Old National Bancorp (ONB) 2017 Q2 法說會逐字稿

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

This call is being recorded and has been made accessible to the public in accordance with 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 July 25 through August 8.

To access the replay, dial 1 (855) 859-2056.

Conference ID code, 49543317.

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, Dorothy, and good morning, everyone.

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

Joining me are Bob Jones, Jim Sandgren, Jim Ryan, Daryl Moore and Mike Woods.

Before I begin the discussion of our second quarter results, I would like to remind you that some comments today may contain forward-looking statements that are subject to certain risks, uncertainties and other factors that could cause the company's actual future results to differ materially from those discussed.

Please refer to the forward-looking statements disclosure contained on Slide 3 of this presentation, as well as Old National's SEC filings for a full discussion of the company's risk factors.

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

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.

Reconciliation for these non-GAAP measures to the most directly comparable GAAP financial measure are appropriately referenced and included within the presentation.

I'll begin the review of our strong second quarter performance on Slide 5. This morning, we reported second quarter net income of $38.9 million or $0.28 per share.

This net income represents an 8% increase over the first quarter of 2017.

Our investment into higher growth markets continues to yield positive results as our portfolio of commercial and commercial real estate loans grew 10% on an annualized basis during the second quarter, while our total loan portfolio grew almost 5% on an annualized basis.

In addition, our fee income grew almost 15% quarter-over-quarter, with gains in almost every line item.

Our credit costs remained low, and our expenses were well controlled.

We are also pleased with the continued upward trend in our tangible book value, which increased 7.5% from a year ago.

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

Thank you, Lynell, and good morning, everyone.

If the definition of a good quarter is executing your stated strategy, then this was a very good quarter for Old National.

The growth market strategy we have detailed for you over the past several quarters led to meaningful commercial loan and fee-based business revenue growth in Q2.

Starting with Slide 7, you can see that $110.4 million in total loan growth for the quarter was primarily driven by our 10% annualized commercial loan growth.

We also experienced loan growth in HELOC balances, while our indirect portfolio declined.

The $128.2 million in commercial growth for the quarter was comprised of $91.1 million of C&I growth or 71%.

And the remaining 37.1 million or 29% was of the CRE variety.

This was a major deviation from the first quarter when all of our commercial growth was in the CRE category.

While we enjoyed excellent commercial balance sheet growth in a number of markets, a few that I'd like to draw special attention to are Evansville, South Bend, Elkhart, Ann Arbor, Indianapolis and Milwaukee, which was a nice mix of our new and legacy markets.

Turning to Slide 8, the graph on the left illustrates a strong quarter from new commercial production.

The $563.6 million we generated represents a 23.7% increase over the first quarter and a 41.7% increase year-over-year.

The middle graph depicts our production yield, which picked up slightly as a result of higher short-term rates.

It's also notable that 68% of our second quarter commercial loans were variable rate loans, which bodes well, should interest rates continue to rise.

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

With the total balance exceeding $1.8 billion on June 30, our pipeline includes almost $800 million combined in the proposed and accepted categories.

By comparison, this time last year, our pipeline included $489 million in those 2 categories.

Also highly encouraging for the balance of the year is that future advances on existing commercial construction loans were just shy of $500 million at the end of the second quarter.

These record numbers speak volumes about the successful execution of our growth market strategy and the ability of our lenders to produce meaningful organic loan growth month-after-month and quarter-after-quarter.

Slide 9 takes an even deeper dive into our loan production yield trends for the quarter.

Beginning with the top graph, you can see that residential mortgage production jumped 37.3% from Q1 to $237.1 million, while the yield remained steady.

The consumer direct slide in the bottom left illustrates the 70.3% production increase over the first quarter, which was driven, in part, by special introductory rate HELOC campaign.

While this marketing campaign had a negative impact on our new production yield, it certainly helped fuel gains in HELOC balances over the first quarter.

The graph on the bottom right is an excellent illustration of our current balance sheet realignment strategy at work.

During the last several calls, we've emphasized the desire to reduce indirect volume while taking advantage of more profitable lending opportunities.

As you can see from this graph, we did just that in the second quarter.

Indirect production dropped 34.3% compared to the first quarter, yet our yield increased substantially.

As we continue to gradually decrease the size and increase the yield and margin of our portfolio of indirect loans, we anticipate additional improvement in this category going forward.

Turning to Slide 10, which focuses on fee-based business revenue on a quarter-over-quarter and year-over-year basis.

I'll begin at the far left and look at Wealth Management.

Our 7.7% quarter-over-quarter increase in revenues is primarily the result of tax preparation work and filings that occurred during the second quarter of each year and the corresponding revenue.

The year-over-year revenue increase we experienced can largely be attributed to recent market performance.

Moving to our investments division.

Second quarter revenue was flat compared to Q1 as we continue to transition from a transaction-based brokerage model to a more fee-based advisory model.

From a year-over-year perspective, revenue was up as a result of our anchored partnership that closed in 2Q of 2016 and like Wealth Management due to recent market performance.

Financial planning at fee-based advisory business continue to be significant areas of focus.

We touched on our residential mortgage gains in the previous slide, and the graph on this slide further illustrates a successful quarter from a mortgage perspective.

The nearly 24% revenue growth compared to Q1 was driven by increased production in a number of markets.

Additionally, we continue to see a higher level of home purchases versus refis.

And in the month of June alone, home purchases increased to 80% of our new production for the month.

Our mortgage pipeline remains strong entering the third quarter with 74% of the loans in the home purchase category.

Based on our pipeline, which stands at nearly $140 million at June 30, we anticipate Q3 loan production being equal to or higher than that of the second quarter.

We also continue to add key producers in some of our growth markets with special focus on Indianapolis.

The final graph on Slide 10 is a snapshot of revenue growth and capital markets with the $2.7 million we generated in the second quarter more than doubled our revenue compared to the first quarter of '17 and more than tripled versus the same quarter last year.

The primary driver of this impressive growth was strong sales production and customer interest rates derivatives or swaps, which was boosted by the higher levels of commercial production.

Also of note is that we experienced nice growth in our foreign exchange revenue, which is a relatively new business for Old National.

Thanks to Chris Wolking's continued strong leadership in this area, both our customer derivatives and FX pipelines remained strong going into the second half of the year.

Overall, we executed our stated growth market and balance sheet realignment strategies exceptionally well in the second quarter, which resulted in significant commercial loan growth and some meaningful revenue gains in mortgage and capital markets.

We also delivered on our pledge to reduce indirect lending volume, while increasing profitability.

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

Thank you, Jim.

Starting on Slide 12, I'm pleased to report that adjusted pretax preprovisioned income grew by 5.8% quarter over quarter and 17.8% year-over-year as a result of strong underlying fundamentals in our banking business, our focus on expense reductions and the contribution from our acquired markets in Wisconsin.

We are pleased with the results of growing adjusted pretax preprovisioned income as we remain focused on improving the operating leverage of the company.

Slide 13 details the major components of total revenue.

As a reminder, both the sale of our insurance business and our partnership with AnchorBank closed in the second quarter of 2016.

When you exclude the $7.1 million that we reported in insurance commissions in the second quarter of 2016, our fee income grew 11% year-over-year.

Moving to Slide 14.

You'll see the trend of our net interest margin and a new graph depicting the portion of the margin attributable to accretion income.

The decline in our reported net interest margin was attributable to the decline in accretion income in the quarter.

This change in disclosure, which we believe we'll begin seeing on an industry-wide basis, is now preferred by the SEC.

The current quarter margin did benefit from our continued strong loan growth and the last interest rate increase.

Excluding changes in accretion income, loan coupons should continue to trend higher from recent increases in short-term interest rates and the improved mix.

Interest rate and core deposit costs were 1 basis points higher during the quarter at 23 basis points.

Currently, we do not anticipate any significant repricing of our core deposits.

Further margin improvement could come with a steepening of the yield curve.

Shifting to noninterest expenses on Slide 15, operational expenses, as defined on the slide, totaled $101.1 million in the second quarter and were slightly higher than the first quarter.

Our current quarter operational expenses did include an additional $1 million in annual merit increases.

The $1.7 million depicted in the orange portion in the current quarter represents $700,000 in branch consolidation charges and $1 million related to a client experience improvement initiative currently underway.

We anticipate additional charges related to an initiative of $1.9 million in the third quarter and $800,000 in the fourth quarter.

We expect this investment will continue to reduce complexity in our support areas and further reduce cost.

As we move further along in this initiative in the coming quarters, we will update you on our progress.

As Lynell referenced in her opening comments, Slide 16 shows the changes in our tangible common equity ratio and our tangible book value per share.

Both metrics have increased nicely from prior quarters and year-ago levels.

My final slide is Page 19.

It's an update on the anticipated impact from our historic tax credit business.

Not much has changed from our original guidance last quarter.

We still expect our full year 2017 effective tax rate to be 31% and now expect our GAAP rate to be 1% lower at 22%.

We anticipate recording impairment charges of $4.4 million and $5.5 million in the third and fourth quarters of this year.

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

One last important note for your benefits, we are comfortable that we should meet or exceed the meeting -- meeting earnings' estimates for the remainder of the year.

I'll now turn the call over to Daryl.

Thank you, Jim.

We're pleased to report that strong performance in a number of asset-quality categories continued in the most recently ended quarter.

In this regard, as we move to Slide 19, we've laid out for you net charge-offs and provision results comparing the current quarter's net charge-offs and provision expense to both the prior quarter, as well as to the second quarter of 2016.

The current quarter, we recognized provision expense of $1.4 million compared to provision expense of $300,000 last quarter and $1.3 million for the second quarter of 2016.

The provision expense in the quarter was mainly driven by losses in additional impairment requirements in our acquired portfolios.

The need for increased provision associated with new loan growth was largely offset by a decrease in estimated incurred loss rates in most portfolio segments.

With respect to net charge-offs, we posted net losses of $200,000 representing 1 basis point of average loans in the current quarter compared to $300,000 in net losses last quarter and net charge-offs at $200,000 in the second quarter of 2016, both also representing 1 basis point of average loans in their respective periods.

While those charge-offs in the quarter were again relatively controlled, we benefited greatly from recoveries of $3.2 million, which were 94% of gross charge-off amount of $3.4 million.

While the ending allowance for loan losses was $1.2 million higher than the beginning balance, the allowance to total end-of-period loans remained at 55 basis points given the loan growth in the quarter.

However, the allowance to nonperforming loans declined from 37% -- or 38% to 37% in the period due to an increase 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 $107 million.

As we move to Slide 20, you can see that special mentioned loans increased slightly in the quarter with several former Anchor Wisconsin loans offsetting, to a degree, strong reductions in the remainder of this portfolio segment.

Substandard accruing loans increased $8.1 million in the quarter.

A good share of the net growth in this category can be attributed to the addition of 2 large C&I credits totaling roughly $20 million, again from the former Anchor portfolio, as well as a $5.6 million legacy credit moved into this category in the period.

Offsetting the addition of these credits were numerous paydowns and upgrades and the movement of a $17.5 million credit to nonaccrual.

Nonaccrual loans increased $10.1 million in the quarter.

Improvement in this category as a result of a good number of payoffs and upgrades was more than offset by the addition of the $17.5 million relationship just mentioned.

This credit is the assisted living commercial real estate relationship from our Wisconsin portfolio that I discussed as a concern in the call last quarter.

Overall, while we did have an increase in classified assets in the quarter, we continue the trend of low net charge-offs in controlled 30-day or greater delinquencies, which stood at 32 basis points at quarter's end.

While there are a number of risk areas that we intend to focus on as we look forward, some of the more important topics we are currently discussing are commercial real estate lending in segments that may be at/or close to the top of the market, such as multifamily, how to think about the rapidly changing retail industry segment, loan concentrations and the appropriate methodologies for identifying the most significant exception categories and managing the level and severities the same.

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

Great.

Thank you, Daryl, and good morning, everyone.

As always, we appreciate your participation in our calls.

I want to begin my closing comments with my usual perspective on our quarter, which in the spirit of music references that I've listed on this slide, I wanted to label, moving up the charts.

But Lynell vetoed my ideas being too corny, as if most of my comments aren't corny enough already.

The quarter continued the positive trends that we have seen for some time.

Strong loan growth funded by low cost core deposits along with robust pipelines, our growing fee income and anchored by continuing strong credit performance, all of which is reflective of the transformation of our franchise and the stronger markets and our focus on execution.

Our focus on expenses remains a key priority.

And when you adjust for certain items that maybe nonrecurring, I feel good about the progress we have made in the platform for sustainable improvement in future quarters.

This quarter is indicative of our overall strategy of consistent, quality earnings and one that further strengthens our ability for high performance.

Our confidence is bolstered by what we are hearing from our clients in the so-called, soft measures, that are being reported.

For the most part, our clients can look past the noise coming out of Washington.

And they do believe that over time, there will be a more business friendly platform, but they don't view this as the sole contributor of the growth for their businesses.

Their horizon may be longer, but their optimism remains.

For the most part, we have seen many of the traditional hard measures improve in all of our markets.

Unemployment is at very low levels.

Our GDP is growing at a slightly better rate, and sales volumes and pipelines for many of our clients continue to strengthen.

Let's hope that as we look to the future, the business climate can eliminate the WWE events occurring in D.C.

Many of you probably looked at the next bullet point and thought I was referring to my inauspicious dating career, you're directionally correct.

But that's not the context of my reference to the Three Dog Night song of the late '60s.

Instead the title of the song is apropos to the lack of significant progress in D.C. in moving forward with any legislation to improve the growth trajectory of our economy.

In other words, as an industry, we will need to drive earnings growth by ourselves with little or near-term assistance in the areas of tax or regulatory reform or infrastructure spend.

We may remember in our fourth quarter call, I referenced the euphoria coming out of the election and its potential for making a positive impact on the economy and on our industry.

At that time, I did give the caveat that the excitement could get derailed by the continuing theatrics in D.C. Fast forward 7 months and here we are with what appears to be Cats, one of the longest-running shows on Broadway.

So what does this mean to Old National?

It means that our game plan does not call for any economic impetus from D.C. We will continue to focus on old-fashioned banking, executing against our plan or revenue growth driven by strong commercial and retail loan growth and anchored by excellent credit, funded by low-cost core deposits and continued emphasis on becoming more efficient, which is why the work that Jim Ryan is doing at process improvement is so critical and the continued strength of our sales efforts, led by Jim Sandgren, in what will drive performance.

This lack of any significant economic or regulatory support is more than likely that the banking Tinder app has been more active of late.

We have seen an increase in a number of books crossing our desk.

There does seem to be a great deal more activity of late.

Our focus has not changed.

We are still willing to partner with the right bank and the right markets at the right price.

An ideal partner would be one that is in a growth market where we can strengthen an already strong C&I presence with added balance sheet opportunities and additional products that allow us to focus on a niche that is not currently the primary focus of the large regional banks.

Finally in closing, there is a new kid in town, someone that many of you may know or clearly have heard from our calls.

We are pleased to announce that effective on July 31, [John Moran] will be joining our team as the Head of Corporate Development.

In his new role, John will report to Jim Ryan.

He will focus on corporate strategy, M&A.

And he will assist Lynell with our already strong Investor Relations program.

We're thrilled to have John's insights.

And now, he's part of our team.

And with those brief comments, Dorothy, we'll be glad to take everyone's questions.

(Operator Instructions) Your first question comes from the line of Scott Siefers with Sandler O'Neil.

I just had a couple of quick questions.

So first, the $1 million of charges related to the client experience improvement in this [trip].

Can you just expand a little on exactly what you're doing there?

And that sounds like there'll be another roughly $2.5 million to $3 million of charges for the remainder of the year.

Just kind of -- just a little more thought on what you're doing there and what you intend to accomplish?

Yes, Scott, as we've come together over the years with multiple integrations and partnerships, you develop complexity.

And it's good to bring in folks from the outside that can look at an organization and process flows.

It's really a cross-the-company review of how we can approach things differently, serve our clients better, and at the same time, reduce some of their complexity both for our internal and external clients.

We've hired an outside group.

Those charges are really are for their consulting fees, which are helping us analyze the processes that we do have.

And we expect for the full year of about $3.7 million.

We expect that the return will be far in excess of that.

As many of you know, I'm not a big fan of putting a cute name on a program.

And we would prefer that we not make a commitment in terms of savings, just realize that our goal is to deliver and to over commit and under promise.

Okay, perfect.

And then I guess just on the vein of the cost base overall, I think in the 1Q, you guys have been suggesting sort of $405 million to $410 million expense base for the full year.

Is that something you're still comfortable with?

Yes.

Okay, perfect.

Then maybe if I can sneak one last one in.

So the indirect portfolio declining, but the yield's going up, so that's all kind of steady as she goes in terms of what you guys had articulated.

Would you anticipate further declines here as we go forward?

Or is there a point where that -- hits kind of a steady state just in terms of balances?

Yes.

I don't think we've hit steady state yet, Scott.

I think there's still some opportunities to increase the yield, and volumes will decrease correspondingly.

It's a very competitive business.

And we think there's more opportunities on our balance sheet on the C&I and CRE side.

I will say that Chris is doing a great job of driving of up yield though.

Yes, definitely, definitely looks that way from the numbers.

Your next question comes from the line of Chris McGratty from KBW.

If I could follow up on Scott's question about growth and the remix of the indirect portfolio.

If we're thinking kind of, Bob, out a few quarters, is that the right time horizon to think, kind of stability in that portfolio and the yields getting to where they need to be?

Because I think you've talked about the mid-single-digit consolidated to loan growth near term.

Is that -- I guess with an acceleration of loan growth, if the commercial trends continue, is it fair pressure or is that too aggressive?

No, I think that's fair, Chris.

What we really ideally like to do is get to a platform as we look to '18.

We're through the balance sheet change and the ability to grow from there.

So I think that's a very fair analysis.

Okay.

Maybe the second, you referenced Anchor a few times on the credit side.

I'm wondering there, Daryl, how that portfolio broadly has performed relative to the expectation and then also the pipeline of recoveries that you're continuing to recognize?

Yes, Chris, I don't think the portfolio's not performing any different than we thought it would.

As you know, when we go into the banks and you get a year or 18 months as you begin to get new financial information in and apply our standards to it, sometimes that we confirm where we were.

Other times, we'll look at borrowers and just say, "Okay, are there some weaknesses here?" And we always have, in this organization, our #1 application to credit areas, make the asset quality rating call right.

And so we're just applying what we have in other acquisitions.

So I don't -- there's nothing there that really creates issues for us.

So I don't think that we are concerned at all about where that portfolio is.

And to your second question recoveries, those recoveries are so lumpy.

And it's just so hard to tell.

Our guys have done a great job of getting those.

But it would just simply be a guess to tell you where we were because they just -- they come as they come.

Understood.

If I could sneak one in.

Bob, on your comments on M&A, obviously, there's a transaction in Wisconsin earlier or late last week.

I think in the past, you said how much you like this market given the success with Anchor.

Is that something you might have looked at?

Or the pricing just wasn't right for you?

Or is there other kind of initiatives that would have precluded you from considering them?

Yes, obviously, we can't comment on a specific transaction until everything's filed.

But we think Associated's a great competitor.

It's a good deal for them.

And we wish them the best, and we continue to love Wisconsin.

Your next question comes from the line of Terry McEvoy with Stephens.

To your first question, the commercial growth, the complexion changed a bit more C&I versus last quarter and not as much CRE.

On the C&I side, is that more seasonality?

Or Bob, some of your comments were actually really hearing and seeing the outlook for organic growth stronger?

And then as a follow-up on CRE, Daryl, you mentioned multifamily/retail.

Would you expect that business to grow in the second half of this year?

And maybe what areas of the market are you comfortable growing?

Obviously, it's not multifamily or those connected to retail?

Yes, Terry, this is Jim.

I'll first address the C&I growth in the quarter.

I think certainly, part of it was seasonality.

We did see line balances drive up.

But then we did have a really nice kind of cross-section of growth within -- in C&I.

Obviously, we're in a lot of college towns.

We had some opportunities with some of the public and private universities within our footprint.

We saw some nice growth in our manufacturing sector, some not-for-profit growth.

So it was just a, really a strong quarter from a C&I perspective.

Still had some nice production on the CRE side.

Our pipelines today are about 50-50 with a nonowner occupied investment real estate, about 50% and the balance owner occupied in C&I.

So strong quarter for the second quarter, and I look forward to additional growth in the coming quarters.

I would just add, Terry, there is optimism amongst the clients.

So I think, in addition to the normal seasonality, we are seeing folks expand inventory, making capital commitments.

Unemployment rates -- less than 3 people are looking for ways to expand and some of it involves technology and just process improvements.

And Terry, with respect to the commercial restate, the multifamily is really interesting.

We talked to our guys last week about this whole segment.

And one of the first comments they made was the borrowers themselves are really retracting with respect to loan request.

So that's going to be that kind of first part is that we're just not going to have as many requests to look at.

We do still have some very strong borrowers, especially in our Wisconsin market, with some submarkets that we've got some things in the pipeline.

So we might be putting on some additional multifamily.

The other aspect to this is, there's a lot of stuff going out the back door as these multifamily developers are refinancing nonrecourse in the secondary market.

So there's a couple of dynamics there.

With respect to retail, it's just hard to do a lot of retail projects today, right?

I mean if just look at the dynamics and where that industry's going to go, it's just -- it's very difficult to take a look at lease expirations and the strength of some of the tenants and get [comped] with those projects.

So I just think it's not just us, but across the industry.

That's going to slow down quite a bit until -- and if that stabilizes.

I think the one segment that we're seeing some growth in and feel pretty strongly about is the industrial warehouse segment.

We have a couple of markets where because the transportation in and out of those markets, that segment is growing.

It's strong.

The performance is strong.

So that would be one segment that I think, that we might see some growth in as we move forward.

And then just a question on deposits.

Could you just talk about attrition at some of the branch closures?

And then are you seeing any differences in deposit pricing expectations paid as between your legacy Indiana markets versus your newer growth markets?

Yes.

Terry, let me first address your question on the closures that we had in January.

I think due to the continued investment in our mobile and online, attrition continues to run at a lower level than really expected.

A lot of those banking centers, we had other locations in close proximity.

So that continues to be a good opportunity for us to kind of rightsize our footprint.

So attrition, I think, has been minimal.

As far as deposit pricing across the footprint, knock on wood, we haven't had to move our pricing at this point.

Every now and then, you see some unique pricing out there, aggressive pricing, but really not too bad.

Certainly, in our legacy markets where we had strong market share, really haven't felt the impact at all.

It's the newer growth markets where you might see a little bit more aggressive pricing.

But again, to date, have not seen huge pressures on the deposit pricing.

Yes, Terry, I might just add the beauty of our franchises, we're able to fund our own balance sheet through these markets that -- so-called legacy or where we have significant share.

And we kind of have to grow in this market.

So we've been saying for 8-plus years, it's going to come the day when there's a value on the deposit franchise.

And as rates continue to move up, we think that comes closer to reality.

So we look forward, we continue to be able to fund ourselves and use the variety of markets we have to be able to do that.

Your next question comes from the line of David Long with Raymond James.

I want to follow up with Scott's question on the operating expense number, the $405 million to $410 million.

Does that include the tax credit investment-driven impairment charges and also the client experience charges?

Yes.

Yes.

Okay, okay, so we'd be looking at the back half of the year.

We're at almost $205 million for the first half.

We'd be looking at sort of the worst case then sort of matching that, the back half of the year, even including those charges, right?

Yes.

Okay, okay, great.

And then secondly, I think you guys in the past have talked about the mid-$40 million range for fee-based revenue and were obviously higher than that maybe led by the securities' gains.

Is that still the right way to think about the noninterest income?

Yes.

We're comfortable that mid-$40 million, depending on what Chris does in the capital markets, might get a little bit above that...

(inaudible) mortgage...

We're seeing some seasonality in the mortgage.

But we're seeing an awful lot of clients using the derivative product today.

And Chris is building a foreign exchange product that -- and some of our larger markets has been very well received.

Your next question comes from the line of Andy Stapp with Hilliard Lyons.

All my questions have been answered except for one remaining question.

And that's just on deposit service charges, they're down year-over-year despite having a full quarter's fees associated with Anchor.

Any thoughts as to when this might stabilize?

Yes.

I ask that same question to Jim every quarter.

Obviously, you're seeing customer behavior change.

We're trying to be much more relationship-driven on how we look at pricing.

I would say we're getting close to stability.

Then obviously, quite frankly, I'll be honest and say that while it's frustrating to see that number come down, I think it's the right thing to happen.

So I've said in the past that we, as a company and maybe as an industry, maybe got addicted a little too much to service charges.

I think we need to be a little more pro-consumer, more pro-friendly.

So I think we're close to the bottom, and we'll continue to build from here.

Okay, great.

We do have a follow-up question from the line of Chris McGratty with KBW.

I'm all set.

I was just -- my question was on the onetime charges.

I'm all set.

(Operator Instructions) Your next question comes from the line of Peyton Green with Piper Jaffray.

A question for you though, Bob.

How do you balance at this point with a fair amount of hard work and repositioning the franchise in an environment where M&A pricing has gone up, how do you balance the attractiveness of your own stock via maybe a stock repurchase relative to -- and just really buying more of ONB at a relative discount versus maybe franchises for sale in the public market at a premium?

Yes, it's a great question, Peyton.

And I think it's a question we discussed with our board every quarter.

To your point, we feel that there's opportunity in the upside in our stock.

We think as you look at the strength of our balance sheet, the consistency of our earnings and remove any discussion on accretion, we think that we're undervalued against our peers.

That's a discussion we have, we will also tell you that we think there are a lot of interesting transactions that have been floating around.

And I think over time, we've shown ourselves to be an excellent integrator, one that have kind of over -- under committed and overpromised or maybe -- excuse me, under-promised and overcommitted in terms of our ability.

So again, we had the discussion every quarter.

You're probably all aware of our Finance Committee also spends a lot of time on M&A and best use of capital.

So I think (inaudible), we should be doing right.

And again, we'll have those discussions every quarter.

See, we depend a lot on you guys to giving us better reports so our stock price goes up.

Maybe a follow-up to that, Bob.

I mean in thinking about historically, a lot of the emphasis over the last 5 years has been extending the footprint into more growth-oriented markets, larger metropolitan markets.

How would the strategy look going forward?

I mean is that still the emphasis?

Or would you be looking for more end-market rationalization opportunities?

Yes.

A lot of it's driven by the return we give to our shareholders.

So the overall strategy won't change.

We still think there's an opportunity in the Midwest to be a consolidator along with a few other excellently well-positioned franchises.

Obviously, end markets, you can get a quick return, but you got to get the right pricing.

And you got to make sure that they're the right markets.

Our opinion is you don't just do an end market for the fact we're ripping out a bunch of cost.

You want to build something you can grow from.

So we really are driven by what we think is the right for shareholder value.

And for us, is to continue to improve the top line as well as be able to reduce costs.

And again, even in our out-of-franchise or nonend-market transactions, we've been able to get over 30% cost saves.

So I think as you look at that, even against some of the larger end markets, it's a pretty good number.

And we can get to a place where you can get double-digit growth, similar to what we're getting in Wisconsin.

I think it's a pretty good return for our shareholder.

There are no further questions at this time.

Great.

As always, if you have any follow-ups, let Lynell know.

We appreciate everybody's interest.

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, 49543317.

This replay will be available through August 8. If anyone has additional questions, please contact Lynell Walton at (812) 464-1366.

Thank you for your participation in today's conference call.