Lynell Walton - SVP of IR Jim Sandgren - President & COO Daryl Moore - Senior EVP & Chief Credit Executive Jim Ryan - Senior EVP & CFO Bob Jones - Chairman & CEO.
Scott Siefers - Sandler O'Neill & Partners Jon Afrstom - RBC Capital Markets Chris McGratty - KBW Terry McEvoy - Stephens Inc. John Moran - Macquarie Securities Andy Stapp - Hilliard Lyons.
Welcome to the Old National Bancorp Fourth Quarter and Full-Year 2016 earnings conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC Regulation FD. The call, along with corresponding presentation slides, will be archived for 12 months on the investor relations page at oldnational.com.
A replay of the call will also be available beginning at 1.00 PM Central time on January 24 through February 7. To access the replay, dial 1-855-859-2056. The conference ID code is 50911607. 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, LaTonya and good morning, everyone. Welcome to Old National Bancorp's conference call to discuss our fourth quarter and full-year 2016 earnings. With me today are Bob Jones, Jim Sandgren, Jim Ryan, Daryl Moore and Joan Kissel.
I would like to remind you that some comments today may contain forward-looking statements that are subject to certain risks and uncertainties that could cause the Company's actual future results to materially differ from those discussed.
Please refer to the forward-looking statement disclosure contained on slide 3, as well as our SEC filings, for a full discussion of the company's risk factors. In addition certain non-GAAP financial measures will be discussed on this call, as referenced on slide 4.
Non-GAAP measures are 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.
Old National's strong fourth quarter performance completes a very successful year for our Company. Slide 5 contains some of the positive financial highlights of this quarter's performance, including our reported net income of $33.5 million and earnings per share of $0.25.
Included in these quarterly results was a gain, along with various charges for several initiatives, as listed on the slide. Organic loan growth for the quarter was 6.1% on an annualized basis, driven by strong organic growth of 9.7% annualized in our commercial and commercial real estate portfolio.
We also continue to the civility in our core net interest margin. Moving to our full-year financial performance on slide 6, we were very pleased to report record earnings this morning of $134.3 million or $1.05 per share.
Our organic loan growth for the year exceeded 7%, driven again by strong organic performance in our commercial and commercial real estate portfolio of close to 11%. Our credit performance remains excellent, with just four basis points in net charge-offs for the year and low delinquency levels.
We also saw good organic growth in our core deposits of almost 6% and our tangible book value increased almost 9%.
Slide 7 contains some of the more significant strategic actions Old National completed during 2016 to either improve the operating leverage of the Company or improve our growth profile, both of which should provide positive benefit to our shareholders going forward. With that overview, I'll now turn the call over to Jim Sandgren..
Thanks, Lynell and good morning, everyone. From politics to baseball, 2016 was a year filled with surprising outcomes and shattered trends, yet for Old National it was year marked by tremendous consistency and a continuation of an oppressive impressive trend of loan growth.
To be precise, Old National has now achieved seven consecutive quarters of substantial organic loan growth thanks to another strong quarter. As Lynell mentioned in her opening remarks, our net income was the highest in history of our Company.
If you'll turn to slide 9, I would like to begin by taking a closer look at our loan growth for both the quarter and for the full year. From a quarterly perspective, the 6.1% annualized loan growth that our producers generated was fueled by a nearly 10% gain in the commercial category.
These strong quarterly results are an extension of our full-year 2016 loan growth numbers. As you can see in the bottom half of slide 9, we produced 7.1% in organic growth for the full year, with much of the success driven by a 10.7% gain in commercial lending.
Our strong fourth quarter results are a direct reflection of our continued focus on driving more C&I and CRE lending.
While we enjoyed excellent quarterly results in a number of our communities, I'd like to draw particular attention to our South Bend/Elkhart market, where we enjoyed a quarterly increase of over $37 million in commercial loan balances.
Our Fort Wayne and Louisville/Lexington markets also posted excellent results, with both markets exceeding $27 million in new commercial growth for the quarter and we continue to see nice growth in both Wisconsin and Michigan as well.
Turning your attention to slide 10, I will start by pointing out that the $459 million of new commercial and commercial real estate production we experienced in the fourth quarter represents a 42% gain over fourth quarter 2015 and a 12% jump from third quarter 2016.
Markets of note are Louisville/Lexington, with more than $92 million in new production, Wisconsin, with nearly $80 million and Evansville with $57.8 million in new commercial production. During the quarter we experience a higher level of C&I production than we've seen in prior quarters.
While still over half of our commercial production was in the CRE category of 54%, we saw C&I grow to total production, up from 32% in Q3 and 37% of total production in Q2. It is probably too early to tell, but I think this may be a good indicator of how our commercial customers are feeling about their future prospects post-election.
The middle graph depicts a quarter-over quarter and year-over-year decrease in our production yield which bears explanation. As a footnote on the slide indicates, we had a higher mix of tax exempt and variable rate loans in the quarter which ultimately brought our yield down to 3.18%.
That being said, our ultimate spread over cost of funds remains fairly stable and due to the higher level of variable rate loans provided in the quarter, we will certainly benefit from a rising rate environment going forward. The final graph on slide 10 depicts yet another record quarter for our commercial loan pipeline.
As of December 31, our pipeline [indiscernible] $1.4 billion, with $290 million of that in the accepted category and another $412 million classified as proposed.
Not only is our current commercial pipeline twice the size it was one year ago, the $702 million combined in the accepted and proposed categories nearly equals the entire fourth quarter of 2015 pipeline. This clearly provides us great optimism for additional commercial growth in 2017.
I continue to believe that the strong, steady organic growth we have produced over the past seven quarters is evidence that we're executing our growth market strategy exceptionally well. Throughout our footprint, we have skilled and motivated producers in place, along with outstanding synergy and cooperation between our credit and lending teams.
Moving to slide 11 which focuses on our fee-based businesses, you can see that wealth management revenue for the quarter was up over 6% over fourth quarter 2015 and flat compared to third quarter 2016.
While our wealth division certainly benefited from post-election gains in the equity markets, these gains have largely been offset by the dip in the bond markets that has impacted our more traditionally conservative trust clients.
The 18% year-over-year gain for investments was due in large part to our successful anchor partnership which allowed us to add 15 talented investment advisors. Our 4% increase over Q3 was largely attributable to advances in the market.
Moving forward, we believe we're well-positioned throughout our franchise to help both our investments and wealth management clients fully benefit from coming market changes.
Moving to slide 12, you can see that mortgage revenue for the year was up over 61% compared to 2015, due to a strong real estate market, low rates and the addition of a great team of mortgage loan originators and large servicing book associated with our Anchor Bank partnership.
Specifically for the quarter, mortgage revenue was up nearly 110% compared to fourth quarter 2015, but down significantly from third quarter 2016.
The lower revenue in the quarter was driven by lower production levels due to seasonality and a slight uptick in rates, as well as a negative adjustment to four commitments as our pipeline dropped by over $56 million to $90.6 million at December 31.
While we saw rates tick up in the quarter, our ratio of refi-to-purchase production still remained about 60%/40%. We certainly expect that ratio to shift more to purchases in the coming months, with 30-year rates over 4% which seems to be the watermark which slows refi production.
In spite of the lower expectations for production in 2017, we're still encouraged by the strong real estate markets throughout most of our footprint and the great relationship that our MLOs have with realtors in those markets.
Overall, 2016 was a record-breaking year for the bank and a solid year for our fee-based businesses, all of which continues to validate the effectiveness of our growth market strategy. At the risk of repetition, I truly believe you have the right people in the right markets with the right products and services to meet our clients' needs.
The consistent loan growth you are now seeing from Old National quarter after quarter is proof positive that our strategy is working and I'm very confident that we're in a position to continue the success in 2017 and beyond. With that, I will now turn the call over to Jim Ryan..
Thank you, Jim.
To build on Jim's enthusiasm about the quarter and year, starting on slide 14, I am pleased to report that adjusted pretax, pre-provision income grew by 12.9% year over year as a result of strong underlying fundamentals in our banking business, our focus on expense reductions and the contribution by newly acquired markets in Wisconsin.
We're pleased with the results of growing pretax, pre-provision income as we remain focused on improving the operating leverage of the Company. On slide 15, the graph depicts our quarter-over quarter and year-over-year trends in total revenue. Total revenue was $655.5 million in 2016 compared to $596.7 million in 2015.
Excluding the gain on our insurance sale and a net gain from recent branch transactions, operating revenue was up 5.9% year over year. These branch actions include both the repurchase and recognition of deferred gains on the properties that we previously sold in lease back and charges associated with the recent branch consolidation.
One item of note, other income in the fourth quarter benefited from higher anchor recoveries on loans that had been previously charged off prior to the acquisition. These recoveries were elevated from the third quarter. Moving to slide 16, you will see the trend in our GAAP net interest margin and our core net margin.
Our reported GAAP net interest margin benefited from the organic loan growth we experienced in the quarter and the contribution from the newly acquired markets in Wisconsin. As we've seen from past transaction, the margin contribution from purchase accounting can be more impactful in the early periods.
We were pleased that a core market was stable at 3.10%, benefiting from higher-than-anticipated collection of interests from nonaccrual loans and from a slowing of the premium amortization from investment securities due to higher rates. Our core margin also benefited from increase in interest rates in December.
As a result, we're estimating our core net interest margin should be stable to slightly positive in the first quarter, despite having two less days.
Shifting to non-interest expenses on slide 17, operational expenses, as defined on the slide, totaled $108 million in the fourth quarter and are slightly higher than our third quarter operational expenses of $102.6 million. As noted on the slide, the fourth quarter included higher-than-typical year-end accrual adjustments that totaled $5.5 million.
Excluding these items, operational expenses were right in line with the third quarter levels. Despite any tailwind from organic growth in interest rates, we will continue to remain focused on reducing cost during the year. We do anticipate that $1.2 million in branch consolidation charges in the first quarter of 2017.
For the full year 2017, we're expecting operational expenses to be in line with current consensus estimates of approximately $400 million. Just as a reminder to you as you build your models, our operating expenses peak in the first and second quarters due to employment taxes, insurance and merit increases.
On slide 18, we've looked at the actions taken during the year to improve our operating leverage. Most impactful is the reallocation of capital from a lower return insurance business to a higher return banking business via Anchor Bank.
Additionally, we consolidated 20 more branches as we continuously review our distribution network and investment in more online and mobile banking capabilities. We expect that we will continue to review our branch distribution network and reduce branches consistent with our clients changing branch usage and mobile adoption.
Slide 19 shows the changes in our tangible common equity ratio and our tangible book value per share. Both metrics were impacted at year end by a $40.5 million decrease in OCI resulting from interest-driven fluctuations in the value of our investment portfolio.
Despite the changes in OCI, we're pleased with the 8.9% year-over-year growth in our tangible book value per share. Excluding the reduction in OCI, our tangible book value per share would have been $8.60 or $0.30 higher at year end.
One final note on income taxes, assuming no change in the federal statutory income tax rate, we anticipate our 2017 federal effective tax rate to be 25% and our fully taxable equivalent rate to be 33%. We have begun an analysis of the impact from a change in the federal tax rate.
We would expect some impairment of our deferred tax asset and a corresponding reduction in our capital ratios. We believe under the potential discussed tax rate our capital is sufficient and the earned back any impairment in the deferred tax asset in less than three years. I will now turn the call over to Daryl..
Thank you, Jim. As we move to slide 21, the chart displays comparisons of the current quarter's net charge-offs and provision expense to both the prior quarter as well as the fourth quarter 2015.
For the current quarter, we look to capture from the allowance of $1.8 million compared to provision expense of $1.3 million and $500,000 for the prior quarter and the fourth quarter of 2015, respectively.
With respect to net charge-offs, we were in a slight recovery position in the current quarter compared to net losses of $1.6 million last quarter and a recovery of $500,000 in the fourth quarter of 2015. Full-year 2016 provision was $1 million, with the net charge-offs at $3.4 million or four basis points of average loans.
While we're pleased with the four basis points in losses for the year, we did see recoveries as a percent of average loans at their lowest level in at least the last five years in addition to recoveries to gross charge-off ratio at its lowest level since 2013.
Should these trends continue, we would expect to see net charge-off levels begin to increase in future quarters. Although the allowance for loan losses to total end-of-period loans dropped slightly to 55 basis points, it's important to remember that we also have $130 million in marks on acquired loans.
Total allowance in loan marks to total pre-marked end-of-period loans stood at 196 basis points at quarter's end. Moving to slide 22, you can see the special mention loans decreased materially in the quarter, moving down by $30.3 million or 24%, in the period. Upgrades and payoffs where the main contributing factors to this category's improvement.
Substandard accruing loans increased $7.2 million in the quarter. A great deal of the growth in this category related to downgrades in our agricultural portfolio which continues to whether through an extended difficult period. Accrual loans showed improvement in the quarter, falling 13% or $20.1 million.
The improvement in this classification came mainly from payoffs and pay downs on a number of loans, with very little dollar inflow in the quarter.
As we move into the first quarter of 2017, we will begin to receive the results of last year's operations from our agricultural clientele which may reaffirm our concerns of continuing difficulties in this industry.
While we believe that we have a firm grasp on our risk in the segment and have been proactive in our management of the same, we may see some additional downgrades. At this point in time we do not see any meaningful loss exposure, barring any significant decreases in land values.
As a reminder, our agricultural portfolio comprises roughly $270 million or 22%, of our tier 1 risk-based capital plus allowance for loan losses. One other area that we're beginning to watch closely is the area of consumer loan delinquencies.
These while the end of the year typically brings with it higher consumer delinquencies rates, 2016's end-of-year delinquencies were higher than the year-end 2015 levels.
Some of the increase may be a result of temporary inefficiencies we experienced in our collections area in the fourth quarter, due to some structural changes we had implemented, as well as the addition of some retail accounts from the Anchor partnership. However, we want to make sure it's nothing more than that and we will be tracking it closely.
Finally, as we review the OCC's semiannual risk perspective recently published, we can confirm we're seeing pressured increased risk layering, policy exceptions and LTV ratios as well as a desire on the part of our borrowers to diminish covenant protection.
We, as with all banks, are very focused on these risk factors as we seek to build our loan outstandings. With those comments, I'll turn the call over to Bob for concluding remarks..
Thank you, Daryl and good morning, everyone. I hope that everyone has an enjoyable holiday season. There are a number of reasons for Old National to celebrate our performance in 2016.
We did achieve the highest net income in our 182-year history, we saw strong loan growth in all four quarters and our focus on improving operating leverage continued and in fact, it didn't accelerate in the second half of the year. We also more than successfully integrated our largest partnership to date and the results have been excellent.
But the most significant accomplishment for the year is the platform that we have established for 2017 and beyond. There's a great deal of optimism within our Company as it pertains to future growth, driven mostly by our own internal capabilities we have built and supported by some external tailwinds.
But as I remind my team on a far too frequent basis and this is advice I received from one of my most respected mentors, do not confuse great performance with a bull market. While we have strong optimism for the future, it is critical that we stay laser focused on execution.
This means continuing to build upon the foundation we have built with strong revenue growth, continued emphasis on improving our expense base, while maintaining our strong credit standards. 2017 does present some real opportunities.
In the spirit of the upcoming Super Bowl which, by the way, my beloved Browns will not be playing in once again, the game will begin with the question, heads or tails. I believe time will tell what headwinds or tailwinds are in store for industry throughout the year.
On page 25, I will give you my perspective on these potential winds, some particular to us and some that are more global in nature.
It has been sometime since any bank has been able to highlight the value of a good deposit franchise, but given that the anticipated rise in the economic activity should lead to increased lending activity, along with the potential rising rates, the ability to use low-cost core deposits to fund this growth will be a competitive advantage.
One of the key aspects of our franchise is our ability to use our legacy low-growth markets as strong funding sources. These markets, while not strong lending areas, have historically been an excellent source of core deposits as we have been able to couple significant market share with loyal customers to drive deposit growth.
We have seen continued increases in economic activity and our markets reflect what most of the economic polls are indicating which is a greater sense of optimism amongst business owners and a feeling that there will be more capital projects and greater potential.
A word of caution, though; these positive feelings need to be translated into real activity. While we have seen increased activity to date, it could be derailed by inactivity in Washington.
We do feel at this date that the increased activity, along with the pipeline we have built, should lead to commercial and commercial real estate growth comparable to or better than, 2016 and mid single-digit total loan growth as we continue our previously discussed strategy of slowing indirect originations to improve margins.
It is the given that rising rates are a good tailwind for all banks, the range of expectations is varied and we have taken a more conservative view in our forecast, relying more on the forward curve. As Jim Ryan referenced earlier, that should improve to improving net margins which will have a strong impact on earnings.
Our growth strategy through acquisition allows us to leverage that growth and the inherent scale we have built to continue to reduce cost. Efficiency opportunities exist in areas where increased volumes can be achieved without additional FTE.
We also recognize that our current branch network can be further optimized as clients continue to gravitate towards mobile banking solutions. A great deal of our optimism comes from the ability to improve market share and leverage current relationships in our newer markets.
We continue to see excellent opportunities to build share to expand the relationships and building new relationships in these new markets. We will also leverage the expertise we have gained in these markets throughout our franchise. As Jim Sandgren discussed, rising interest rates do have the potential for reducing our mortgage activity.
While we clearly see a shift in more purchase versus refis, we do gain some comfort from the fact that many of our markets still report good activity from their realtor base with regards to new home purchases. One of the biggest issues we hear is lack of inventory. Continued rate increases may cause that problem to disappear.
We also believe that our mortgage servicing income will offset some of the potential volatility from lower production. As most of you know, tattooed across my forehead are the words accretion income. We get the fact that we have been the beneficiaries of accretion income during our expansion and that over time this will run off.
While there is volatility with our accretion, we're confident that at the end of the day it is a sloping hill versus a cliff. As such, we do expect that we will be able to offset the impact of the declining accretion with the continuing organic growth we have experienced and our focus in improving efficiencies.
A great deal of attention has been focused on the area of regulatory relief. Like many of my peers, I have been spending a lot of time on this area, both in my role as the CEO of Old National and as the Chair of the Mid-Size Bank Coalition. What I can say is there is a great deal of momentum to some form of relief.
What shape and in what time frame is to be determined. Though I am optimistically we may see something sooner than later, the real unknown is what impact it will have on individual banks, what cost can or will be eliminated or is it more of a cost avoidance and ease of doing business benefit.
Time will tell, but for our planning purposes we expect that the latter is more appropriate. At this time, we do not see significant cost savings, but we do believe we can avoid some future costs and be able to reallocate some cost into our revenue areas. Our thought process is supported by our risk appetite statement.
Before closing, let me spend a few minutes on M&A. As we have discussed, we do not feel compelled to do another transaction. For us, the right play is defined as the right markets, with the right team and at the right price.
We believe there will be opportunities and we also believe that we have demonstrated a path of success in integrating partners while meeting or exceeding the metrics tied to the partnership.
In closing, based on the optimism we feel for our organic growth opportunities, our focuses on expenses and execution, we're very comfortable with the consensus estimates that exist for Old National at this time. LaTonya, at this time we will be happy to take any questions from the audience..
[Operator Instructions]. Your first question comes from the line of Scott Siefers of Sandler O'Neill & Partner..
Jim Ryan, I was hoping you could expand a little on your thoughts on the cost basis. We look out, a little bit of push and pull simply from a timing perspective.
On the one hand, I would imagine early in the year should get some relief from the roughly $5.5 million of elevated operational expenses, but by the same token, you also noted in your remarks your expenses annually tend to be higher in the first half of the year.
Just to the extent possible or you are comfortable, would you mind maybe a little bit of a walk-through how you would anticipate the year panning out from a core cost perspective?.
Yes. You understand our expenses pretty well. The $400 million consensus estimate out there for expenses is - we're comfortable with and it is just that linear. You're going to see slightly higher expenses in the first quarter, a little less in the second quarter typically and then a third and fourth quarters are typically our best quarters.
We don't have an exact line to draw for you but in total, we're comfortable with the full-year number..
Okay. Good.
If you can just, to the extent you have observations from December's rate hike and any thoughts on deposit pricing, deposit pressures, either what you guys have done, if anything or what kind of things you are seeing competitively within your markets?.
Yes, Scott. Jim Sandgren here. No, we really haven't seen any movement. We didn't move deposit rates here at Old National and we really haven't seen much movement across our footprint. We're keeping a close eye on it and as rates do tick up we will need to be proactive on how we manage our deposit pricing. To date, there has not been much change.
Kind of feel good about where we're but certainly staying very close contact with our markets and if something changes we will have those conversations..
Scott, I would to add to that, as you think about one of the comments I made about the value of a deposit franchise, the fact that we've got these legacy markets where we can really be the guerrilla in driving rates, I don't feel the need to raise rates in lock step with any raising rate environment.
We can continue to generate deposits which ultimately will help our margin..
Your next question comes from the line of Jon Afrstom of RCB Capital Markets..
Maybe a question for Daryl.
You kind of touched - a simple question; can it get any better on credit?.
It's going to be hard to get better, Jon, really. As much as we made kind of light of it, you are exactly like. We've had a couple of really nice years and I can't imagine that were going to be able to repeat that performance for many more consecutive years, so yes. Fair comment..
I guess the real question is around how you want us to think about provisioning. Obviously, when you look at the discounts of the marks, it is pretty healthy. You talked about ag; you talked about maybe watching consumer a little bit closer. How do you - maybe this is for Jim Ryan, too.
How do you want us to think about the provision requirements for the Company?.
I can tell you from a loss perspective, because there are a couple of things that enter into it that, from a loss perspective, we're looking at 2017 probably to be in that 10 basis points but we also thought 2016 would be there.
The way our portfolio works and the very few losses that we have once something goes to default makes it a little difficult to say 10 basis points and add growth and think that, that's going be the provision. There are a lot of things that mix into that, including changing of asset quality rating.
I think if we look at 10 basis points and look at the gross or the projected loan growth, that probably gets us maybe as close to figuring out where we might be with provision..
All right. Bob, maybe a question for you, just 30,000-foot view.
What are the Bob Jones priorities for Company for 2017, maybe the top two or three?.
As I tried to lay out in my comments, continue to focus on organic growth, continue to build upon the loan growth we have seen. I would like to see better performance in our wealth and investment group.
For us, expenses, though I will say just to comment on expenses, the guidance that Jim gives for the full year does not require any additional actions on our part to get to. That's really, if we strip away some of the unusual items in the fourth quarter, that to us is a run rate that gets us to the $400 million.
Now, saying that, we will continue to focus on efficiencies and the expense side. That is where we're comfortable at a minimum of the guidance we gave. It is the old-fashioned basic banking, Jon which is grow revenue, continue to focus on cost.
While M&A is an important element in our history, I don't feel compelled and given some of the prices I have seen of late, we're going to observe a lot and if it's the right market, the right people and I can get it at the right price, we will be happy to participate. I don't feel compelled to do it.
Obviously, you wrap all of that in a bow that says we're going to always continue to have better-than-average credit and to me that is just old-fashioned banking. I am not smart enough to do it any other way, Jon..
Okay, good.
I guess the last one here, would you declare Anchor a success at this point or do you feel like there is still a lot of work to do?.
There is absolutely no work to be done. Anchor is a phenomenal success. I spent three days a couple of weeks ago up in Milwaukee. I have never left a market feeling better of where we're post integration than I did there and that feeling is exponentially even better in Madison. We're fully integrated.
You walk into those markets, you talk to our RMs, they are speaking Old National. The only thing we have to do is grow and as the numbers show, our growths in Wisconsin have been excellent. The future is extraordinarily bright up there, a little cold these days, but extraordinarily bright..
Your next question comes from the line of Chris McGratty of KBW..
Maybe a question to start with you, in your prepared remarks you referenced income recoveries that flowed through from Anchor.
Could you just quantify what that benefit was and what may be coming through in the next few quarters?.
The next few quarters is a little more difficult. We have certainly seen it, post-closing, with Anchor. It has impacted us. The way we thought about it, Chris, really those elevated expenses really offset the other income categories, so kind of nets to a pretty minimal amount between the two of them..
You gave the $400 million guidance for the expenses.
Maybe if you back out kind of unusual items in the fee income, maybe the question is could you give us a little help on kind of first quarter, first-half noninterest income trends or expectations?.
I think it is going to be consistent with what we see in the fourth quarter.
We talked about the mortgage line items specifically just being a little bit seasonally a little bit lower and the fact that the mortgage rates have stuck above 4% here for a quarter or more, offset by we've got good service to income to help us offset that revenue in the mortgage line item.
I would say for - absent mortgage, everything should be stable to slightly up..
Okay. Just so I'm clear, you reported around $63 million.
If we back out the $13 million gain, the bond gain, you're suggesting kind of that high 40s approaching 50 is a good run rate or would you walk me down a little bit?.
Yes, that high 40s obviously includes that number in that other income category. I'm sorry, no, that the third quarter number - yes, that’s pretty consistent I think..
I'd say, Chris, your high 40s is pretty good for modeling purposes..
If I could take a step back and look at efficiency, you guys have made progress with the integration and the branch initiatives. I believe the Board kind of aligned the interest with the management of achieving efficiencies.
Can you just remind us where 2017, where that bar is? I believe typically they ratchet it up a little bit on you, but just interested in the absolute level..
It will be less than we were this year. Unfortunately, Chris, with the change in our reporting, our Board meeting is not until Thursday. I can assure you that they will ratchet it down. I can't tell you what the number will be till they ratchet. It all depends how good of a negotiator I am.
You can assume it will be below the 63 target that we've have had and this year's pushing closer to that 60..
Okay, that's helpful. Maybe last question, just to make sure I am understanding the guide.
Jim, the $400 million, that was clear, but when you guys made the comment that you feel comfortable with the consensus, was that looking at the consensus full-year earnings or just the expenses?.
That is full-year earnings..
Okay.
So that would equate to roughly $1.08 or something like that? $1.07, $1.08?.
Yes..
Your next question comes from the line of Terry McEvoy of Stephens..
A question on the loan pipeline, commercial loan pipeline, the change from third quarter to fourth quarter, could you just talk about the mix being more C&I? I think that was referenced earlier.
If that was the case and listening to some of your comments about some optimism on the C&I side, do you expect, then, the CRE growth to slow as you just kind of model out commercial loan growth or do we get the benefit of that CRE group which has shown up in the numbers plus some renewed optimism on C&I?.
We have seen kind of across-the-board increases on the pipeline but we have seen a little bit more of an uptick in the C&I space. I think that reflects the optimism of small business owners kind of post-election. We've talked a lot about 2016.
I think our customers felt really pretty good about things, but they were kind of wait and see what happened with the election. I think we're starting to see what could be more even higher levels of C&I, but I don't see us dropping down from the CRE perspective. I think we'll continue to leverage the expertise we picked up with the Anchor partnership.
I will tell you some of those folks have traveled throughout our regions and making sure that we're utilizing that expertise to grow CRE in key markets throughout our footprint. I'd say CRE will continue to grow and then we will just kind of at a little bit of C&I on top of that which we did not see as much of in 2016.
Hopefully that answered your question..
It did, yes. Thank you. As a follow-up, I want to make sure I understand correctly, effective tax rate for 2017 33% and then federal 25%.
What is driving the difference in 2017 versus what we've seen in prior years and prior quarters?.
Yes, the effective rate is 25%. The fully taxable corporate rate is 33%. For us it is slightly higher than we were anticipating. Income moves around a little bit. The fourth quarter obviously impacted by the gain on the branch rationalization and the sale lease back buybacks.
We had slightly elevated tax rates in the fourth quarter, but pretty consistent as we look out across 2017. Obviously, we look for ways to minimize those taxes going forward.
We have a number of initiatives, including some more tax credit business and loan from housing tax credits that hopefully we can institute throughout the year to drive those lower, but generally consistent with prior years. Plus, we had the big insurance gain.
Joan reminds me we had the big insurance gain during the year which drove the overall effective rate higher..
Just one last question on my list, you've talk about this for a while, the decline in service charges on deposit accounts I guess continue to move lower and really up modestly from the year ago which did not include Anchor.
Do you see a bottom at all within that line item or do you think just because of industry-wide changes that, that revenue source will go lower?.
I think we're awfully close to the bottom. We've really tried to realign our service charges more in line with consumers' demands. Absent any significant change from the regulators, we think we're pretty close to the bottom at this stage. We have not touched our service charges for a number of years. I don't anticipate that we would.
We have seen better behavior both from our clients and then we have been doing a much better job of educating them. We're close to the bottom. I think we're there..
Your next question comes from the line of John Moran of Macquarie Securities Group..
Just a couple of quick ones, I missed, Jim, the mortgage pipeline numbers that you gave and then I can't recall if you guys gave the purchase versus refi split..
Yes, so in the fourth quarter refis were a little over 60%. It's is a 60%/40% split between refi and purchase. Pipeline at December 31 was $90.6 million..
$90.6 million, that was down from something like the $150 million or something like that?.
$146 million or so--.
Got it..
Some of that seasonality, too, I think there is some rate there but I think obviously in the markets we're in, December is not the most beautiful time to be go out looking for a new house. We have seen a little bit of an uptick coming off a little bit of better weather in January.
There is a large portion that is rate but there is seasonality in that number..
Okay. I just wanted to circle back on the loan growth guidance. I think, Bob, you said mid-single digits. I know that there is a little bit of asset remix thing going on here where indirect is being deemphasized and commercial obviously showing some pretty good growth.
If we could go through the puts and takes on that real quick, what gets us to mid-single digits? Certainly it seems like high-single digit or even low-double digit if things pick up a little bit would maybe be a little bit - in other words, are you guys just being conservative or is it really that indirect book running down versus things?.
I think there is a bit of conservativism in there and it all depends on how quickly we can run down that book. Obviously, in that spirit of transparency, you saw that book actually increased a little bit in the fourth quarter. While we have increased the rates, the volumes have stayed there.
You get to that high to better than what - this year commercial, commercial real estate, a lot of it, John, just depends on our ability to run down that indirect book. I would say the balance of our loan portfolio would perform much like it has this year. Really the intangible is how quickly we can move that book.
Obviously, if we can get better spreads, we'll move it at a slower rate. If the spreads don't, then we're going to accelerate it. We're probably being a little conservative there..
The last one for me, you guys have alluded to it a couple times in prepared remarks here, but further optimization in the retail footprint. You've got 15 or so branches that come out in January.
How much more is there to do there? I guess stating the obvious, that would suggest that there could be a positive surprise on OpEx as we look out to 2017 verses that $400 million that you guys are guiding to..
We believe there are opportunities. Our guidance does not reflect that we've built any of that into our forecast, but as Jim looks at his branch system, we're going to always look at the bottom 10% and look at opportunities to reduce cost.
It is a balancing act, because while you may have a branch that is not particularly hitting it's hurdle rates, there is costs associated with closing the branch and I want to make sure that we're cognizant of that as we look at lease termination and all those costs. Clearly, there is some upside as we look at the branches.
I would be very, very surprised if a year from today we don't have percent less branches comparable to where we're today but some of that is just as we walk through those actions..
Your next question comes from the line of Andy Stapp of Hilliard Lyons..
Just want to make sure I had the core salaries and benefits number correct.
Do I take the $72.3 million reported number and back out pension and severance charges or were there other one-timers in there?.
Included in our salary and benefits line is the pension termination, some M&A. Those higher numbers we talked about on the right-hand slide, most of that, too, was also in the salary and benefits line. The severance charge, we had $1.8 million in severance charges there, too Andy..
Yes, I had that. Okay. You mentioned that mortgage banking fees were impacted by seasonality and evaluation mark. Just wondering what the valuation mark was..
I think it was $0.05 million but we benefited positively in the third quarter. The pipeline grew at the end of the third quarter, so the net number's something north of $1 million when you look change quarter over quarter..
Thank you. At this time there are no further questions. I will return the floor to Management for closing remarks..
Great. As always, your follow-on questions to Lynell. We appreciate everybody's time and attention. We'll talk to you later..
Thank you for your participation in today's conference. You may now disconnect..