MB Financial's (MBFI) CEO Mitchell Feiger on Q3 2016 Results - Earnings Call Transcript

| About: MB Financial (MBFI)

MB Financial Inc. (NASDAQ:MBFI)

Q3 2016 Earnings Conference Call

October 21, 2016 11:00 A.M. ET

Executives

Mitchell Feiger - President and Chief Executive Officer

Randall Conte - Chief Financial Officer

Mark Hoppe - President and Chief Executive Officer, MB Financial Bank

John Francoeur - Chief Accounting Officer, MB Financial Bank

Michael Morton - Chief Credit Officer, MB Financial Bank

Analysts

Brad Milsaps - Sandler O'Neill

Chris McGratty - KBW

Kevin Reevey - D.A. Davidson

Nathan Race - Piper Jaffray

Jason Otting - JPMorgan Chase

Chris York - JMP Securities

Brian Martin - FIG Partners

Operator

Good morning and welcome to the MB Financial Third Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

Presenting today are Mitchell Feiger, President and Chief Executive Officer; Randall Conte, Chief Financial Officer of MB Financial Inc. Also present from MB Financial Bank are Mark Hoppe, President and CEO; John Francoeur, Chief Accounting Officer; and Michael Morton, Chief Credit Officer.

Before we begin, I need to remind you that during the course of this call, the company may make forward-looking statements about the future events and future financial performance. You should not place undue reliance on any forward-looking statements, which speak only as of the date made.

These statements are subject to numerous factors that could cause actual results to differ materially from those anticipated or projected. For a list of some of these factors, please see MB Financials forward-looking statements disclosure in their 2016 third quarter earnings release. Please note that this event is being recorded.

I would now like to turn the conference over to Mr. Mitchell Feiger. Please go ahead sir.

Mitchell Feiger

Okay. Thank you and good morning everyone. Thanks for joining us today. Third quarter was a good one for our company, very good I think, much to talk about. I’ll start with a few opening remarks and Randy will follow with, I’d say offering clarifying remarks about our financial results, which need clarification.

In the third quarter, we continued our record growing organically and by acquisition, of executing well across our business while simultaneously and successfully executing a complex integration. I’m very proud of what we accomplished in the third quarter. If you are a stockholder or an employee or a client of MB, I hope you are proud too.

On August 24, so almost three months ago, we acquired American Chartered Bancorp and its Bank, American Chartered Bank. Around a month later in mid-September, we converted American Chartered and its clients to MB Systems and Products. With the exception of possibly consolidating some branches, we have substantially completed the integration of the two companies thus far and we have no intention of letting our guard down here, but thus far both clients and employee retention have been as expected.

Since we completed the acquisition of American Chartered in the third quarter, our third quarter financial report to you reflects the required purchase accounting. We know that makes our report more complex than usual, so we added a few things to our report to help you separate our legacy or organic performance from the impact the acquisition. With that process I think our performance in the third quarter was very good. We completed an integrated the acquisition.

Net income was strong especially when you consider expenses related to the acquisition. Operating earnings, which excludes non-recurring items like acquisition transaction costs and accounting and an accounting change were very strong. Earnings were strong because legacy loans grew $434 million or 17.2% annualized in the quarter with good contribution from commercial banking asset-based lending specialty banking indirect lending, our mortgage business leasing and lease banking, in other words every business unit.

Over the past couple of years, we’ve worked hard to better diversify our loan origination capability and that served us well in the third quarter. Period end low cost deposits increased $414 million or 17.2% annualized. That's legacy loan growth. Some of the deposit growth came at the end of the quarter, it may be temporary. So if you consider average low cost deposits in the quarter they grew by $220 million or 9.1% annualized. Again that’s organic.

Period end non-interest bearing deposits made up 45% of total deposits. The increase from 42% at the end of June reflects the addition of American Chartered's excellent deposit base in some organic growth. Credit performance remains excellent, non-performing loans and non-performing assets both declined and net charge-offs were only 9 basis points, which is ridiculously low.

Please keep in mind that I believe the very low credit costs we’re experiencing are unusual and will at some point end. Now there is nothing I see that worries me at the moment, but it’s just unreasonable to expect a true commercial bank with a real middle market loan portfolio to be able to maintain net charge-offs of less than 10 basis points.

And yet that’s where we have been for four out of the last five quarters. So to be it’s just amazing. As a result, a good credit performance of provision for loan losses was slow and that helped earnings. Our fee businesses performed well led by a fantastic quarter for mortgage. Mortgage earned more than $10 million in the quarter as a result of around $2 billion of loan originations and very high gain on sale margins.

Low interest rates, particularly tenure rates drove larger origination volumes and better pricing. One disappointment I had in the quarter was our net interest margin. Our core margin, now this is the one excluding purchase accounting loan accretion, which I think is a better reflection of our core operating performance. So, our core margin declined 7 basis points. Randy will provide a bit more information on this subject.

I think expenses were reasonably well controlled given how much we accomplished in the third quarter, as well as our escalating investment in new sales and technology staff. Finally our operating return on average assets hit 1.2%, and operating return on average tangible equity was 15.2%, both excellent results.

All right, enough from me. I’ll turn it over.

Randall Conte

Okay thanks Mitch and good morning everyone. As Mitch indicated, there are plenty of moving parts in our results this quarter, but we have stayed consistent with our approach from previous acquisition quarters and provided into tables and breakouts on loans and deposits in our guidance like that. So we hope we will provide insights into our core performance. What I’d like to do is start with the non-core items and quickly address how we handle the acquisition accounting and conclude with a summary of our core in segment performance.

So first let’s dispense with the non-core items in the quarter. The largest was $11.4 million of pre-tax merger related costs. Consisting primarily of severance related costs, early termination of contracts, conversion-related expenses, and professional and legal fees associated with the closing of ACB. These costs were partially offset by $2.9 million reversal of an exit cost associated with a favorable lease termination on a branch we acquired through the Taylor Capital merger.

We expect that you will see approximately $10 million in additional merger costs within the next few quarters, primarily in occupancy and severance areas. We expect our total transaction cost to be well under the $32 million originally, $32 million originally communicated when we announced the merger. Other large non-core items included $4 million dollar pre-tax contribution to MB Financial Charitable Foundation, as well as a $1.8 million income tax benefit, resulting from the adoption of a new stock-based compensation guidance.

The after-tax impact of the non-core items totaled $7.5 million. Operating earnings available to common stockholders were $49.9 million or $0.63 a share, up from $42.9 million or $0.58 a share in Q2. I would like to briefly touch on acquisition accounting, our approach as well as the disclosure is provided in our earnings release are consistent with what we have done in the past.

I really don't plan to go into detail on the call, but didn't want to highlight that the total acquisition accounting discount on American Chartered loans was $34.1 million as of the acquisition date. We will continue to refine this number in Q4, but currently expect that the overall impact of acquisition accounting on our results to be minimal. As we expect to establish a corresponding general reserve over time, as the discount is accreted and the corresponding loans revenue.

Lastly, and certainly the most important I would like to discuss our core performance. I thought our third quarter performance was quite good in many areas and resulted in solid earnings for the quarter. Our net income to common stockholders for the quarter was $42.4 million or $0.54 per diluted share, compared to $41.4 million or $0.56 per diluted share last quarter.

As I previously mentioned, operating earnings to common stockholders this quarter were $49.9 million or $0.63 per diluted share, up from $0.58 per diluted share last quarter. Net interest income on a tax equivalent basis increased $8.1 million, compared to last quarter, due to higher average loan balances as a result of American Chartered merger, as well as loan growth in the legacy MB loan portfolio.

Specifically, legacy loan growth, excluding purchased credit impaired loans and I’m defining legacy as pre-ACB merger. Total $433.8 million, which as Mitch has already pointed out was 17.2% annualized growth. Non-interest income for the quarter increased 18%, primarily due to higher mortgage volumes in higher margins, as well as due to increases in leasing revenues. More to come on them when I cover the segments, but to be fair a portion of that 18% growth is due to the addition of ACB as well.

Credit quality behaved nicely as we mentioned in the release and as Mitch touched on it, our provision for credit loss is $6.5 million increase from Q2, but that’s primarily a result of the loan growth in the quarter. Nonperforming loans decreased $20.8 million from last quarter. Nonperforming assets declined $15.4 million in the quarter. Net charge-offs in the quarter totaled 9 basis points unchanged from last quarter and our allowance to nonperforming loans ratio is 258.8% as of September 30.

And our allowance to total loans fell to 1.11%, as compared to 1.33% in Q2, due primarily due primarily to the impact of acquisition accounting. The acquisition accounting discount on loans acquired totaled $34.1 million and was recorded within the loan balances. The loan negative for the quarter from my perspective was the decline in our core margin consistent with what Mitch pointed out. This is the core margin, excluding the acquired loan discount accretion, which was down 7 basis points to 3.5%, as compared to 3.57% last quarter.

We analyzed this pretty thoroughly and it concluded that the decrease in margin is primarily due to lower yields on our loans as a result of narrowing credit spreads and lower prepayment fees and reversals of nonaccrual loans, as well as due to slightly higher funding costs during the quarter as compared to Q2. Taylor Capital and American Chartered loan accretion contributed $6.2 million to net interest income, down from $7.7 million in Q2.

I expect some continued downward pressure on our net interest margin in Q4, as we continue to see pressure due to credit spreads and deposit flows. Though it’s possible that the prepayment fees and reversals of nonaccrual loans may improve as these items can vary from quarter-to-quarter. Our core noninterest expenses were up $9.6 million this quarter to $154.3 million as compared to $144.7 million in Q2, primarily due to increased staff and the merger.

Increased commission expense in mortgage and leasing as a result of the volumes and increased temporary help within our mortgage and information technology groups. We would have captured 70% of the pretax $16.9 million projected annual merger cost savings by the end of Q4 as we have converted systems, would have exited the ACB corporate headquarters during this quarter and will have completed much of the employee transition by year end. We expect that we will be able to get the remainder in 2017 and basically I guess what I'm saying is we are on track with our projections.

Moving on to our business segments, our mortgage segment had two strong quarters in a row posting net income of $10.4 million in Q3 as compared to $6.3 million in Q2. Total mortgage banking revenues grew by $9.5 million as the favorable interest rate environment and the tailwind of the buying fees resulted in an increase in $267 million in originations over the second quarter of 15.6%.

Gain on sale margins were high as well. Expenses increased $31.7 million in the quarter primarily due to the higher commissions and other volume related expenses, all as a result of the strong quarter. I thought our banking segment had a solid quarter with net income of $37.7 million, as compared to $34 million in Q2.

Non-merger related drivers of interest of the increased net income are the strong legacy loan growth that we’ve already discussed, as well as the increase in capital markets and international banking fees, due to higher swap's and syndication fees, as well as an increase in other income, due to higher earnings from our investments in small business investment companies.

Turning to our leasing segment, noninterest income increased $3.1 million this quarter, but net income was down $603,000, primarily due to higher provision expense associated with a specific reserve related to one loan, as well as the higher salary and benefits as a result of our investment in sales staff for future growth. The stronger lease financing revenue is primarily due to higher equipment maintenance brokerage revenues and as we pointed out these revenues can vary from quarter-to-quarter as you all know.

On the balance sheet, we also already covered loan growth so on the deposit side low cost deposits grew on average by $1.1 billion in the quarter, $220 million of which came from legacy MB, 86% of our average total deposits are low costs.

All right, that's enough from me. I’ll turn the call back over to Mitch.

Mitchell Feiger

Thank you very much Randy. Good report. One last thing and then we’ll open it up to questions. One other thing we did in the third quarter that we are really proud of is, we opened an office in Toronto, Canada for our asset based lending business, so we're now in business for making asset-based loans in Canada.

All right, operator let’s take questions.

Question-and-Answer Session

Operator

Yes sir we will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Brad Milsap of Sandler O'Neil. Please go ahead.

Brad Milsap

Hi good morning guys.

Mitchell Feiger

Good morning.

Brad Milsap

Hi Mitch or Randy just wanted to start maybe with the mortgage business, I know you guys have been working hard to improve the profitability there, just wondered if you could talk a little bit about the improvement you see in the gain amongst our margin, how much of that is market driven versus, kind of what you guys have been doing may be both on the revenue and the expense side and then can you kind of walk us through kind of the puts and takes on the MSR, this quarter looks like maybe the value went up, seems some companies write it down, I know everyone’s hedging is different, so just any additional color there would be helpful.

Mitchell Feiger

Okay yeah thanks Brad. So, I’ll take the first part of the question and then Randy can follow-on on the first part and address your question on the MSR. So, we’ve been working hard and our mortgage team has been working hard to improve its business. And I’m sure you will remember that the business is still relatively young and is growing very fast. So, there have been a number of things that they have been able to do that has increased the profitability of business and I think previously we provided kind of annual run rate earning estimates of $8 million to $10 million and obviously if we have done $10 million in one quarter it makes the annual numbers look a little bit light, but I think it was an unusually good quarter for the reasons that we’ve mentioned.

Nevertheless I think our team has found has found ways to increase the profitability of the business. If we were to reforecast our annual run rate, I think it is probably something north of $10 million, maybe it’s between $10 million and $14 million or $11 million and $15 million, something like that now. On average for an annual run rate that could of course vary a lot based on the way interest rates go up or down, cannot say our margins change.

So there are some things - to answer your question, there are some things that we’ve done that are embedded in the business that we think have improved the profitability of the business and I think that there is more that can be done there and the team is working hard at that. Randy you want to add to that are get to the MSR question.

Randall Conte

I will go right to the MSR.

Mitchell Feiger

Okay.

Randall Conte

Well, I think your question Brad was puts and takes on the MSR, so kind of like what’s going on, but I mean as you know that asset in and of itself is kind of a natural hedge to the origination business itself rights. So - and speaking of that so some of four businesses in particular act differently in different quarters right, the diversification of the model place into effect. This quarter we've had a great quarter for mortgage in total.

In terms of the MSR specifically there is nothing I would say that’s unusual going on at the MSR. It is $155 million at the end of the quarter valued at about 84 basis points. The revenue stream of the asset have been pretty steady I would say. We didn't have any – I noticed a comment about - seems in the comments about write-ups to write-downs. We didn't have anything special going on from an MSR perspective other than I feel that we are hedging the asset well and it’s doing exactly what we think - behaving exactly what we think it should.

Mitchell Feiger

Do you want to comment on the level of hedge in the quarter?

Randall Conte

Yes certainly. We are trying to let's back up from there and say and put that in the context of what we're trying to accomplish, right. And as everybody knows the mortgage business is a volatile business and so we are trying to if you will take away as much as add volatility as we can and of course we can influence the inflows in terms of originations and can influence the interest rates, what we can do and what we have done is taken a more thoughtful and conservative approach towards our hedging of the asset, and if you will try to hedge up the asset into the above 90% range, so that we could take the volatility of that earning stream of the table as much as possible and we’ve been very effective and it’s done a very good job accomplishing that over the several quarters now. I mean it goes back ever since we – ever since the mortgage business became part of MB.

Brad Milsap

Great, that's helpful. Just one follow-up on the NIM, with the Taylor Capital loans that came on a few years ago, you offset some of the accretion with a provision against those loans as they renewed. Do you anticipate doing that with the American Chartered loans? And then secondly, kind of do you have a sense for how quickly some of the accretion may flow in call it over the next four to eight quarters?

Randall Conte

Sure, sure. This is Randy. I’ll take that. We've tried to take, we provided a lot of visibility into that historically and we expect - and we are continuing our approach towards the accretion. So, yes we expect to take a large portion of the accretion associated with [indiscernible] flow into the serve. We are thinking at the moment it could be north of 90%.

Brad Milsaps

Okay, great. And then just a sense for kind of the pace that that would flow through.

Randall Conte

Pace I think, what we've done is, I would say over the next two years, right. Do you have anything different John.

John Francoeur

Yes, I think the majority will come over the next two years with some of the loans are longer term, I think there is a tail on it, but the majority of it will be in the next two years.

Brad Milsaps

All right, great. Thank you.

Mitchell Feiger

I just want to add on to that. So those are my view, I have a personal view, but the required accounting for loans in the bank acquisition is really unfortunate and I really sympathize with, Brad with you and our other analysts that follow us and our investors and try to figure out where are the credit marks and our balance sheet, if some moves rights in our allowance for loan losses and other sets a competitive discount right on acquired loans and in our view if there is a credit market embedded in discount on acquired loans over time similarly retain those loans that credit market really needs to flow into the allowance.

So that’s what we intend to do. We are following the same process that we followed in our call Taylor acquisition. I think in this case to percent - the proportion of the mark that’s related to credit is even higher than it was in the curtailer transaction. So that’s why Randy said we don't think, we discount accretion on the American Chartered loans are going to have that much impact on our, you know net, net on our earnings, right because we are going to take the credit part of the accretion, all other things being equal, you know that’s going to show up in the allowance on the balance sheet.

Operator

And our next question comes from Chris McGratty of KBW. Please go ahead.

Chris McGratty

Hey, thanks for taking the question. Maybe a question on LIBOR, was there any benefit in the quarter from the move? Can you just remind us what proportion of the book or the dollar amount that's tied to one and three month?

Randall Conte

Sure. I would say 60% of our loans are variable-rate and some we shape it with about 45% of that, so 45% of it would be in LIBOR based. So, I think that answers the question specifically, I don't have the breakdown in my fingertips between three months and one month. I think historically we viewed it is more of a three months, but I'd rather get behind the data a little bit more on then make sure that that is still a case especially considering the acquisition of American Chartered and so that’s kind of my perspective on that. I don't know Mitch if you have a different view and if you want to join in that.

Mitchell Feiger

No that was right.

Randall Conte

So, I feel like we are in a good sport as it relates to the long portfolio from that perspective.

Chris McGratty

Great, a question on interest rates. If the market is right and we get a move in December, can you walk us through? Some of your peers are giving us a sensitivity of what 25 might mean for numbers. Given, I guess the question comes back to the move and really the quality of your deposit base, the ability to lag given 45% DDA. Any comments there?

Mitchell Feiger

Sure, I will take that. So yes I think the quality of deposit base which is the key to this strategy right, low-cost composites and when you look at 86% of the deposits being just to find that way, right as low cost deposits is quite helpful and is proving to be a very effective strategy for us and so I will start with that, because I think that is the most important point as with - strategically we’ve tried to accomplish this and have had success and our successful in doing it. So the specific question of what’s 25 basis points going to do to us, we quantified that, I mean obviously everybody files that. And I can say it’s probably $3 million to $4 million in net interest income.

Chris McGratty

Per year?

Mitchell Feiger

Per year. Sorry, yes. Per year.

Chris McGratty

Yes, that's great. Maybe just a last housekeeping one, with the 37 days or so of the contribution from the deal, can you just let us know what - how much of the fees and expenses actually came through just for modeling purposes?

John Francoeur

This is John, I think we're looking at a additive rate of probably $2 million to $3 million of some up and down.

Mitchell Feiger

So, let's make sure we understand the question, so could you rephrase that one for me so it makes clear that we got it right.

Chris McGratty

Yes, no problem. How much of your total noninterest income and noninterest expenses in the quarter were associated with the deal? Kind of stepping aside from the merger charges, like how much fees was from American Chartered and what's kind of on the run?

Mitchell Feiger

Yes so that’s something that I really don't have in my fingertips. I think the number that John quoted is that I don't think - the number that John quoted is really kind of more of a net income number that we think is a contribution from American Chartered, pre-any other cost saves right. So, it’s our expectation that’s going to increase. I already quoted the 70% accomplishments so far or by the end of the quarter or so. So, our expectation is that number is going to go up. In terms of the specific question and split between the fees and noninterest income etcetera, I don't have that one handy, I'm sorry.

Chris McGratty

No problem. No problem; we can follow up. Maybe last one for Mitch. Given how quick the integration has been, what are the thoughts and maybe what are the availability of additional deals in kind of the next 12 months?

Mitchell Feiger

Well I guess we are capable. Let's back up, so it’s a general question about M&A. So from a capability perspective we are capable because even if we sign an agreement to acquire another depository institution now, the closing time is 6 months to 9 months or something like that, so surely our people will have had a chance to rest following the work that they did on this integration, everything would have settled in entirely from American Chartered integration and all the costs as will be in place basically.

So from that standpoint, we are probably good to go, but as I mentioned previously I think the likelihood of the depository acquisition is less than it’s been in the past. So, well for two reasons, one is that there’s just fewer institutions of interest left. And two, the opportunities in our own business and to invest in our own business and use our most talented resources to grow our own business are better than ever. And so any depository acquisition that requires significant integration activity is going to pass it.

You have clear a pretty high hurdle right now, which is a really good thing. This is a really positive thing I think. On the non-depository acquisition that doesn't require a significant integration effort is a little different right. And I think with this we could execute on that and we will be more willing to execute on that if something appropriate came along.

Chris McGratty

Thank you very much.

Operator

And our next question comes from Kevin Reevey of D.A. Davidson. Please go ahead.

Kevin Reevey

Good morning.

Mitchell Feiger

Good morning Kevin.

Kevin Reevey

It looked like you had some pretty strong legacy growth in your commercial real estate and construction real estate lending. Can you kind of give us an outlook as far as what your pipeline is looking like and where do you see pricing especially now that we are hearing that a lot of the small banks and banks in general are bumping up against their regulatory threshold and do you find that that will present you some opportunities?

Mark Hoppe

It's Mark Hoppe and thanks for the question. It’s interesting of how capital, about 60% of the increase in our construction CRE is truly in CRE and the rest of it is really more what I would refer to as owner occupied some of it in C&I and some of it in our Healthcare business. So, it is not all traditional CRE as you would think of it as a multi-family or industrial or retail et cetera. Clearly, we are nowhere those thresholds and I don't think we are very interested in getting very near those thresholds.

As it relates to what opportunities might come up, because some others are in there. I don’t know, I guess, we haven’t really viewed it through that lens. We’ve got our backlog, which we feel pretty good about. We think it’s a solid backlog. We’ve got developers that we deal with now that we like and developers we continue to pursue that have been successful over a long period of time. That’s kind of our plan there. But what opportunities might come up from some banks getting to their limit, we really haven’t looked at it from that perspective.

Kevin Reevey

Okay. Thank you.

Mitchell Feiger

Let me back up. So, right. So our CRE and construction portfolio is well below, as you point out, well below the regulatory warning track thresholds I’ll call them, okay. And we intend to keep it that way. We learned long ago – not long ago. Of course, I wish I’d learned long ago. I only learned like eight years ago, seven years ago concentrations kill and real estate concentrations really kill, and we do not have any plans to get – subject ourselves to those same risks.

So CRE and construction loans as a portfolio are going to remain well below the regulatory threshold. So to your first question that is, does that present an opportunity for us to go out and add a whole bunch of real estate loans. Yes, it does, but, no, we are not going to do it.

The second part of your question about construction is, I think a lot of the build in construction that we’ve seen over the last couple of quarters is funding up of loans that were approved long ago, which is a good thing. I’d much rather have, particularly if it’s a market product as opposed to an owner-occupied product, I’d much rather be bringing it to market right now in the next three or six months than say two years where I worry a little bit about what might happen in the real estate market.

So I like very much what’s in our construction loan portfolio. Randy, I don’t know, you want to add anything to that.

Randall Conte

No, I’m good.

Mitchell Feiger

Okay.

Kevin Reevey

That’s helpful. Thank you.

Operator

And our next question comes from Nathan Race of Piper Jaffray. Please go ahead.

Nathan Race

Hey, guys, good morning.

Mitchell Feiger

Good morning, Nathan.

Nathan Race

Randy, maybe a question for you first. Could you give us the dollar amount of prepayment income and reversals on nonaccrual loans that impacted interest income in 3Q versus 2Q?

Randall Conte

Sure can. I’m going to do it from memory, but it was about $700,000 higher in Q2 versus Q3, so...

Nathan Race

And then just looking at the C&I growth that you guys had on the legacy portfolio, obviously pretty impressive growth there. Can you just kind of speak to the drivers there and kind of where pricing is on new production within your C&I book lately?

Randall Conte

Just to clarify your question, you’re thinking about I’m assuming new pricing relative to what we’ve seen in the past.

Nathan Race

Correct.

Randall Conte

Any thoughts, Mike?

Michael Morton

Yes, this is Mike Morton. Certainly credit spreads are under pressure. And we look at that every day in totality of the relationship yields are. But basically there’s just a lot of good opportunity in the C&I segment and the sub segment of asset- based lending, and so those are two core drivers followed strongly by healthcare.

Randall Conte

Yes, let me – and this is Randy. I can certainly put some specificity around the numbers just to build on what Mike was saying in terms of the renewed pressures, the pressure on renewed loans and spreads. So I would say they are up about, I would say, they’re off in total around 10 basis points on loans that are renewed from the last quarter to this. And then I – while I had the opportunity, while Mike was talking, I double checked the 700,000 quote is exactly right on your first question.

Nathan Race

Okay, great. Thanks. And then just lastly on capital levels, I think in the past you guys have been looking to manage to, at least, you don’t want to go below 11% on total risk-based. Obviously at around 11.6%, you’ve got plenty of room to go forward. Can you just remind us kind of what your internal kind of limits are on total capital, if that still stands today? And obviously you have plenty of profitability improvement that’s going to create capital going forward. So just curious on what the outlook for capital management looks like going forward?

Mitchell Feiger

Right. So our kind of TCE target was something between 7.5%, 8%, and total capital would be north of a 11%, that’s – we’re well above both cases our internal limit, so that’s not an issue. But I – right now just immediately post-American Chartered acquisition, I would like to see our capital levels drift up a little bit from here.

Nathan Race

All right, I appreciate all the color.

Operator

And our next question comes from Jason Otting of JPMorgan. Please go ahead.

Jason Otting

Hey, good morning, everybody.

Randall Conte

Good morning.

Mitchell Feiger

Good morning.

Jason Otting

I guess kind of keeping on the last topic of capital, now that the American Chartered deal is closed, how should we be thinking about share repurchase resuming? Any thought there?

Mitchell Feiger

I don’t think – so consistent with the answer I just gave to Nathan, I would like to see our capital levels drift up some here, so I don’t see – look, I don’t control this and our Board may have a different view. But I don’t see a meaningful share repurchases coming in the next quarter or two. I think, as I said, I’d like to see capital levels move up a little bit.

Jason Otting

Okay, that’s helpful. Thank you. Looking on the loans, indirect vehicle growth was still quite good in the quarter, but it was a little bit slower. Just wondering if you had any color there and maybe thoughts going forward?

Mitchell Feiger

Most likely just seasonality, fewer people buying the boats and the RVs, as we get closer to seasonal usage issues.

Jason Otting

Okay, that makes sense. And I think typically fourth quarter is your strongest for general balance sheet growth. Any insight on how the quarter is shaping up so far maybe on pipelines or anything like that?

Randall Conte

So, you’re right, your memory is really good. So I can’t remember how many times I’ve said fourth quarter is best, second quarter is second best and third and first, right in that order. But I have to say I’m starting to think that that may be different for us. I mean, this year is definitely proven to be different. The third quarter as you just saw was exceptionally strong for loan and deposit growth or normally it would be weak.

And I think what’s happening, we will see, we will need another year or so to prove this out. I think what’s happening is this our business – our new business production capability has become more diversified writing to more business lines that have more substance to them. They are delivering more even growth throughout the year, which is a really good thing. I’m really happy about that. So just with that comment in mind, now we’re going into the fourth quarter, which normally is our best quarter. Look around the room, see if anybody has any comments on the pie chart, if they feel any different now than they were at the beginning of the third quarter, second quarter.

Mitchell Feiger

The pipeline is very, very similar across our different lines of business and very similar to the end of the second quarter, so.

Randall Conte

Yes.

Jason Otting

Okay. Thank you.

Operator

And our next question comes from Chris York of JMP Securities. Please go ahead.

Chris York

Good morning, guys, and thanks for taking my questions. So as we think about the integration of American Chartered and the time it takes a banker to familiarize themselves with a new credit filter and approval process, how should we think about the contribution from these bankers to loan growth in 2017?

Randall Conte

In 2017? Okay. So I’m glad you asked about 2017, because you are not going to see it in the fourth quarter, that’s for sure. It’s going to take them a while. The fourth quarter, they are going to spend taking care of their clients, making sure, they understand our products, how we use them. To your points, the bankers are going to learn how to navigate the MB credit process and credit structure and forms and how to get things done. And so that – those two things are certainly our first priority in – first and second priority and should be.

I think when we get into the first quarter of 2017, they should be back in the market, doing what they do best, which is calling on clients and calling on prospects back in business and if it follows the normal trend, and this is kind of what we saw in the Cole Taylor transaction, many previous ones, follows the normal trend. They get back in the market in the first quarter, we’ll start to see some improvement in the second quarter and then by the third quarter maybe they’ll back in full speed.

Chris York

Got it. That’s helpful. And this question is maybe for Mark. Can you provide us some color on the competitive environment for traditional C&I lending and maybe ABL? You stated some non-bank lenders had been better, a little bit more difficult last quarter.

Mark Hoppe

As it relates to C&I, we really don’t have we see the non-bank lenders very much, but the lenders just continues to be – continues to be competitive. There’re numerous banks and any deal that comes to the market, there are numerous banks “are bidding on deals” and as I said before we have a lot of really, really capable middle market lenders in this market and the Chicago metro area in order really kind of greater metropolitan around here, which we kind of consider as our market.

So that really continues to be very similar to what it’s been not much changed. The non-bank lenders continue to have an impact on ABL. With all the ABL business we’ve got an incredibly strong team with great leadership and it’s diversified geographically and we really like that. That enables us to give of lot of different areas. As Mitch indicated a few minutes ago we’re really excited about the opportunity to be up in Canada. In prior lives we were in the Canadian market in ABL very successfully, so we’re excited about that.

But the non-banks well maybe being a middle less aggressive right now, I think maybe they’re having some issues with funding. They continue to be a factor in ABL. So, I might say that ABL might know your typical revenue ABL there might be even more competitive than a C&I transaction we look at today. But we like the business, we are very diversified geographically and the type of loans that continues to be a great business for us.

Chris York

Great, that color is very helpful. And then lastly, so when you look at noninterest income, how much do you think that line includes CapEx related to maybe some investments in technology? And then does the integration of American Chartered slow this investment at all for the near term?

Mitchell Feiger

Well you guys think about the numbers, I am going to answer the second part of the question. So the easy answer to second part of question, it do not flow our investment in technology or sales people for that matter. In fact, we’ve been working hard to increase our pace of investment. And if you guys have any thought on the line item on the noninterest expense side.

Randall Conte

Well I’m just going to , this is Randy, I mean this is going to pile onto what you said, I actually agree with that completely, I am going to back up a little even further with the COO here now for a second and say that I thought the integration itself went remarkably well from a system conversion perspective and that’s not the take away from any of the point that Mitch made, because I do think even though the system conversion weren’t really well. The customers are now arguing with something that is new, just to the point Mitch made and no matter how well that conversion went that’s a whole change and that’s going to take the time as Mitch pointed out.

So, I actually think the conversion went extremely well and I think that signals that we’re capable of this change that we’ve been talking about from a technology perspective and I agree completely that the acceleration or the ability to get to that acceleration of changes is not going to be impacted by American Chartered, I think we got the right people in place and the right approach, so that’s how I’m viewing it and I think we’ve made a significant change in the last year culturally and directionally and paced the change from a technology perspective. So I’m looking forward to what we can do in the future.

On that front I don't think, now this is going to sound counter to that so John can jump in from a pace of change - the line items, but we’re also trying - we’re trying to look at these things right if we can automate a lot of our processes this should be a - it should be in net benefit. But honesty we are there yet, I don't want to go on record as quoting and that’s where we are, but that’s the goal and I think given what I said before and the changes in the approach, I think we’re closer - we’re already, we are right knocking on the door ready to take those type of steps where the automation in some of our operational areas or in what we can do from a customer perspective should be net additive to this company and set us apart in the future that’s our expectation and that’s our goal. And as I said I think we’re extremely closer - much closer to that and I feel good about where we’re going into the rest of this year in 2017. And a specific line item John do you have any insight feel free to jump in.

John Francoeur

I would say that we continue to, I think invest in our technology and I think year-over-year I think it’s pretty steady and I think we view as highly important and the operations and our processes are key to us and I think we continue to invest in it.

Chris York

Great, that color is very helpful. That's it for me. Thanks for taking my questions.

Mark Hoppe

Thank you.

Operator

And our next question comes from Brian Martin of FIG Partners. Please go ahead.

Brian Martin

Hey, guys.

Mark Hoppe

HI Brian.

Brian Martin

Just maybe a question for, I don't know, maybe Mitch or Mark. Just, if we are getting a little bit late in the cycle and your loan growth has definitely been accelerating lately or at a more - a little bit higher pace than it was historically, can you guys talk about just kind of what a sustainable rate might look like going forward, especially kind of given Mitch's comments about obviously credit only having one way to go as you look forward. So, just trying to get a sense if you are being more cautious and the new production capabilities are that much greater, which is why we are seeing the acceleration or any color you can give would be helpful?

Mitchell Feiger

Well we have this in credit standards of this, the premise of your question and I too worry about our pace of loan growth given - not given the length of this credit cycle, and I don't know if we’re into end of the credit cycle or not and I have no idea about that, no one even have and anybody really knows that, but I think if you’re in our business and you’re making loans you have to worry about it only because of how long we’ve going so far, so I’m taking a pretty quick eye on new loans and I think we all are for that reason but we have not relaxed our loan, our credit standards in any way. But I think earlier this year we tightened them a bit. I do think that we have across the company more sales people, more relationship managers and they are becoming more effective. Actually I should say, we as a company are becoming more effective in originating loans and I think that's what’s driven a lot of our performance over the last few quarters.

Mark Hoppe

Just one other comment and this is based on some meetings that I was involved with earlier in the week. We’re starting to see a little bit of a trend and who knows that will continue where our existing clients are starting to not in a huge way, but in a meaningful and noticeable way. As for an increase in a line of credit they’ve got a $10 million line they want $12 million because they see things out of horizon. We are certain to seeing [indiscernible] say for long time we haven’t seen this where clients are buying equipment now adding lines and these kind of several things. And the reason I mention in this context is that that has had an impact on a loan growth. Now that I feel really good about it [indiscernible] with the loan money to someone who has borrowed it and paid it back many times with year over a period of time, but I’m not saying that is a huge impact, but it’s meaningful.

Michael Morton

Yes, it's always good to lend money to people who are growing their business. Now to answer the last part of your question which was what do we expect for loan growth in the future, I’m still stuck in the – we are still single-digit for sure. And mid-to-high single digit perhaps, I noticed that real nominal GDP has increased around 5% I think, 5.2% I think was the number last month. And so if we can perform a couple of 3 percentage points better than nominal GDP that puts us in a 7% or 8% range, which I think is pretty good place to be.

Brian Martin

Okay, that's helpful. And we've heard some other, maybe the larger banks that they are seeing a slowdown in C&I demand. It doesn't sound like that's something you guys are experiencing. I guess is that fair to say?

Mark Hoppe

No, we're not seeing that at the moment. No. And remember Mitch talked about it and Randy did as well in their prepared remarks that the growth, while we've only got X number of line items in our lease, it is very, very diverse, very broad across a lot of different areas. There is not any one area that contributed an inordinate amount of that 434 million in legacy growth in those because you can see a 100 million of it was really consumer mortgage and indirect, but the remainder of it was very diverse among different industries and types of companies et cetera.

Brian Martin

In locations.

Randall Conte

In locations for sure.

Brian Martin

Maybe this is the last one from me just on the expense front and just kind of how to think about, the recent investments you guys are making, kind of what a sustainable type of growth rate on the expense side is as you continue to invest and bring on the folks at American Chartered?

Randall Conte

Hi, so this is Randy, quite honestly I haven't really - I don't really have a position on the expense growth rate at the moment that I'm willing to share. We are kind of just looking at that as it relates, it is a little too early as it relates to American Chartered to have the numbers down solid. We are in kind of the preparation for 2017. So I think I will have a better feel for that and feel more comfortable, coating the number - those we head into the end of the year. So, I’m going to have to take a pass on that one and have a better insight in the first quarter, in January.

Brian Martin

Okay, how about, Randy, just as far as any major investments, I guess that you're making outside of the American Chartered folks or I guess kind of anything you expect that's kind of in the works that we should be thinking about?

Randall Conte

Yes sure, I can definitely take to that. And that plays back to the conversations we've already had, you know just from a technology perspective and as John pointed out you can see the numbers right, I mean they are popping across the five quarters and they are not really going through the charts at all in terms of an increase, but that combined with a statement that I made where there is an offset, but yes we're going to continue to make some investments in our infrastructure technology-wise.

I don't think it’s a number that’s going to show up in a rector scale in terms of increases on our expense based on the computer and technology line items in our non-interest expense, but given the approach that we are taking, but we do have some insights and some ideas around and proving our infrastructure, both from an operational and IT perspective, and it’s going to end up in being a favorable to the expense base over 4 years to 5 years out as we do the analysis. So, now I will add this to, every investment we make we are running up against the [indiscernible] to say, let the ROI and this investment it doesn't make sense. And right now everything we are seeing is making great sense. So that’s I guess the beauty of being where we are right now as we start continuing to kind of intervening into this and make progress.

So, we are very much analyzing projects from an ROI perspective and that’s picked up I would say since and I am not attaching it to me, but just since in the last two years with all the stuff that we have had going on, call Taylor acquisition et cetera. I would say that our focus on ROI and returns and the initiative has picked up in the last six months compared to where it was a year and a half prior. So, I feel good about saying that I don't expect substantial increases from an IT perspective because at least we're going to have the offset and if it is a temporary blip it is going to be come back and pay back more.

Mitchell Feiger

And let me just chip in. And I'm sure you understand that right some expenses or a lot of expenses are very based on business volumes. Right, particularly leasing and mortgage.

Brian Martin

Yes, okay. I appreciate you guys taking the questions. Thanks.

Mitchell Feiger

Sure.

Operator

[Operator Instructions] Our next question is a follow-up from Brad Milsaps of Sandler O'Neill. Please go ahead.

Brad Milsaps

Hi Randy. Just a quick follow-up housekeeping question on the tax rate, I know you had the benefit this quarter from that early adoption, but just kind of curious what you are thinking going forward. I know that number can kind of bounce around depending upon stock option exercises, stock price, etc. but just kind of curious what your thoughts are on the tax rate going forward.

Randall Conte

Yes so we are sticking to, other then - we're sticking to our normal guidance on that which, you know as well as I do, but I would certainly talk about it, but yeah we’ve had some odd things going on right with the change in accounting and into tax benefit, some is - some of those merger related expenses are not tax deductible et cetera. So the number is bouncing around this quarter, especially with the size of the transition merger related cost. Typically what we’ve counseled on this question is to go look at pre-tax income, take the nontaxable interest off of that and you can figure your way through that. And I think if you do that you will get a very good indication of how we think about the effective tax rate going forward. Did that help.

Brad Milsaps

Yes, great. Thank you.

Randall Conte

Sure.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Mitchell Feiger for any closing remarks.

Mitchell Feiger

Okay, thanks everyone, thanks for being with us today. We look forward to speaking with you again next quarter. Bye.

Operator

And ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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