious, which is, I think, customary for your body language.

But just if you could kind of walk -- could any kind of...

Chris, I wanted to interject before he answers.

That was the most upbeat he's been in 12 years.

Yes.

So Chris, this did come out of the Anchor portfolio, which typically had larger exposures than we would see.

And so as we continue to originate up there, you'll see larger exposure.

But this came out of that portfolio.

It does carry, today, the pool reserve in -- for our substandard loans.

We're in the process of evaluating what we think the value is.

If it deteriorates further, we would look at specific impairment.

But it carries that pool allocation today.

And yes, I may be a little pessimistic about this, but it's probably warranted.

So if I understand the accounting, you've got a general on it.

Would it just be like kind of moving it from one pocket to the other?

Or would you actually set aside an additional provision against it?

I would think -- we don't have the numbers yet, but I would think the reserve that we'll keep against this, if it moves to nonaccrual, will be higher than what we have in the pool today.

Does that make sense?

Did I answer your question?

Yes, I got it.

Maybe, Bob, one for you on the efficiency goals.

You talked about the 63.8% adjusted for the quarter.

Can you remind us where the board reset these for the year and kind of the moving pieces and how you hope to achieve them?

Yes.

So just -- our incentive comp for the short term this year really has 3 components.

20% is our ROTCE; 20% efficiency; and then 60% our EPS targets.

Chris, we've historically not been public with other than the efficiency goal tied to those incentives, and what I can assure you is that the board is deeply committed to high performance as much as we are.

And their goals would be at or beyond what you would expect based on your estimates.

But we just -- we've never been public with those goals, so...

Okay, that's understood.

The -- just a point of kind of clarification.

Given the movement in the tax credits to the expense line, I know you adjust for the amortization.

Would that be fair to assume that you would adjust for that as well?

Yes.

Okay.

And then maybe the last question, Jim, for you.

If we assume -- you gave the color on the tax rate for the balance of the year, which is helpful.

For next year, how do we assume this plays out?

Do we assume kind of a 31% effective and then also some impairments to the expense line?

Or should we assume that we go back to where we were historically?

We continue to originate this business.

We're going to have businesses that we're going to originate through all of 2017.

And I would expect really just kind of a similar year-over-year change.

I would not go back to the historical numbers just because we intend to be in this business and we're currently originating new product as we speak.

Okay.

So just I'm clear, 31% effective and roughly $10 million of amortization -- or impairment, I should say, spread out.

Or is it kind of you incurred in 2 quarters?

I'm just trying to make sure to get the model right.

Yes.

So if for example, a project was to go into service in the first quarter, you'd really see that benefit of the taxes and the benefit of -- or the expense of the impairment in the same quarter.

It's just these projects are spread out -- are later in the year, in the third and fourth quarters.

So that impairment expense could be a little bit volatile just as those projects go into service.

Our next question comes from Jon Arfstrom with RBC Capital Markets.

Production yields, the 3.83% number, I know, Jim Sandgren, you talked a little bit about how there was some pressure on the last quarter.

But does that feel like a sustainable-type number?

Is there anything unusual in there?

No, nothing unusual in the quarter.

I think that's probably a more normalized run rate.

Obviously, if we have any kind of large tax-exempt opportunities going forward, that will have maybe a similar impact.

But I feel like that's a pretty good sustainable run rate.

Okay.

Okay, good.

Jim Ryan, it looks like -- just maybe talk to us a little bit about your asset sensitivity.

I know that in the back of the presentation, it looks like you're more asset-sensitive as time goes on.

Can you maybe talk a little bit about the repricing time line on some of your assets?

Yes, good question.

We do benefit in the second year of our models more than we do in the first year just as we have an opportunity to reprice the investment portfolio and other fixed rate loans.

So you hit the nail on the head and you understand that pretty well.

In terms of sensitivity, the other thing that I'm watching very closely is obviously our reinvestment rates.

During the first quarter, we had higher yields.

And in the second quarter, it came to -- our first quarter came to a big end and then second quarter began, we saw our yields come in a little bit.

And that will also drive any benefits we're going to drive from higher interest rates.

So clearly, we are more asset-sensitive than we were from the -- from 12/31 and that was pretty intentional as we saw an opportunity.

As rates pull back a little bit, it lengthens some liabilities at our wholesale funding book, trying to take advantage of the forward expectation for interest rates.

Okay, good.

You guys seen anything on deposit pricing pressures?

It doesn't look like it, but I'm just wondering if there are any concerns or reactions from clients yet.

No, Jon, really not much.

We're keeping kind of a close ear to the ground with our regions and having conversations all the time.

But no, really haven't seen much change.

So we've been able to keep deposit rates as they are.

And Jon, our model still reflect that when rates continue to rise, we will have to reprice those deposits, even though we've been able to hold off on these first couple of rate increases here.

So our models still reflect the full expectation that deposit rates will reprice at some point in time.

Our next question comes from Terry McEvoy with Stephens.

How about first question?

Could you talk about the group in Madison that's focusing on CRE and moving upmarket and whether any of the deals or success that they could be having showed up, particularly last quarter within the -- that annualized CRE growth that you show on Page 7?

Yes.

This has just really been a continuation, Terry, since we announced the partnership last January, they've had growth every quarter since the announcement.

So we continue to see strong growth in Wisconsin.

But we've had some other growth in markets like Louisville, Lexington, and now into Grand Rapids.

So we continue to leverage that experience and expertise throughout our footprint and keeping a close eye on commercial real estate.

We're still at 190 -- 189% of total capital.

So we still have room to move.

And there are pockets of our markets where the competition is capped out.

And we're seeing opportunities to be a little bit more selective around pricing and fees.

So just kind of a continuation, I'd say, certainly from the Wisconsin perspective.

Terry, just to remind everybody, you probably know this, but our first -- last year in 2016, from date of closing to the end of the year, we grew our loan portfolio in Wisconsin 7%, which is pretty remarkable given the turmoil you go through with your clients.

I think it's a great reflection on the quality of the folks we have up there and the acceptance of our model in those markets.

And then as a follow-up, the 15 branches recently and then the consolidation, 5, I believe, last year, could you just talk about deposits, outflows versus expectations within those 15 or 20 branches?

Yes, Terry.

It really continued to be lower than we have modeled.

I think with the strong investment, our mobile and online platforms, and the fact that we still have branches that are fairly close in proximity to some of those branches that have been consolidated, we continue to see a lower level of attrition in those deposits.

So it's really an opportunity to reduce some costs and then reinvest some of that in technology to make sure we're continuing to serve our customers.

So 3% growth in the quarter from a deposit standpoint is supportive of that.

I think now we're up to the metric we continue to look at is deposits per branch.

I think we're now about $56 million.

3 or 4 years ago, that number was closer to $25 million, $30 million.

So we've made great progress.

And I think we are selectively making the right calls on these branches.

And then just last question.

If you could just help me on the total auto portfolio, how much did that come down in the first quarter?

And what's the expected runoff will look over the next 3 quarters?

Actually, that portfolio grew slightly in the first quarter.

We've -- Chris has done a great job of improving pricing and reducing cost.

But as you all know, the demand is still there.

So we're getting a better yielding product, but -- well, not unfortunately, that portfolio actually grew.

Our expectation for the balance of this year is probably would be stay stagnant to maybe slight growth, again, just based on the volume seen.

Just to remind you, we don't do foreplanning.

And over time, we want to wind through this portfolio.

But we've improved the profitability over the last quarter or 2 under Chris' leadership.

(Operator Instructions) Our next question comes from Andy Stapp with Hilliard Lyons.

Were results impacted by the new stock-based accounting standard?

No.

They're immaterial.

Okay, okay.

And how much was the large trust settlement mentioned in your prepared remarks?

Yes.

We prefer not to disclose that, Andy.

As Jim said, it was significant enough to really change.

But obviously, you can understand the confidential nature of that.

Yes, okay.

And minor question, but do you have a breakout of the $1.4 million in branch consolidation expenses by line item?

We can get that to you.

How about if Lynell follows back up?

We've got a 5-branch over the 15 branches.

We can get that to you.

And if anybody else has an interest, drop Lynell an e-mail and we'll get it to you.

Our next question comes from Peyton Green with Piper Jaffray.

Bob, question for you.

In terms of the loan production and the loan production yield, we think -- I mean, if we look at the first quarter versus the fourth or the year-ago number, the production yield was substantially higher, 3.83%.

And the new production balance was roughly stable, linked quarter.

And I guess my question would be, are you expecting to work a mix change with the securities book going forward, such that overall ROA might improve more than balance sheet growth?

And then also, the second question would be, with the loan pipeline proposed and accepted, does that support mid-single-digits loan growth going forward?

Yes, I can answer the second half of that question which is, absolutely.

Pipeline, as Jim said, at a record level, even in a pull-through rate of 35%, we still get to that mid-level growth that you just referenced.

As to your first question, I'm going to let Jim Ryan address that.

Yes.

It's actually in the other category, the other loss category.

And it shows up in our income statement in the Other expense category, is a big bulk of the expenses, which were a lot of lease termination charges.

The rest of it's pretty small in the Other categories.

So different question.

You're answering Andy Stapp's question and this...

So Peyton, you want to repeat that question?

I apologize.

Sure, no problem.

The production yield of 3.83%was up versus 3.36% a year ago and 3.18% in the linked quarter.

And yet, the production volume was around $455 million, roughly flat with $459 million in the fourth quarter.

And my question was, if you generate the 5% loan growth, would you expect earning assets to grow by a similar amount?

Or will you work mix change?

Yes, I would expect it to grow by a similar amount.

That production yield is highly dependent on that mix of taxable versus tax-exempt and also the fixed versus floating.

And so you're going to see a little bit of volatility to the extent that we have more tax-exempt loans in a particular period over another.

But the fact of the matter is that prime and LIBOR being higher, all those are going to lead to higher production yields versus the year-ago numbers.

Sure.

And at the margin, you're less likely to add indirect, which is lower.

Absolutely, absolutely.

(Operator Instructions) And at this time, there are no further questions.

Well, Kristen, I think everybody's had enough time for breakfast.

So with that, we'll conclude our call.

If you have any follow-up questions, please reach out to Lynell, and thank you for your time.

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 3913117.

This replay will be available through May 9. If anyone has additional questions, please contact Lynell Walton at (812) 646-1366.

Thank you for your participation in today's conference.