Oct 28, 2013
Executives
Lynell J. Walton - Senior Vice President and Director of Investor Relations Christopher A.
Wolking - Chief Financial Officer and Senior Executive Vice President Daryl D. Moore - Chief Credit Officer and Executive Vice President Robert G.
Jones - Chief Executive Officer, President and Director
Analysts
R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division Emlen B.
Harmon - Jefferies LLC, Research Division Stephen G. Geyen - D.A.
Davidson & Co., Research Division Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division John V.
Moran - Macquarie Research John Barber - Keefe, Bruyette, & Woods, Inc., Research Division Taylor Brodarick - Guggenheim Securities, LLC, Research Division Peyton N. Green - Sterne Agee & Leach Inc., Research Division
Operator
Welcome to the Old National Bancorp. Third Quarter 2013 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 8:00 a.m. Central Time on October 29 through November 11.
To access the replay, dial 1 (855) 859-2056, conference ID code 85826718. Those participating today will be analysts and members of the financial community.
[Operator Instructions] At this time, the call will be turned over to Lynell Walton for opening remarks. Ms.
Walton?
Lynell J. Walton
Thank you, Jasmine. And good morning, everyone.
I apologize for the technical difficulties we've experienced. Hopefully, you're all able to join us at this time.
Joining me today in the room on Old National Bancorp's Third Quarter 2013 Earnings Conference Call are Bob Jones, Chris Wolking, Barbara Murphy, Daryl Moore, Jim Ryan and Joan Kissel. Some comments today may contain forward-looking statements that are subject to certain risks and uncertainties that could cause the company's actual future results to materially differ from those discussed.
Please refer to the forward-looking statement disclosure contained on Slide 4, as well as our SEC filings, for a full discussion of the company's risk factors. Additionally, as you review Slide 5.
Certain non-GAAP financial measures will be discussed on this conference call. References to non-GAAP measures are only provided to assist you in understanding Old National's results and performance trends and should not be relied upon as a financial measure of actual results.
Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentation. At the conclusion of the prepared remarks, we will open the line to take your questions.
I'm happy to begin the discussion of our financial performance, on Slide 6, which highlights recent successes or initiatives that resulted from the execution of our basic bank community banking strategy. This morning, we reported earnings of $23.9 million or $0.23 per share in the third quarter.
Contributing to this performance on the balance sheet side was our year-over-year strong commercial loan production, along with the repricing of a large book of CDs, which aided in the increase of 4 basis points in our core net interest margin. We did consolidate 18 branches during the third quarter and anticipate 4 more consolidations and the sale of 3 additional branches, all to occur in the fourth quarter.
Jim remains busy on the M&A front, as we closed on the purchase of 24 banking centers in Michigan and Northern Indiana and just recently announced the pending acquisition of Tower Financial Corporation, located in Fort Wayne and Warsaw, Indiana. Obviously, a very busy and productive quarter for Old National.
Moving to Slide 7, you'll see a chart of other items impacting our third quarter results. Looking to the positive items on the left.
Our continued strong credit position allowed us to record a recapture of provision for loan losses of $1.7 million. We did receive a $1.6 million benefit as the result of the great work done by our procurement area in the renegotiation renewal of a large contract.
Also included in the quarter was the benefit of BOLI proceeds of $1.1 million. The 2 largest negative items on the slide represent charges taken as part of our branch consolidation process and the acquisition and integration of the 24 banking centers.
We were also able to fund our foundation with $1.2 million during the quarter. For more detail, I'll now turn the call over to Chris.
Christopher A. Wolking
Thank you, Lynell. I'll begin my presentation on Slide 9.
Without securities gains and merger and integration expenses, pretax, pre-provision income was $31.2 million for the third quarter 2013. Third quarter 2013 pretax, pre-provision income was $6.4 million lower than the second quarter but $3 million higher than third quarter 2012.
Compared to third quarter 2012, pretax, pre-provision income is up 10.6% in the third quarter of this year. As you can see from the bar chart, we have maintained a fairly steady increase in quarterly pretax, pre-provision income since third quarter 2012.
In Lynell's Slide 7, she noted several other items in addition to merger costs. If I subtract the income and expense items she noted, I estimate pretax, pre-provision income was $33.2 million for the quarter.
Also reducing pretax, pre-provision income in the third quarter was the operating expense for our new Michigan and Northern Indiana branches. Operating expenses exceeded income for these branches by about $900,000 for the quarter.
Lynell also noted the $1.7 million previously charged as loan loss provision, which we recaptured in the quarter. Daryl will discuss credit in much more detail, but continued low net charge-offs and lower criticized and classified loans in the quarter contributed to our ability to release these reserves.
The graphs on Slide 10 show the success we've had managing impaired assets acquired in our recent acquisitions. In all 3 acquisitions, we've recognized more loan interest income than we originally expected at the time of the purchase.
Monroe loan interest income from impaired assets was $900,000 for the quarter, and the nonaccretable discount has remained relatively stable from $14.4 million to $14.5 million over the last 4 quarters. Integra impaired assets generated $9.2 million of income in the third quarter, and the expected nonaccretable discount declined from $146.5 million in the second quarter to $139 million.
Indiana Community impaired assets generated $1.8 million in income for the quarter, and expected nonaccretable discount declined an additional $8.6 million to $14.2 million in the quarter. Due to our successful workout efforts, the nonaccretable loan discount for IBT loans is less than half of what it was originally expected to be last year at acquisition.
On Slide 11, I'll highlight the change in average loan balances during recent quarters. Because we're still working out of impaired assets we acquired in these transactions, total Integra and Indiana Community loans declined again this quarter.
Average core loans increased $59.7 million from the second quarter of 2013 and are up $332.3 million from third quarter last year. Year-over-year, core loans are up 7.9%.
This year, in the third quarter, we sold $11.6 million of commercial leases and $96.9 million of portfolio-d residential mortgages. Slide 12 shows trends in commercial loan growth and production.
The first chart on Slide 12 shows C&I loan balances, excluding FDIC-covered assets, at period end. In the period, C&I loans declined by approximately $29 million compared to period-end second quarter, due in part to the $11.6 million lease sale.
I would note, however, that so far in Q4, C&I balances are higher than September 30. As you can see from the chart, we've seen a steady increase in C&I loans over the past year.
The second graph on this slide shows the trend in an internal performance metric used by our banking business unit. Commercial and commercial real estate loan production was $191 million in the third quarter, down approximately $10 million from the second quarter of this year but up from the third quarter of 2012.
On a year-to-date basis, production is $98 million higher than for the same period in 2012. Moving to Slide 13.
The commercial loan pipeline declined to $444 million in Q3 from the very strong $507 million at the end of the second quarter. You can also see that our commercial line of credit utilization declined in the third quarter compared to the second quarter of this year.
Line utilization declined to 35.8% from 36.5% in Q2. We'll continue to watch these statistics for evidence of significant slowing in loan demand, but as I noted earlier, our C&I balances have increased since September 30.
Slide 14 breaks down our noninterest income for the third quarter. Total noninterest income was $47.5 million.
Starting at the bottom of the bar chart, indemnification asset expense was $2.1 million in the quarter. Our remaining FDIC indemnification asset was $81.6 million at the end of the third quarter, and we expect continued quarterly expense until this asset is fully amortized.
Service charges on deposits were $13.9 million in the quarter, $1.7 million of which was generated by the deposit accounts of our newly acquired Michigan and Northern Indiana branches. Service charge income stabilized in the third quarter, but we expect downward pressure on service charge income due to continuing decline in overdraft presentments.
Fees from our investment and insurance businesses were $18.9 million in the third quarter, up over 9% compared to third quarter last year. Investment brokerage continues to have a strong year.
Brokerage revenue is up 33.2% compared to third quarter of 2012. Other income of $7 million included $1.6 million -- included a $1.6 million credit related to the renewal of a large processing contract.
This contract is a multiyear renewal and should show benefit over the next several years. Mortgage banking, BOLI and ATM income for the quarter was $9.9 million and included a large, single life insurance benefit of $1.1 million.
On Slide 15, I've broken down noninterest expenses for the third quarter. As expected, we experienced charges related to our branch acquisitions and divestitures in the quarter.
Of the total $96.7 million expense for the quarter, $5 million was due to either the acquisition of the Michigan and Northern Indiana branches from BofA or the disposition of the 18 branches we closed in the third quarter. We announced the 18 branch consolidations earlier this year, and the branches were closed in August.
We also announced the sale of 3 branches and the planned consolidation of 4 branches. 2 of the sales should close in November, and 1 should close in December.
The 4 branches we plan to consolidate should be closed before the end of 2013. We expect to see final expenses of $1.6 million related to the Northern Indiana and Michigan branches in the fourth quarter.
Core expenses were $85.5 million in Q3; plus, we incurred operating expenses of $3 million from the new branches. Core expenses were higher due to an additional salary at the end of the quarter, several miscellaneous costs.
The 18 branches we closed in August should generate $3.5 million to $4.5 million of savings annually, and the benefit should be fully phased in by the end of first quarter 2014. We experienced some operational expense savings from these closures in Q3, however.
Also, we should have savings in Q1 of 2014 from the additional 7 branch consolidations and sales in Q4. I expect the personnel expense for the Michigan and Northern Indiana branches to grow as we add customer contact personnel in this market.
Slide 16 takes our reported efficiency ratio and brings it back to an adjusted non-GAAP third quarter efficiency ratio. By subtracting the other income and expenses and the acquisition and divestiture expenses listed in Slides 14 and 15, I estimate an efficiency ratio of 69.1% for the third quarter.
If I subtract the income and expense directly attributable to the newly acquired branches, the adjusted efficiency ratio declines to 67.9%. When we embarked on our mission to attain a 65% efficiency ratio, we didn't envision having the opportunity to acquire the Northern Indiana and Michigan branches.
It will take us several quarters to generate the new income we expect from this market. The 67.9% efficiency ratio is still short of our 65% target.
We know that we have additional work to do, and we remain committed to attaining the 65% target efficiency ratio. Slide 17 tracks our acquisitions and asset growth against the changes in our full-time equivalent employees.
Full-time equivalent employees increased to 2,658 in Q3 from 2,578 in Q2, due primarily to the increased FTE employees in our new branches in Northern Indiana and Michigan. We expect the FTE employees to decline by 10 to 15 FTE by the end of the year due to the additional branch sales and consolidations.
Slide 18 breaks down our net interest margin in the third quarter and the trends in net interest margin during the year. Net interest margin on a fully taxable equivalent basis was 3.96% in Q3, down from 3.97% in the second quarter.
Core interest margin was up 4 basis points in the quarter, from 3.29% to 3.33%. Certificate of deposit costs declined from 1.44% in the second quarter to 1.20% in the third quarter and was a major driver of the improved core margin.
Additionally, noninterest-bearing demand deposits increased approximately $34 million on average during the quarter, which also helped core margin. Much of the total increase in noninterest-bearing demand deposits came from our new branches.
For the month of September, core deposits of the acquired Northern Indiana and Michigan branches averaged approximately $515 million. Accretion income from the acquired loan portfolios declined to $13 million in Q3 from $14.3 million in the second quarter.
In the third quarter, accretion from acquired loans accounted for 63 basis points of our net interest margin. Accretion income should decline over the next several quarters as acquired loans mature or are paid off in other ways.
$188.2 million of certificates of deposit should reprice in the fourth quarter. On average, these deposits cost 0.99%, and we expect that they will reprice to no more than 0.30%.
The sale of $96.9 million of portfolio-d residential mortgages, with a weighted average coupon of 4.24%, late in the quarter will likely lower the margin. Due to these and other factors, like loan growth or investment portfolio reinvestments, we expect fourth quarter core margin to decline 3 to 4 basis points.
Slides 19 and 20 provide information on our current sensitivity to rising interest rates. Slide 19 shows the sensitivity of our net interest income to rising rates in 2 scenarios of the several we model.
The first scenario models the impact on 2 years of net interest income from a 200-basis-point immediate increase in rates along the entire yield curve. In this scenario, we estimate that cumulative net interest income would decline 2.55% compared to a decline of 5.18% at June 30, 2013.
The second scenario models a more likely outcome, which uses a series of implied forward yield curves over 2 years. In this scenario, we estimate net interest income would increase 1.68% compared to an increase of 1.67% at June 30.
Compared to June 2013, the September forward curves showed a slower pace of federal fund rate increases and a steeper yield curve. These changes in the forward yield curves offset the impact of our actions in the quarter, and our model output in this scenario was unchanged from June.
I added the results of economic value of equity model in an up-200-basis-point scenario. This model captures the impact of repricing beyond our 2-year net interest income model.
2 items are worth mentioning regarding our EVE model. One, the economic value of the firm increased approximately $275 million from June 30 of this year due to the acquisition of the deposits from Bank of America.
This underscores our belief in the value of non-maturity deposits, particularly in a rising rate environment. And two, the projected change in economic value of the company, when modeled in an up-200-basis-point scenario, declined to minus 10.35% in September compared to minus 12.28% in June.
The most material assumptions driving our rate risk models are related to the repricing of our non-maturity deposits, and we believe we treat the repricing of the non-maturity deposits in a conservative fashion. 40% of our total non-maturity deposits reprice immediately at 62% to 100% of the increase in the federal funds rate in our models.
Slide 20 lists the actions we took during the quarter to reduce our exposure to rising rates. The most impactful decision, other than closing on the deposit acquisition, was the sale of $96.9 million of residential mortgage loans.
The loans had an average yield of 4.24% and a weighted average maturity of 281 months. Also during the quarter, we discontinued originating long-duration mortgage paper for our balance sheet and executed $300 million in forward-starting, pay-fixed-rate interest rate swaps.
Overall, we are comfortable with our current exposure to interest rates, but we continue to pay close attention to our balance sheet and the output of our rate risk models. We will continue to evaluate our rate risk and may execute more transactions to maintain or reduce our sensitivity to rising interest rates.
I'll finish my portion of the presentation with our capital ratios on Slides 21 and 22. Because our investment portfolio is primarily accounted for as available for sale, the increase in interest rates between June 30 and September 30 had an impact on the market value of our investments and other comprehensive income.
Slide 21 shows that common tangible equity declined by $18.8 million due to the change in investment portfolio OCI. We also repurchased 250,000 shares of stock in the open market in August at an average price of $13.72 per share, which reduced tangible equity by about $3.4 million.
As of the second quarter, our TCE-to-tangible assets ratio was higher than the average ratio of our peer group. For the past several quarters, the company has been focused on tangible common equity, in part because we assumed Basel III would disallow trust-preferred and include accumulated other comprehensive income in regulatory capital.
Now that the capital rules are finalized with a more traditional view of trust-preferred and AOCI, we included a slide with tier 1 risk-based capital ratios. With $28 million of trust-preferred on our balance sheet, high common equity and low risk-weighted total assets, the chart shows that we are well above the average tier 1 capital ratio of our peers.
Our good capital base gives us the latitude to grow organically, acquire additional banks or businesses using cash or continue to return capital to shareholders. As I noted, we repurchased 250,000 shares of stock last quarter and have repurchased 750,000 shares through third quarter this year.
We have 1,250,000 shares available in the $2 million -- 2 million share buyback the board authorized for 2013, should we decide to repurchase additional shares. Also, the acquisition of Tower Bancorp, which should close in the first quarter of 2014, will be paid with approximately 30% cash and 70% common equity.
I'll now turn the call over to Daryl Moore for his credit presentation.
Daryl D. Moore
Great. Thank you, Chris.
Slide 24 is where I will begin my remarks this morning. On this slide, we show a trailing 5-quarter summary of net charge-offs for our core portfolio, as well as for our 3 most recently purchased portfolios.
In this period, we posted consolidated net losses of roughly $300,000, representing an annualized net charge-off rate for the quarter of 2 basis points. Consolidated annualized net charge-offs stand at 7 basis points for the 9 months ended September 30.
As you can see from the chart, the Old National core portfolio continues to perform very well, with losses in the current quarter of roughly $200,000. Year-to-date net losses in the core portfolio stand at $1.4 million, representing approximately 4 basis points of net charge-offs on an annualized basis.
Performance in the Monroe and Integra portfolios was also strong in the current quarter, with small net recoveries being recognized in each of these portfolios in the period. Year-to-date, the Monroe portfolio has reflected a net recovery of roughly $900,000, while the Integra portfolio has produced approximately $1.4 million in net losses prior to FDIC reimbursements.
Year-to-date losses in the Indiana Community Bank portfolio have been approximately $1 million. We continue to monitor the impact that recoveries are having on our net charge-off results, not wanting to dismiss the influence that this important dynamic has on our current results.
Year-to-date recoveries represent approximately 77% of gross charge-offs, compared to 66% for the same period last year. The trailing 6-year average of recoveries as a percent of gross charge-offs at Old National is 31%.
As we look forward with respect to provision expense and appropriate allowance levels, this dynamic will certainly enter into our decision-making process. Slide 25 shows our trends in the allowance for loan loss coverage of non-covered, nonperforming assets.
On a consolidated basis, we continued our modest improvement trend, increasing our coverage of non-covered, nonportfolio assets slightly from 30% to 32%. The improvement came as a result of the reduction in nonperforming loans of $16.9 million in the quarter, offset in part by the reduction in the allowance for loan losses of $1.6 million.
While this level typically might be of concern, I would remind you that this coverage number does not include the $12.8 million currently outstanding mark on the Monroe portfolio or the $45.6 million mark on the Indiana Community Bank portfolio. As we move to Slide 26, you can see that we have displayed the combined allowance for loan losses and loan marks as a percentage of the pre-marked loan portfolio for each of our differently tracked portfolios.
Similar to past quarters, the combined ALLL in marked to pre-marked loan balance percentages appear to appropriately rank and reserve the risk levels of each of these portfolios, with the Integra portfolio remaining the most troubled, followed by the most recently acquired Indiana Community Bank portfolio. You can see that combined allowance and marks represent roughly 6% of the pre-marked Monroe portfolio, 13% of the Indiana Community Bank portfolio and almost 29% of the Integra portfolio.
Keep in mind that the majority of the Integra portfolio is also covered -- or also subject to our loss-share agreement with the FDIC. On a combined basis, the allowance for loan losses and loan marks as a percent of the pre-marked loan portfolio is now 4.05%, as compared to 4.31% at the end of last quarter.
On Slide 27, we display trends in third quarter results with respect to portfolio delinquency levels. At 51 basis points, 30-day-or-greater non-covered delinquencies showed some deterioration from last quarter's level of 42 basis points but continue to compare very favorably to peer results of over 100 basis points for the trailing quarter.
90-plus-day non-covered loan delinquencies fell back down below $1 million in the current quarter and remained roughly at 2 basis points of period-end loans. As in prior quarters, Old National results continue to be at level -- at a level considerably lower than that of our peers, even in light of improving peer trends, whose average trailing quarter results stand at 44 basis points.
Moving to Slide 28, you can see that we have shown trends in our criticized, classified and nonaccrual loans. Non-covered criticized loans fell $23.3 million in the quarter.
Virtually all of the improvement in this category was as a result of the reduction in line of credit outstandings within several of the larger relationships in this category. While this reduction might be viewed by some as a potentially temporary change, as these borrowers do have the ability to readvance on their lines of credit, it also indicates, to a degree, that the borrowers are in a healthy enough state with respect to cash flow to be able to reduce leverage within their respective business operating cycles.
Consolidated classified loans remained relatively flat in the quarter, increasing by $1.7 million. Nonaccrual loans continue their downward trend in the quarter, falling by $21.9 million.
This quarter's improvement came as a result of minimum downgrades into the category paired with good movement of nonaccrual credits out of the bank, most notably within the Indiana Community Bank portfolio. We continue to be pleased with the overall trends in our credit quality metrics, especially with respect to our net loss results year-to-date.
Generating new loan volume at appropriate returns, while at the same time assuring only acceptable risk is taken and appropriate structuring is in place, remains a challenge, as it has always been as we move out of the downturn and into a period where loan demand has not yet picked up to any meaningful degree. In this regard, we continue to focus on proper loan underwriting and administration.
At the same time, we continue to review ways, as a management team, to take on incremental measure, to manage risk and attempt to serve our clients. With those comments, I'll turn the call over to Bob for concluding remarks.
Robert G. Jones
Great. Thank you, Daryl.
Before I begin my remarks relative to the quarter, I would like to thank all of you who reached out to Lynell following her family's fire. Your support and concern means a great deal to all of us at the Old National family and is very much appreciated.
Our team did its usual job of providing you with an overview of our quarter, their usual good job. From my perspective, it was a good quarter, one that was consistent with our forecast and also one that allowed us to take additional steps towards ensuring that positive trend continues in the face of a still challenging environment for banks.
Let me close our remarks with a brief synopsis of that environment that all banks are facing. While the economy continues to demonstrate a slow and somewhat erratic recovery, we are seeing more pockets of strength versus weakening.
In conversations with our clients and our prospects, we are hearing more discussion about capital expansion and potential inventory builds, some of which is related to prior delayed -- planned delays by our clients, and some of which is related to business expansion based on the improving volumes that they are seeing. Indiana is seeing a broad-based strengthening, as are Louisville and Michigan.
The Illinois markets are still hampered by the state budget challenges, but we have seen some strengthening there as well, though not nearly as strong as the other markets. The strength of the economy is not such that it can withstand any significant challenges to that growth.
The most obvious is the continued challenges in Washington. You could almost hear the steam coming out of the recovery as our leaders in Washington debated the debt ceiling and the continuing resolutions.
This uncertainty has the potential to derail any positive momentum in the economy if these issues are not dealt with over the next few months in a more proactive manner. As a side note, if you have not read Dallas Federal Reserve President Richard Fisher's speech, "Uncertainty Matters," which he delivered in Dallas on October 3, I might suggest that you do so.
President Fisher does an excellent job of discussing the impact that this lack of clarity on our fiscal policy can have on our economy. Another potential slowdown challenge to the recovery will be the anticipated easing of quantitative easing by the federal reserve.
It has been some time since borrowers have seen rising rates. The current low rate environment may be masking some of the cash flow indicators of our borrowers, and they have been -- may have been slightly lulled by a historically low rate environment.
While tapering will affect the long end of the yield curve, any time you have rising rates, you can have an impact on potential borrowings. The regulatory environment also presents potential challenges to banks in 2014.
I will start with the caveat that we do view our regulators as adding value and greatly appreciate the role that they play, and we also understand the role that they have been put into with the continued implementation of Dodd-Frank. Many of you have seen our visual, Flat Tony, which we have included in the appendix for these slides.
This visual shows the number of regulations that ONB dealt with in 2012 alone. Today, we estimate the regulations may be as tall or taller than Flat Tony.
The emphasis that we are hearing from our regulators seems to continue to be on BSA/AML compliance and cyber security, but there is an intense focus on all areas of risk. In fact, regulators are now advising banks that they should be prepared to move to a strong risk profile, which they define as a bank having a very strong risk culture with an articulated risk appetite that is board approved and delivered through an independent and highly effective risk management group.
While this is the essence of what banking is all about, achieving this comes with additional cost. The external challenges above have created a very competitive environment for revenue growth.
We are seeing extremely competitive pricing and structure on loans in all of our markets. Let me give you just a few examples.
We recently lost a loan to a competitor who priced their loan at a 30-day LIBOR plus 1.30%. In addition, another market lost a loan to a competitor who priced a fixed-rate loan at 2% for 10 years.
We are also beginning to see the waiver of personal guarantees on CRE loans more of a norm than an exception. This is driven mostly by the large regionals, but smaller community banks have been quick to follow suit.
Of course, I'm sure that, as you ask the question, everyone will say that it is the other guy. Truth is, we are all probably as guilty, to some degree, as others, but I can assure you that we have a disciplined pricing structure in place that requires exception pricing approval at the most senior levels in our company.
We are also less likely to give on structure because of our focus on credit quality. Finally, let me update you on our recent -- most recent partnerships.
Before I do, I am pleased to announce that our Bloomington, Indiana, market was just named the Large Business of the Year by the Bloomington Chamber of Commerce. You might ask, why do I mention this?
It has only been 2 years since we completed our partnership with Monroe Bank. And many times, there is an extended period when integration activities and other changes reflect poorly on a bank in the market.
Because of the great leadership of our market team and our disciplined integration process, this has not been the case in Bloomington. I also believe this is indicative of how well our process works and our focus on doing what's right for the market.
In Michigan, we have hired a senior commercial banker with over 20 years experience at a regional back in Kalamazoo, as well as another commercial banker, to join the team. In the first 45 days, they have been able to build an approximate $10 million loan pipeline, and they have been very well received by the market.
We are looking at hiring an additional RM. We have also hired 2 mortgage bankers to join our indirect lender in the consumer space.
We have generated $1.2 million in consumer loans and an additional $5 million in indirect loans in the quarter. Also joining the Michigan team is one investment representative, with plans to hire one more.
We are also getting very close to building out our wealth management team. And as Chris noted, there is a cost to building this team, but we are very happy with the response from the markets and are thrilled with the attitude of the Michigan team.
With our most recent partnership, Tower, we are very pleased with the market reception, and the teams in Fort Wayne and Warsaw are just outstanding. Our integration activities are moving very fast, with 20 project teams in place that are populated with representatives from both banks.
They are having weekly meetings and continue to make great progress. We have 2 mock conversions scheduled already, and we still anticipate closing in the first quarter of 2014.
Last week, Tower did announce quarterly earnings of $2.1 million and year-to-date earnings of $5.7 million, both of which represent record performances for Tower. Total assets stood at 700.1 -- $701.9 million at quarter end.
And I would note, trust and brokerage fees were $1.1 million, which also represented a record, while assets under management in the trust group were $719 million. This is a great reflection of the quality of the Tower associates and their leadership team and why we are so enthused with this partnership.
In closing, I would like to remind all of you that we are having our Analyst Investor Day on November 19 and 20. I promise you, Lynell has a great 1.5 days planned for you, and we look forward to seeing you.
Jasmine, you can now open the line for questions.
Operator
[Operator Instructions] Your first question comes from the line of Scott Siefers.
R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division
I guess I wanted to just make sure I'm hearing you guys correctly on the 65% efficiency ratio target. Chris, you mentioned that it's still a goal, but I couldn't tell if I was supposed to kind of read between the lines and figure out whether or not it's still a fourth quarter goal specifically because you mentioned a few quarters still to get the Bank of America branches up to necessary -- or requisite levels of profitability, et cetera.
So is that still a goal for the fourth quarter specifically? And then, I guess, within the context of the way things are trending now, what would be the main levers to get you there?
Robert G. Jones
Yes, great questions, Scott. And if we had done a pool here, we were going to suggest the first question was going to be on the efficiency ratio.
So we appreciate that. It is still absolutely a goal for the fourth quarter.
We have a number of initiatives still in place. In all frankness, it's going to be tight whether we hit in the fourth quarter, but I can tell you that we've got a lot of things going on, remind you of the branch closures, also.
Well, we'll get a full quarter effect for those in the fourth quarter. But it is still a goal for the fourth quarter.
It's still a very, very important part of our incentives. Now to your second part, the levers.
Given the rate environment and some of the other challenges coming out of Washington at all, really, the levers, Scott, we have to look at as expenses. If we get a boost in revenue, that's great.
It's gravy on top of the turkey. But all of our initiatives, and we've got well over 20, are all expense focused.
So bottom line is, it is our goal, it is our target, it is our aspiration, it is everything you can think about. The board is keenly focused on it, I'm keenly focused on it.
Are we going to hit it in the fourth quarter? Boy, I sure as hell hope so, but it's going to be close.
R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division
I appreciate the color and, I guess, the objectivity as well. And then the second question, Bob, I was hoping you could maybe talk a little bit about -- I guess, a little bit more about some of the factors affecting you guys specifically as it relates to loan balances.
I guess, with the second quarter, just given the size of the pipeline, the increase you had in utilization rate at that time, I guess I sensed there was maybe a little bit more enthusiasm. This quarter may be a little more guarded, given the flatter utilization and the down but still strong pipeline.
So what kind of puts and takes do you see out there as you look at overall loan momentum?
Robert G. Jones
Yes, great question, Scott. There's a couple of factors.
One, as you look at our quarter-end C&I balances, there are some internal factors. We had 2 large credits that we lost.
One was a company that we had taken almost from birth to, well, exceeding our capacity that actually went to the capital markets through an acquisition. They acquired a company and used the capital markets to do their financing.
And quite frankly, they appreciate our relationship so much they asked us to join the syndicated pool, but quite frankly, the margins were so slim that we walked away. And that was $19 million of outstandings.
In addition, we lost another $12 million credit. It really was a structure issue.
It was a credit that we've enjoyed, it was a good relationship, but as we said, it's competitive, and somebody came in with a structure that we just couldn't get comfortable with. So that's $12 million.
And as you know, we sold that lease portfolio. So that really is somewhat of an indicator of why we had the little bit of a drop in our outstandings at quarter end, and that's why we put the slide in there.
I would tell you, as you look at moving to an external factor, as you look at the pipeline, you look at our utilization -- and I used the phrase in my comments, you could almost hear the steam come out when all the crap was going on in Washington. Literally, our clients, our volumes, our applications, people just didn't know what to do, and it just really slowed things down.
As Chris said, we've seen our balances in -- through the fourth quarter get above where they were in the third quarter. Activities picked up in the pipeline, activities picked up on the consumer side.
So I'm hoping that's a brief blip based on the circus that was Washington. Now we've only got another 1.5 months until we get back to that circus, but it was -- I think everybody just got very frustrated.
I hope that helps, Scott.
Operator
Your next question comes from the line of Emlen Harmon.
Emlen B. Harmon - Jefferies LLC, Research Division
I was hoping that you could talk a little bit about the shifts in mortgage products. And so how was that -- how do you expect that to end up affecting your production volumes generally?
And I guess, does that affect mortgage banking equally as it does just kind of what's coming on the balance sheet?
Robert G. Jones
It'll select -- I think, first and foremost, we did it as a rate issue. We wanted to get the iteration shrunk.
We, at the opportune time, one, to do the sale, plus to back off, as we're seeing some slowing of activity and mortgage, to back off some of the longer-term product. I think it's going to have a little bit of slight downward pressure.
But the -- I don't know that it's going to be significant on a go-forward basis. Clearly, refis are not nearly as robust, but our purchase activity has been fairly good.
Emlen B. Harmon - Jefferies LLC, Research Division
And then I did want to hop back to the expense, I guess, question quickly. I hear -- you guys are talking about some additional savings that come in, in the fourth quarter from branch closings, but then also, you do have kind of some RM hires and some of the other investments that you're making in wealth management, for example.
How do we think about just kind of the, directionally, which way the personnel end is headed as we get up in the next couple of quarters here?
Robert G. Jones
I would say personnel line would be flat to maybe slightly up based on timing. There's other areas that we can reduce costs and will be reducing costs.
But as we build the revenue positions in the Michigan market, clearly, we've had reductions in staff, and the average salaries are going to be a little different. But for modeling purposes, I would be -- second to third quarter is not that bad of an indicator to use.
Emlen B. Harmon - Jefferies LLC, Research Division
And one more quick one, if I could. So how are you guys thinking about the kind of incremental yield on the BofA deposit base at this point?
Obviously, you guys have kind of pre-invested, to some degree, coming into this. I guess, how do we think about what you pick up as you start to get some loan production out of those new branches?
Christopher A. Wolking
Yes, Emlen, it's Chris. I don't have all the numbers right at my fingertips, but the mix was not that dramatically different than ours.
In fact, their CD rates were a little bit lower than ours, given our high CDs. So we really focused on the noninterest-bearing deposits, and that's a good, gosh, 10% or 12% of their -- of the total deposits.
So the deposit base, from our perspective, is an excellent deposit base with pretty low cost dynamics.
Robert G. Jones
Yes. And just to give you a perspective, Emlen, total deposits at the end of the quarter for BofA -- or that Northern Indiana, Michigan markets; we're trying not to use that BofA word too much -- but we're a little over $500 million, and $71.5 million of that was in noninterest, another $88 million were -- $88.9 million was in NOW with slightly over $50 million in money -- in savings and $166 million in money markets.
So you can see that it models a little bit -- pretty closely to where we are, with probably a little slightly higher balances in the noninterest DDA. And fortunately, those deposits have stabilized, and we're actually starting to see some growth in the Michigan markets.
Emlen B. Harmon - Jefferies LLC, Research Division
Great. Got you.
Yes, sorry -- I noticed that you guys are trying to head toward that new moniker there. Sorry, it was stuck at the back of my brain.
I guess I...
Robert G. Jones
There would be fines from the governments, so we've got to watch what we're called.
Emlen B. Harmon - Jefferies LLC, Research Division
Fair, fair. I guess I would -- I'd also be kind of curious in terms of what you're doing on the asset side there because, I mean, presumably, the proceeds of that funding have been invested in shorter-duration -- something shorter duration in the securities book.
So I was kind of curious what you feel like the gap between what you're getting on a yield for the securities invested there versus what you could expect to get longer term.
Christopher A. Wolking
The loans, again given our -- the people we've hired and our overall credit philosophy, I don't expect that our loans will look that much different in BofA than they are currently with Old National at the core bank. So up 100 to 200 basis points, probably, on average as we move into higher-quality assets that have a little better spread.
I think, repricing, I think we have to assume that those are going to be relatively short repricing assets, floating-rate assets. So we're somewhat beholden to how quickly short-term rates rise before we see an absolute increase in yields relative to that, which we're taking off the investment portfolio.
Robert G. Jones
I just might mention, Emlen, on the loan side -- now it's not significant, but when we acquired those branches, we had just under $8 million in loan outstandings. At quarter end, we were up to $12.5 million and pretty well balanced in between commercial as well as consumer.
So in 45 days, they've been able to add outstandings that were 50% above where they were. Now we've got a lot of 50%s to go to make up the deposits, but I think it's a good indicator of the quality of the team.
And we're going to, obviously, get a little better spread on that.
Operator
Your next question comes from the line of Stephen Geyen.
Stephen G. Geyen - D.A. Davidson & Co., Research Division
Maybe just a couple of questions here. Starting off, the $1.6 million, the -- I'm looking at the chart on -- or table on Page 7.
The renegotiated contract, 1.7 -- $1.6 million. Is there anything likely to continue with that, or is that a kind of a onetime benefit in third quarter?
Robert G. Jones
Yes, that onetime benefit is there. The -- obviously, the benefits of the renegotiated contract will continue, but that's why we highlighted that in that slide just because that is a unique item that -- but we shouldn't get any more unique items other than the benefit savings over the duration of the contract.
Stephen G. Geyen - D.A. Davidson & Co., Research Division
Okay, got it. All right.
And let me see. The wealth management trust, you had some nice growth there.
Just curious if there's anything in particular that you can point to. Is it kind of across footprint?
Are you seeing some areas, some regions doing a little bit better than others with some adds?
Robert G. Jones
Yes, it's -- the sales factor is across all regions. In total transparency, we did have a large estate mature, and that fee comes into our Evansville region.
But we've had good sales. But a pretty good portion of that is that we did have a large estate mature in our Evansville region, and you get the fee, a corresponding fee, for that.
Stephen G. Geyen - D.A. Davidson & Co., Research Division
Sure, got it, okay. And maybe a question for Chris.
I'm looking at the balance sheet. With the changes and the mix change in earning assets, can you kind of talk a little bit more about what the expectation or where you might be going over the next couple of quarters?
Christopher A. Wolking
Well, I think, Stephen, if we look at it purely from a rate sensitivity standpoint, we'd expect fewer long-duration assets, whether they're coming to us in the mortgage loan book or the investment portfolio. So -- and from a quality asset standpoint, I'd like to make room for more growth in consumer and commercial loans.
So that's, strategically, the direction. Obviously, quarter-to-quarter, there are some things that can impact whether or not that happens, but you can be assured that our reinvestment objectives in the investment portfolio are to be in shorter-duration assets, which implies lower yields, given the steep yield curve.
So I'd expect that to continue. As we mentioned, the -- or the sale of the portfolio of residential mortgages was a big deal for us.
And we would continue to do that if we thought that it was appropriate, but right now, we're feeling pretty good about our rate risk position and, certainly, our capacity to absorb additional commercial loans and consumer loans.
Stephen G. Geyen - D.A. Davidson & Co., Research Division
Okay. And so maybe just focusing on loans and the investment securities, kind of that mix.
So certainly, you want to add to loan growth as you can, but as far as any repricing and where the runoff might be going, where you might be reinvesting, also, okay...
Christopher A. Wolking
Short. Short and lower yields.
I think, when I look back at the last quarter, our average yields were somewhere in the -- in reinvestments were somewhere between 1.5% and 2%. And on an average basis, the investment portfolio currently is significantly higher than that.
We are doing some munis when we have the opportunity, but for the most part, it's floating-rate stuff and very structured agency and mortgage-backed product.
Robert G. Jones
Yes, Stephen, I know this is your first call back, but the direction I've given Chris is strengthen duration, reduce the risk and increase the yield. And he's done well on 2 of the 3, but that third one, he's still struggling with.
I'd rather get the first 2.
Operator
Your next question comes from the line of Jon Arfstrom.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Couple of questions here, just following up on Emlen's line of questioning. It -- we'll call them the new Michigan branches.
Anything other than hiring -- finding or hiring the right people, anything that prevents that -- those branches, longer term, from having a similar loan-to-deposit ratio as maybe the rest of the bank? Is that the longer-term...
Robert G. Jones
Nothing at all. It's a matter of -- I've got to be honest with you.
I've said this to Barbara that our Michigan markets have all the potential to look a lot like Bloomington over time. They're just good markets with just phenomenal people.
I -- when I'm having a really bad day, I just call our Michigan President, who I don't think's ever had a bad day. But he's building a heck of a team, and we're really encouraged, if you can't tell.
So I think that's going to look a lot like Bloomington or some of our other markets.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Could I get the number, Bob, for when I have bad days...
Robert G. Jones
Sure. 1 (800) Phil Harbert.
Now just be prepared, it's a long conversation, but it's all I need.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
All right. Chris, for you, on regulatory costs.
I know it's a lot of work and somewhat of the pain. But do you -- is there more needed, or do you think you have most of it captured in the run rate?
Christopher A. Wolking
Well, I -- we've got most of it captured in the run rate, given the investment that we've made in our BSA/AML work. In fact, I think the number probably comes down as we get into a steady state and begin to amortize the cost of the systems work that we did.
As Bob said, though, you don't know where the next regulation or where the next cost is going to come from. We're focused on stress testing and those kinds of things, so it feels like it's going to be kind of a regular event, as we have to look harder at responding to some of the requirements coming out of Washington.
Robert G. Jones
Jon, I think the only wild card there is this desire to move banks to what they call strong. There's probably a cost for that.
I'm not sure that any of us know what that is because when you ask what is strong, they'll give you the statements that I just gave. But sometimes, I think, after the exam, you're going to have a better sense of what strong is, and there may be some investment for all banks, quite frankly.
So fortunately, we spent a full day with our board looking at what strong meant to us, and we're comfortable we've got the people in place and should not be much incremental cost. But obviously, our history is that we're going to do what we have to do the maintain that strong risk profile.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Okay. And then maybe just one more, if I can, question for Daryl.
Robert G. Jones
He was kind of lonely, Jon. He's the Maytag salesman of Old National.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
I figured that. For Daryl, the nonaccrual relationships, $2 million or greater.
You have a slide in the very back. And in terms of the number of credits and the dollar amount, it's down materially.
I'm just wondering if there's anything specific that happened there that's just the natural course of things as credit mends.
Daryl D. Moore
Yes, Jon, it is the natural course. We continue to work on these, and it's just, as we work on those through the tough economic environment, the larger credits have done a nice job of moving those out.
So there is nothing really unusual. It's just the hard work that our guys are doing.
Operator
Your next question comes from the line of John Moran.
John V. Moran - Macquarie Research
John Moran, actually. Say, just a real kind of quick one circling back on the operating expenses.
The full run rate saves from the 18 consolidations, that was $3.5 million to $4 million. You expect that in the first quarter.
Did you ever quantify what the run rate saves would be out of the 4 conversions and the 3 additional sales in fourth quarter? Or is that -- or am I at risk of double counting?
Robert G. Jones
No, you're not at risk of double counting. It's separate, but we never really quantified it because, while it's meaningful, it's not significant.
I think if you take the number that we gave you for the fourth quarter and divide it by the number of branches, it will give you a good indication of what it should be because our average cost is about the same per branch.
John V. Moran - Macquarie Research
Okay, that's helpful. And then, Chris, you -- I think in your prepared remarks, you said, "Hey, look, there was an extra day on comp and several miscellaneous costs that contributed on the OpEx line item."
Several miscellaneous costs that are expected to hang around, or is there an aggregate number that you could kind of tease out that might drop?
Christopher A. Wolking
No. Yes, I don't have an aggregate number, but these were onesies, twosies, small deals that just seemed to be there in the third quarter.
I guess implied there is that of those, I wouldn't expect to see them again in the fourth quarter, but not particularly material.
Robert G. Jones
I think the bigger effect was the extra day on payroll.
Christopher A. Wolking
Extra day on payroll, yes, which is a big -- not a small number. I think it's about a...
Robert G. Jones
And just, yes, for modeling, that extra day is about $0.5 million. So we don't -- you always are going to have onesies and twosies.
Christopher A. Wolking
Yes.
John V. Moran - Macquarie Research
Got you. I'm not sure my controller likes the word onesies and twosies.
All right. And then the last one for me, kind of nitty-gritty, but tax rate came in kind of well below where you guys were running in the first half of the year.
Any thoughts there in terms of what we ought to be looking for going forward? And then was there anything unique this quarter about that?
Christopher A. Wolking
I think, on a full year, that the GAAP number we expect to be is around 28%, which I think is a number we've talked about in previous quarters, correct. I think it's an important number for us.
It's just an expense. And we continue to work really hard to make sure we're doing the right thing.
But as our taxable income continues to increase through the acquisitions and things of that sort, it -- that number is just naturally going to rise.
Operator
Your next question comes from the line of Christopher McGratt (sic) [McGratty].
John Barber - Keefe, Bruyette, & Woods, Inc., Research Division
It's actually John Barber phoning in for Chris. Just wondering, how do you expect the Tower acquisition to impact your interest rate sensitivity?
Christopher A. Wolking
It's a little early to tell you. And I think we always like to see what those final deposits are and how the marks are treated, but not materially different.
And it's not a huge number, really, in terms of total as a percentage of the balance sheet. So we'll wait and see and watch that.
We're certainly running the balance sheet with an eye towards what happens next year, but it doesn't really change my strategy any.
John Barber - Keefe, Bruyette, & Woods, Inc., Research Division
And Bob, I know you mentioned that loan pricing is competitive across the footprint, but are you seeing any differentiation in pricing in Michigan or Northwest Indiana, some of the newer markets?
Robert G. Jones
Michigan, not so bad. The cesspool of pricing is really Indianapolis right now.
It is unbelievable. We're seeing a little bit in the other markets, but Indianapolis is where we've seen it.
And actually, we've been pleased with what we've seen so far in Michigan and up in that part of the world, [indiscernible] in Indianapolis.
John Barber - Keefe, Bruyette, & Woods, Inc., Research Division
And just the last one I had. You talked about how we have some clarity, finally, on Basel III.
Any update to your long-term capital targets? I think the last I remember is that you used to target TCE of 6%; tier 1 common, 9%; and total capital, 13%.
Christopher A. Wolking
I think, as we watch those numbers, we're a little more sensitive to the peer group numbers than we are to any targets that we've got only because we're trying to respond to what the regulators expect and those kinds of things. So we'll just continue to work our stress testing very hard and try to do the very best we can with the capital that we've got.
Robert G. Jones
I just might note, John. You mentioned that we used to talk about a TCE at 6%.
That number has probably crept up above that at this level, given Basel and the buffers and all, and it's probably closer to 7%. But absent that, we still believe that we're going to be very deliberate in our capital strategies and look to do what's right for the shareholders.
Operator
Your next question comes from the line of Taylor Brodarick.
Taylor Brodarick - Guggenheim Securities, LLC, Research Division
Daryl, a question about, I guess, how long we can expect the under-provisioning/provision recapture, kind of how are we thinking about the reserve plus the marks? And is there any target you want to move it down towards?
Daryl D. Moore
Yes, there is no target that we're looking at right now. Charge-offs are low, our loss rates continue to come down, and our trends were good in the quarter.
All of those enter into that mix. And it's so difficult, in today's environment, to know where all of those things are going.
So -- and Taylor, in a short answer to you, we don't have a target that we're trying to get to. And it's just a quarter-by-quarter evaluation.
Robert G. Jones
What I would say, Taylor, is as you think about your 2014, I would just make an assumption that whatever you have in your models for charge-offs, for modeling purposes, I would have you at least matching our charge-offs. Now that's not what we're going to do, but I think, for your modeling, it's probably the safest.
We may or may not do that, but for your purposes for modeling, that's where I would go.
Operator
Your next question comes from the line of Peyton Green.
Peyton N. Green - Sterne Agee & Leach Inc., Research Division
Just a question with regard to the interest rate sensitivity. Maybe, Chris, if you could just talk about where you're ultimately trying to go with it and what sacrifices you'll make.
I mean, is it as simple as using the derivatives market with more swaps? Will that do it?
Or would you look for more balance sheet shrinkage from the investment portfolio?
Christopher A. Wolking
All of the above. I don't -- like I said in my comments, I feel good about where we are right now.
I think we just want to be in a position to respond. We were pleased to be able to get the sale of the mortgages done.
I mean, that's -- those are sometimes difficult trades, logistically, to put together. It went very well.
I would prefer to not do those kinds of things again. I hate giving up 4.25% revenue.
So I think we'll continue to try to do what we've done, which is reinvest the investment portfolio in a fairly conservative fashion and continue to expect that loan growth will continue to offset some of that in a higher-spread product. But as long as we've got this strong deposit base that we've got, a lot of non-maturity deposits, that gives us a lot of latitude, I believe, to take advantage of opportunities wherever they might be on the asset side.
Peyton N. Green - Sterne Agee & Leach Inc., Research Division
Then, I guess, what were the terms on the swap that you executed?
Christopher A. Wolking
We did several. Most of them -- as I said, they're pay-fixed-rate swaps, and they start anywhere from late this year to 2016, probably, Peyton.
I think we've got a full breakdown of that in the Q, so you'll be able to see that when we release the Q. But generally speaking, nothing immediate.
And it's a great tool for us. We feel like it helps with our economic value of equity without impacting our current net interest income too dramatically.
Robert G. Jones
Our Q will be filed on Friday. It's got a pretty good -- it's got a very good disclosure in there of the...
Christopher A. Wolking
I think they're all listed in there, yes.
Robert G. Jones
Yes.
Peyton N. Green - Sterne Agee & Leach Inc., Research Division
No, I was just curious if that would be a better tool to use now that spreads have come in a good bit more than they were for on -- at least on average compared to the third quarter. Is that something you're more likely to use going forward?
Or really, just you're going to be using that combination?
Christopher A. Wolking
No. Again, I think we'll just take advantage of things as they happen.
If we get a nice run on the fixed income mark and we have the opportunity to sell some paper, we'll probably do that. I mean, it's just a -- it's whatever makes sense at the time.
This has been a good product. It's accounting friendly for us.
But again, with a relatively small wholesale -- portfolio of wholesale funding, it's kind of difficult to do these things and still stay in good graces with the accountants, but we'll do what we can.
Operator
And there are no further audio questions at this time.
Robert G. Jones
Great. As always, if you have follow-up questions, please give Lynell a call.
And again, for anybody that's still on the phone, from all of us at Old National, thank you so much for your prayers, kind words and support of Lynell during her family's challenges. It's reflective of the quality of the people that are on the phone and reflective of all of our caring attitude towards Lynell.
So have a great day, and we look forward to talking to you.
Operator
This concludes Old National's call. Once again, a replay, along with the presentation slides, will be available for 12 months on the Investor Relations page of Old National's website, oldnational.com.
A replay of the call will also be available by dialing 1 (855) 859-2056, conference ID code 85826718. This replay will be available through November 11.
If anyone has additional questions, please contact Lynell Walton at (812) 464-1366. Thank you for your participation in today's conference call.