Old National Bancorp (ONB) 2017 Q3 法說會逐字稿

Welcome to the Old National Bancorp's Third 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 in the Investor Relations page at oldnational.com. A replay of the call will also be available beginning at 7:00 a.m. Central Time on October 25 through November 7. To access the replay, dial 1 (855) 859-2056, conference ID code, 93364517. 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 third quarter 2017 earnings. Joining me are Bob Jones, Jim Sandgren, Jim Ryan, Daryl Moore, John Moran, and Mike Woods.

Before I begin the discussion of our third quarter results, I'd 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 statement disclosure contained on Slide 4 of this presentation as well as Old National's SEC filings for a full discussion of our risk factors.

As referenced on Slide 5, 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. Reconciliations 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 third quarter performance on Slide 6. This morning, we reported third quarter net income of $39.4 million or $0.29 per share. This net income represents a 13.5% increase over the third quarter of 2016. Our investment into higher growth markets continues to yield positive results as our portfolio of commercial loans grew 12% on an annualized basis during the third quarter, while our total loan portfolio grew over 7% on an annualized basis.

The third quarter also saw the continuation of low credit costs and well-controlled noninterest expenses. We are also pleased with a continued upward trend in our tangible book value, which grew 7% from a year ago.

On another note, I'm sure all of you saw our 8-K filed last week in which we announced the regulatory approval of our most recent partnership with Anchor Bancorp, in Minnesota. Pending shareholder approval and other customary closing conditions, we should be set to close on this deal on November 1.

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

Thank you, Lynell, and good morning, everyone. I began my remarks last quarter by stating that our strong results demonstrated our growth market strategy at work, I'm pleased to say the same premise holds true for the third quarter. Fueled by strong commercial loan growth, our Q3 results are an excellent illustration of a franchise very well positioned in the right market for growth. The catalyst for our quarterly success is $157.7 million in commercial loan growth, as illustrated on the right slide of Slide 8. Of this 12% annualized growth, $110.2 million was in the CRE category and the remaining $47.5 million was in C&I. While the majority of our third quarter growth was centered in CRE, reminder, CRE balances currently stand in the modest 188% of capital, we are still pleased to see our annualized growth in our C&I portfolio of 9.3%. Also of note is that our year-to-date annualized commercial loan growth is nearly 10%. We also continued to see some nice growth in HELOC balances, nearly 8% annualized, while our indirect portfolio continued to decline consistent with our stated balance sheet remix strategy.

While we enjoyed excellent commercial balance sheet growth in a number of our markets, a few I'd like to draw attention to are Indianapolis, Louisville, Central Michigan and Wisconsin. The common denominator among these markets is a vibrant economy that is fueling business growth. Clearly, the Old National name and brand are resonating exceptionally well in these communities.

Turning to Slide 9. The graph on the left illustrates another very good quarter for new commercial production. The $574.9 million that we generated, 62% of which was CRE and 38% of which was C&I, represents a 40.2% year-over-year increase and a modest increase compared to the second quarter. The middle graph depicts our production yield, which contracted slightly as a result of a large tax-exempt loan that was booked and funded in the quarter. It's also notable that 76% of our third quarter commercial loans were variable rate loans, up from 68% in the third quarter (sic) [second quarter]. As in prior quarters, this positioned us well to take full advantage of rising rate environment. The final graph on Slide 9 shows our quarterly loan pipeline results which are consistent with our third quarter 2016 pipeline numbers and down compared to our record-breaking second quarter of this year.

With the total balance exceeding $1.3 billion on September 30, we remain well positioned to generate loan growth in Q4 as our producers are hard at work rebuilding our pipeline after 2 quarters of substantial growth. Additionally, we have over $500 million in future advances on commercial construction projects that should help boost growth in the coming quarters.

Slide 10 takes an even deeper dive into our loan production and yield trends for the quarter. Beginning with the top graph, you can see that residential mortgage production increased 21.2% from Q2 to $287.6 million, while the yield declined slightly. The consumer direct slide on the bottom left illustrates continued solid production in this category, driven primarily by recent HELOC promotions as outlined in last quarter's call. The graph on the bottom right illustrates our ongoing balance sheet realignment strategy. I've spoken to you on recent calls about our desire to reduce indirect volume while taking advantage of more profitable lending opportunities. As you can see from this graph, our indirect production is down 11.2% year-over-year, while our yield compared to Q3 2016 has improved substantially. While we've already made good product -- progress decreasing the size and increasing the yields and margin of this portfolio, we believe there is room for additional improvement moving forward.

Turning to Slide 11, which focuses on fee-based business revenue on a quarter-over-quarter and year-over-year basis, I'll begin at the far left with a look at Wealth Management. The dip in revenue from the second quarter can be attributed to tax preparation work and filings that occur during the second quarter of each year. These filings accounted for approximately $900,000 in Q2 revenue. Our year-over-year increase from $8.6 million to $8.8 million is primarily due to improvements in the equity market and the increase in our assets under management.

Moving to our Investments division, you can see the third quarter revenue was up slightly, both quarter-over-quarter and year-over-year. We continue to transition from a transaction-based brokerage model to a more fee-based advisory model, which has helped drive revenues and strengthen relationships. We've also seen higher life insurance sales, which have emerged as a result of our more targeted efforts around financial planning for our clients. We will continue to emphasize this financial planning and advisory model as we go forward into 2018.

I referenced our quarter-over-quarter production gains in the residential mortgage category on the previous slide and the mortgage graph here on Slide 11 further illustrates our quarterly results specifically on revenue. While production was up for the quarter, we saw the mix shift in more balance sheet versus secondary market production and that had an impact on third quarter revenues, which were essentially flat compared to Q2. We continue to see high purchase volume compared to refinances as 75% of new production in September was for home purchases. Based on our pipeline, which stood at nearly $110 million on September 30, we anticipate lower seasonal production in the fourth quarter.

The final graph on Slide 11 is a snapshot of revenue growth in capital markets. While third quarter production was not as strong as our record second quarter, you can see that we more than doubled our year-over-year production. The primary driver of this growth continues to be solid sales production and customer interest rate derivatives or swaps boosted by the higher levels of commercial loan production.

We also continue to see growth in our foreign exchange revenue as Chris Wolking and his team are doing an outstanding job of positioning Old National as a trusted advisor in this area throughout our franchise.

Overall, this was another quarter where we executed our growth market and balance sheet realignment strategies exceptionally well, resulting in significant commercial loan growth and steady fee-based business revenue.

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

Thank you, Jim. Starting on Slide 13, you can see that we've made some changes to our previous format to help better compare core trends and specifically identify the impact of future anticipated tax credit amortization. I'm pleased to report that adjusted pretax preprovision income was $61.1 million and grew by 5.7% quarter-over-quarter and 3% year-over-year, respectively. The growth in adjusted pretax preprovision income was primarily result of strong underlying fundamentals in our Banking business and our focus on expense reductions.

We remain focused on a growing adjusted pretax preprovision income as well as improving the operating leverage of the company. As demonstrated on this slide, our adjusted efficiency ratio improved 179 basis points quarter-over-quarter and 141 basis points year-over-year. We also saw improvement in our operating leverage, which improved over 200 basis points quarter-over-quarter and year-over-year.

Moving to Slide 14. You'll see the trend of our reported net interest margin as well as a graph depicting the portion of the margin attributable to accretion income. Our reported net interest margin benefited 4 basis points from the increase in accretion income, 3 basis points from higher-than-anticipated interest collected on nonaccrual loans and an additional 3 basis points from a full quarter's impact from the previous Fed fund rate increase. We do not anticipate the higher-than-normal benefit from interest on nonaccrual loans next quarter.

Interest-bearing core deposit cost increased just 2 basis points during the quarter to 25 basis points. Further margin improvement could come with the steepening of the yield curve.

Shifting to noninterest expenses on Slide 15. Adjusted noninterest expenses, as defined on the slide, totaled $96.4 million in the third quarter and were lower on both a linked-quarter basis and year-over-year basis. As we look forward to the fourth quarter, we anticipate pretax charges of $16 million related to our Anchor Bank partnership, $2.9 million related to the 14 branch consolidations that will occur in November, and an additional $800,000 related to our client experience improvement initiative.

Turning to Slide 16. As Lynell referenced in her opening comments, we are pleased with the continued improvement in our tangible common equity ratio and tangible common book value per share. Our tangible common equity book value per share grew 1.9% quarter-over-quarter and 7% year-over-year.

My final slide, Page 17, is an update on the anticipated impact from our tax credits. The first column displays the year-to-date benefit of $6.1 million we have received from these credits, all of which has occurred in the income tax line. The second and third columns display our fourth quarter and full year 2017 forecast, which are dependent on the timing of the completion of these projects. Our initial guidance earlier in the year was that we anticipated tax credit amortization in the third quarter. We are now expecting that amortization to be recorded in the fourth quarter. We are also expecting net income from this business would be approximately $2 million. Currently, we are projecting the full year net benefit to be slightly better at $2.2 million to $2.9 million after tax. EPS impact will be approximately $0.015 to $0.02 for the year. This impact does not fully reflect all of the benefits from this business, including other loans and deposits, investment relationships and importantly, CRA credit. We expect the tax credit business to have a similar net benefit in 2018 and the tax credit amortization in 2018 to be comparable to the expected fourth quarter, but the amortization should be more evenly distributed next year.

During the fourth quarter, we will update our 2018 projections. Going forward, we are also cautiously sure we will still benefit under lower marginal tax rates. Additionally, we will pay close attention to any tax reform that could limit the benefits of these types of (inaudible) going forward.

I will now turn the call over to Daryl.

Thank you, Jim. We'll start the credit quality segment of this morning's call with review of charge-offs and provision expense for the quarter.

Moving to Slide 19. While third quarter 2017 gross and net charge-offs were lower than those in the same period last year, net charge-offs in the current quarter were higher than those posted last quarter. These higher net charge-offs resulted entirely from loan -- or from lower recoveries in the third quarter compared to second quarter levels as gross charge-offs in the period were actually lower than gross charge-offs in the second quarter.

For the current quarter, we recognized the provision expense of $300,000 compared to provision expense of $1.4 million last quarter and $1.3 million for the third quarter 2016. The $300,000 provision in the current quarter was roughly equal to the charge-offs in our nonmarked portfolio, giving (inaudible) of losses in that portfolio or losses in the marked portfolio were covered on a combined basis by loan marks in those portfolios.

The reduction in provision expense in the quarter was mainly driven by lower loss rates in the nonacquired portfolio, which more than offset the need for provision associated with strong loan growth in the period. For the 9 months ended September 30, net charge-offs as a percent of average loans stood at 2 basis points compared to 6 basis points for the same period last year. Current year-to-date provision expense has been $2 million, which represents 125% of net charge-offs, a stronger coverage than even in 2016 where we covered 79% of net charge-offs for that comparable year-to-date period. While the ending allowance for loan losses as a percent of end-of-period loans fell 2 basis points to 53 basis points, I would remind you that we also have marks on the acquired loans, which at the end of the current quarter, totaled $96.5 million.

As we move to Slide 20, you can see the special mention loans increased in the quarter, up $30.7 million or 31%. The material portion of the increase came in 2 relationships, the first being a $14.9 million commercial real estate product where our borrower and the project contractor are having disputes. The sponsor of our project is using his liquidity to continue to move the project along, and we are working with parties involved to come to a resolution on a longer-term plan to remedy the issues. The second relationship is an $8.3 million relationship where the borrower distributed cash from the operating entity to its owner, who has also provided a limited guarantee, which resulted in a single year debt service coverage ratio of less than 1:1. Typically, we might not place a credit like this in special mention category, except for the fact that 2017 interim financial results are a little weaker than those historically posted by the borrower, we want to see positive year-end operating results prior to any upgrade.

We also added a number of other relationships in the $1 million to $3.5 million range in this category in the quarter.

On a more positive note, substandard accruing loans decreased $22.9 million in the quarter. While $6 million of this improvement came as a result of the downgrade of our relationship to nonaccrual, the bulk of the improvement in this category came from either upgrades or pay downs. Nonaccrual loans fell $6.2 million in the quarter despite the addition of that $6 million credit downgrade in the category I just mentioned. Most of the improvement in this category came as a result of either payoffs or upgrades of credits.

Overall, credit results in the quarter were relatively good, the increase in special mention loans notwithstanding. Just a couple of last comments about what we are seeing in our portfolios. In our retail portfolio, we have inquired of our underwriting managers whether we are seeing a change in the characteristics of our applicants, either in terms of debt burdens or overall leverage. To date, we've not seen any change of note, but we'll continue to be inquisitive in this regard given some talk about retail portfolios and where they might be headed in the longer term.

In our C&I growth, the common theme we are hearing from our clients is the difficulty in finding quality labor. This issue can manifest itself not only in labor cost going forward, but as importantly, in operational efficiency and the ability to deliver product on a timely basis. My personal belief is that this issue is not unique to Old National's markets and will be with us for more than a short period of time.

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

Great. Thank you, Daryl. Frankly, I thought I would be starting my comments with a shout-out to Cleveland Indians, but unfortunately, that's clearly not appropriate. I will begin my comments on a more positive note by highlighting the overall themes for our quarter and adding some additional color about our Minnesota partnership.

As you look at the bullet points on my slide, you will see the positive themes for most of the key elements. This is a good indicator of my overall perception of the quarter. While I will not repeat the same information that the others have communicated this morning, I do think it's worth reiterating that the fundamentals of the quarter are reflective of our overall basic bank strategy and the quality of the franchise that we have built over the last few years. Strong loan growth, loan growth within our existing markets and not generated through syndications or purchase loans. In other words, old-fashioned lending at its best. This loan growth is supported by low-cost core deposits, which are also generated within our markets with limited pressure on our rates. When you add in our good credit quality, you truly see what a basic bank franchise looks like.

To be totally transparent, there are clearly areas of opportunities. Our fee-based businesses have upsized as we continue to enhance the sales culture and reduce the inefficiencies in these areas. While we have made substantial progress on expenses, I am confident that opportunity still exists, and I have elevated expectations for the work that Jim Ryan and the team are doing on our client experience program. We look forward to reporting the results of that work in 2018 and beyond.

As we think about the fourth quarter and 2018, we continue to have positive dialogue with our clients as they discuss their perspective on business opportunities for the next year. While our pipeline is down today, a good portion of that is related towards closings, and we should expect to see it build over the next few months and into 2018.

While the expectation of a rate increase in December is positive, future rate increases are somewhat myopic at this stage based on the potential for changes in Fed leadership. Of greater importance will be the shape of the yield curve and its impact. This lack of clarity in the interest rate environment only enhances our focus on expense management.

As I turn to our discussion about Minnesota, I will start by apologizing for what we know will be a very noisy fourth quarter for us. The combination of the accelerated close of Minnesota, potential charges associated with our client experienced project, the branch termination charges and the amortization of our times credit expense will somewhat mask our operational earnings. I'm confident that Lynell will do an excellent job of making those earnings very clear to you. We were very pleased that we will be able to close on Minnesota on November 1, which is just 85 days post announcement. This reflects our board's commitment to our risk profile and the excellent track record my associates have had with prior partnerships.

While our conversion is still scheduled for the second quarter of 2018, we've already made considerable progress on the cultural integration. The leadership in Minnesota, led by Jeff Hawkins, has been nothing short of incredible. While change is never easy, morale amongst our associates in the Twin Cities in Mankato is strong and their focus on serving their clients has been excellent. Our retention of key individuals has also been outstanding with no key departures. Again, a true compliment to Jeff and his teams.

Their earnings have been consistent with what we have modeled, and we do not expect any changes to what we told you back in August with 2018 accretion prior to onetime charges of approximately $0.08 per share. For the balance of 2017, we have expected contribution to be approximately $3 million. And just as a reminder, we will be issuing approximately 16.5 million shares in conjunction with the close.

Loan growth for Minnesota through the end of the third quarter has been 8% as compared to last year, and we have seen similar growth with their core deposits. We still expect 36% or pretax $20 million in cost savings with the partnership, with about 75% of those savings coming in the third and fourth quarters of 2018 and then fully realized in 2019.

I'm sure that the question on your mind is what is next for us. Our mantra has not changed, it has to be the right market at the right price. In other words, we will be a selective acquirer. Hooks continue to be circulated and we've seen several of them, but our focus remains in finding the right partner for ONB and its shareholders, and we do not feel any compulsion to have to do another deal.

With those brief comments, we'll be happy to answer your calls. Dorothy, could you open up the line?

(Operator Instructions) Your first question comes from the line of Chris McGratty with KBW.

Just a question on the balance sheet. You kind of -- you've commented about what you're doing previously in the indirect book. But as you kind of put in 2 companies together in the quarter, how should we be thinking about any repositioning of either your or their investment portfolio, the size of the balance sheet, any kind of adjustments that typically come in kind of into the noisy quarter?

Yes. I don't know you'll see much adjustment in the balance sheet, Chris. As we -- obviously, we're not going to do the conversions of the second quarter, we're going to have to run them as a separate entity. And we'll continue to do the balance remix on, what we call, the legacy portfolio on a go-forward basis. So I don't know you'll see much different in what we bring in from Minnesota.

Okay. And then, if I heard you on the -- maybe for Jim on the margin you said about the accretion, it was up about it looks like 6 basis points and you called out the noninterest, the recoveries. How should we be thinking about the near-term dynamics of your margin? Your betas are low, which is helping to offset the flat curve. But, I guess, can you maintain the margin like this as we see? Or could we see some incremental expansion?

Yes. The 3 basis points we've benefited in the quarter related to the last Fed fund rate increase, we anticipate maintaining that. With respect to deposit pricing, we're going to continue to price like we've always priced, and don't see any changes to that. So we've been -- we benefited from our franchise as we talked about previously being in markets that we can effectively control the price.

Okay. So if I'm hearing you, you're working of essentially like 315 base and kind of factoring in those dynamics, is that all right?

Perfect.

Yes.

Okay. And then maybe the last one on the taxes. I appreciate the color on the timing. But if we didn't boil it down to the fourth quarter, what's the effective tax rate? I've got some confusion on the fourth quarter, but what's the effective we should be using for Q4?

I think it's going to come at the lower end of the full rate -- the full year tax rates that you see listed there. Really, all of the expenses, the tax credit amortization occurs in the fourth quarter. So that will effectively lower the rate towards the lower end. I think it's a good rate.

So the [26 FD]?

Yes.

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

A couple of questions. Just on the pipeline. I know you had a very strong pipeline last quarter and you've touched on it a bit. But just -- is the activity consistent? Or have things changed? Would you say they've slowed down a bit? I mean, it looks like it from the numbers, but I think your commentary suggests otherwise. Could you maybe just go into a little more detail on that?

Yes. Absolutely, Jon. I would say the activity is still there. The sentiment amongst our customers and prospects is still very, very positive. I just think we've spent the quarter closing a lot of loans and that's great, but I will tell you, the #1 priority among our commercial RMs is rebuilding that pipeline. Already in the quarter, our accepted pipeline has moved in the right direction. And so now it's just a matter of just getting more volume into that pipeline. But no, I don't think there's any systematic issues in any of the markets that -- throughout our franchise, so.

I might add, Jon, just a little bit color on the Minnesota folks, they're reported a pipeline that's probably amongst the highest it's been in the history of their company as they began to talk to clients that want the value of our expanded balance sheet and some of the other opportunities. So we continue to be encouraged by activity in Minnesota as well.

Okay. Okay, good. That helps. A follow-up on Chris's question on the margin, just give us an idea of what you're seeing on deposit cost? It looks like it was just a very modest increase and also your noninterest-bearing deposits were up pretty healthy. But just what's going on there, the noninterest-bearing growth and also any pressures?

Well, I think the noninterest growth is really a testament to Jim Sandgren and his team with the focus they put on sales and retention of our DDA products. So I think it's just being in these better markets having better sales focus and better products to offer. In times like this when you see rate start to move and deposit competition is when you get the value of franchise like ours where you have dominant market share, and you can keep deposit costs flat to slightly up. And then, if you have to run a few specials in more vibrant markets, you can do that without impeding the overall total cost. And I don't think that strategy changes anytime soon because again, we've got -- we're growing in so many of these markets were we can generate deposits and quite frankly we're not feeling a lot of pressure right now.

Okay. And expect any surprises or any slippage from the branch closures? I know you've closed a few so far. So curious how that's going on and what your expectations are on deposits?

Jim's track record -- I should let Jim speak, but Jim's track record is excellent. We've communicated. I always judge it by the number of calls they get to me and I have had 1 call so far in the 14 branches that we're closing. So I'm pretty confident we're going to continue to see retention rates consistent what we've done in the past.

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

First question on the tax credit just so I'm clear. If I look back 3 months ago, you were expecting about $9.9 million of the investment impairment charges that run through the expense line. None of that occurred in the third quarter and now you expect the $13 million to $22 million to happen in the fourth quarter. One, am I just correct in connecting these dots? And two, why the increase from 3 months ago in terms of the expense line?

Yes. So you are correct in your assumption. The challenge with we having a historic building is that the construction time lines can move around a little bit. So all you're seeing is just construction forecasting when project's going to be complete, and we get certificates of occupancy for these projects. In terms of why the amount is actually higher, so we've actually been hard at work in growing that business and have projects that as we update and look out into the future, we feel like we will close more projects than we originally anticipated. So that's the difference in the higher tax credit amortization and higher after-tax benefit.

Now Terry, I might just add to Jim's comments, but as we think about that business, what you don't see, and Jim alluded to in his comments, is we've probably got an excess of $60 million in lending relationships in this business as well that you generate net interest income, and we've got a pretty substantial amount of core deposits that come with that business as well. So the overall profitability is even better than what you see on that page.

And then, the production yields were down quarter-over-quarter and I think you mentioned there was one specific loan. If you had backed that loan out, any feel for production yields 3Q relative to 2Q of '17?

Yes, Terry. We did look at that and basically it'd be flat from the second quarter. So about that 388 number, I think, is where we were playing, yes.

And just last question. As I look at my model for 2018, what could really offset the success you're having on the cost saves and the accretion from the deal, simply the provision line? And so I'm just wondering, will there be any reserve build for Anchor loans as they just go from marked and then they're re-underwritten and then moved into the kind of the nonacquired portfolio? What type of reserves and provisions have you had to take on past deals? And do you think that creates any headwinds as it relates to the provision line in 2018?

Terry, this is Daryl. We're not anticipating any provision build associated with these. We think we've got it marked appropriately and has been managing going forward. Historically, we have not seen that as an issue. And just given the culture and the credit up in Minnesota, I don't see any change there at all.

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

A question related to the branch consolidations. And when you think about opportunities going forward, excluding the Anchor transaction, any more thoughts as to will we see more closings or rationalization in the back half of 2018 after the integration is completed there with Anchor?

It's safe to say that we will continue to look at our branch franchise. Whether there'd be any in Minnesota, I think, is to be determined. Right now, we think they've got a terrific franchise. But as we continue to look at the balance of our franchise, Jim does a great job looking at the bottom 10% publicly. So I'd be disappointed if we didn't have more closures in '18.

Okay, got it. And then secondly, related to deposit beta where you guys have had -- been able to keep that quite low. Any color on any particular geographies that you may have had better or worse deposit betas relative to the rest?

No, we've run a couple of specials in some of our higher growth markets, but really, we're not getting any pressure. Again, it's nice to be the leader in some of those markets where you actually create the issue. And right now, we're not creating anything.

(Operator Instructions) Your next question comes from the line of Andy Stapp with Hilliard Lyons.

Capital market fees were down quite a bit linked-quarter. Is there any color you can provide to help us in modeling this line item going forward?

Yes, great question, Andy. That's a fairly immature business for us, and you're going to have erratic earnings as you build up the ability and some of that is still linked to the larger deals. So I'm not even sure I can give you a run rate for '18 other than to say, Chris is doing an excellent job, and we would hope to get to that third -- or second quarter number and build from there. But might be I'll give you a little more color in the fourth quarter -- after the fourth quarter. And we're really optimistic about our opportunities up in Minnesota because they tend to have clients of that use that type of product more so than what you have in throughout our franchise. So we apologize for the -- a little bit of lumpiness. But again, it's a fairly immature business, run by very mature individuals, by the way.

That's fair. I understand it completely.

And Andy, I guess, I would just add, we had a couple of very large, large transaction in the quarter in the second quarter that probably won't happen. So we really felt like the third quarter was a pretty good quarter. But when you compare it to the record quarter in the second. So again, hard to give guidance, but given the rate environment and continued commercial production, should continue to be fairly strong.

Okay. And just a couple of housekeeping questions on the noncore expense items. Did I presume correctly that pretty much all of the branch consolidation charges were in occupancy?

For the quarter, yes. There was a little bit of severance as well. Most of those will be in the occupancy expense line and then, obviously, a little bit on the severance side.

Okay. And then, with regard to the client experience initiation -- initiative cost, where were they at? I guess, some are in professional fees?

It's all professional fees.

It's all professional fees at this stage, Andy.

What's that?

It's all professional fees at this time.

Your next question comes from the line of Nathan Race with Piper Jaffray.

Just a question on the client experience improvement program. As the teams were kind of nearing the tail end of that investment, just curious how you would kind of characterize the successful investment on this program?

Yes. So as I've always said, I come from a culture that used to over promise and under deliver, and our desire is to under promise and over deliver. Saying that, I would tell you that investment we've made in that project is going to, I think, help us considerably in 2018 from how we serve our clients and also allow us to reduce some overall cost. And as we get those runs on the board, we'll be glad to share. But at this stage, we have a lot of theories and a lot of actions, and I feel very, very comfortable with where we are. But I would much prefer not to put a tight little bow around and a cute name and show you the results as we get them on the run -- on the scoreboard, unlike my Browns, who can't score.

Fair enough. And just to confirm. The conversion with Anchor is still scheduled for 2Q despite the earlier closing?

Yes. As we said on our August call, we've got 2 major technology projects, one involving our mortgage system and the other one is the EMV card conversion. So our desire is to not put our new clients up at Minnesota to 2 painful processes, we'll just put them through 1.

Your next question comes from the line of John Rodis with FIG Partners.

A quick question on, I guess, expenses for the -- for this year, I guess, on last quarter's call, you talked about you still felt good about full year expenses of $405 million to $410 million, but that included the tax credit expense. So, I guess, is it fair to assume if the tax credit expense comes in towards the higher end of the range, you could come in higher than that $410 million? Is that the right way to think about it?

Yes. We tend to think about those tax credit amortization really separately from our operating expenses. So that's where we tried to part plenty of disclosure around that. So I think for purposes of your question, think about that incremental higher amount and that gets you back to a total for the full year. But we tend to think about those separately as we think about how we run the business.

So Jim, just to make sure I'm hearing you right, so you still feel good about the $405 million to $410 million, excluding going from basically $9 million to $10 million in tax credits to $12 million to $22 million? Is that the right way to think about it?

Yes. I would look at that higher amortization, that difference and add in to those numbers that you just quoted. So the fact is we're going to have higher amortization than we originally expected in 3Q and 4Q that we previously reported, just add those to your total numbers and you're going to get back to the apples-to-apples comparison.

But I think it's also important to realize, we're going to have higher contributions from those businesses as well.

There are no further questions at this time.

Great. Thank you all for your attendance and as always, Lynell will be glad to provide you any clarity and I look forward to how she talks about our fourth quarter. Thank you.

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, 93364517. This replay will be available through November 7. If anyone has additional questions, please contact Lynell Walton at (812) 464-1366. Thank you for your participation in today's conference call.