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Midland States Bancorp (NASDAQ:MSBI)
Q4 2017 Earnings Conference Call
Jan. 26, 2018 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2017 Midland States Bankcorp Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

If anyone should require assistance during the conference please press * and 0 in your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Allyson Pooley from Financial Profiles.

Ms. Pooley, you may begin.

Allyson Pooley -- Financial Profiles -- Senior Vice President

Thank you, Daniel. Good morning, everyone, and thank you for joining us today for the Midland States Bancorp Fourth-Quarter 2017 Earnings Call. Joining us from Midland's management team are Leon Holschbach, president and chief executive officer, and Jeff Ludwig, chief financial officer. We will be using a slide presentation as part of our discussion this morning.

If you haven't done so already, please visit the Webcasts and Presentations section of Midland's Investor Relations website to download a copy of the presentation. Leon and Jeff will discuss the fourth-quarter results, and then we will open the call for questions. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of Midland States Bancorp that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements.

These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release, available on the website, contains the financial and other quantitative information that will be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.

And with that, I will turn the call over to Leon.

Leon Holschbach -- President and Chief Executive Officer

Allyson, thank you. Good morning, everyone. Welcome to Midland's earnings call. Slide 3 summarizes the highlights of the fourth quarter.

We'll start there. As with many banks, it was a noisy quarter for us due to the impact of tax reform on our deferred-tax asset. We also had a couple of charge-offs that drove our provision expense higher in the quarter. Relative to the third quarter, the higher provision expense impacted our EPS this quarter by $0.14.

But if we strip away the noise including the acquisition and integration-related expenses, we are pleased with the trends that we're seeing in our core operating performance. Most notably, our efficiency ratio has improved to 64.6% from 69% last quarter. This improvement was primarily due to expense reductions resulting from the continued realization of the synergies of the Centrue acquisition. We also had a strong quarter of balance sheet growth with solid increases in both loan and core deposits.

As we mentioned last quarter, we were still seeing good loan demand, but we were being more selective in our loan production in order to manage our loan-to-deposit ratio.With the pending acquisition of Alpine getting closer to completion, we felt comfortable taking our loan-to-deposit ratio a bit higher and booking more of the attractive lending opportunities we were seeing. Essentially, we predeployed some of the liquidity that we'll be adding. We were very pleased with the broad-based loan production that we saw in the quarter. We had increases across all of our major lending areas with the exception of commercial real estate.

The strongest growth came in our commercial, construction, and consumer loan portfolios. The commercial loan growth was driven by increased line usage among existing customers as well as some new commercial relationships established during the quarter. Much of the growth of our consumer portfolios this quarter was attributable to the program we had with GreenSky credit, which we discussed in the past. While most trends we saw in the quarter were positive, we had softer quarters from both our commercial, FHA, and residential mortgage banking businesses as well as another small writedown of the value of the residential mortgage servicing rights, which we had moved to held-for-sale.

The performance in these areas provided more evidence to us that we made the right decision to focus Midland around our core community banking and wealth-management businesses. These are more stable businesses, with consistent growth trajectories that we believe will reduce the volatility that we've seen in our recent financial performance. Ultimately, we believe we are on the right path to a business mix that will enhance the value of the company for our shareholders in the years ahead. Admittedly, we've had a lot of noise since we came public that has obscured the true performance of the company.

We always operated with a long-term perspective in mind and that means taking some near-term pain to make the company stronger in the future. We don't hesitate to take whatever actions we believe are in the best long-term interest of our shareholders. Since we have come publicly, we've incurred cost to optimize our branch network and to reduce our exposure to the volatility of mortgage-servicing rights. We've also had significantly increased the size of the company through transactions that are also resulted in near-term acquisition and integration charges.

Although the noise has significantly impacted our reported results, we've steadily seen improvement in the core performance of the company. Our revenues are up, our operating efficiency is improving, and our level of returns are increasing. And all of those trends should continue in a positive direction after we realize the synergies that we're projecting from the Alpine acquisition. Over time, we feel confident that the steps we've taken to strengthen the company and increase our earnings power will become more apparent in our reported results.

Now I'm going to turn the call over to Jeff and he'll walk through some of the details of the fourth-quarter performance.

Jeffrey Ludwig -- Chief Financial Officer

Thanks, Leon. Starting with Slide 4, I'll review our net-interest income and net-interest margin. Our net-interest income decreased by 2% during the third quarter. This was primarily the result of a decline in our net-interest margin.

On a reported basis, our net-interest margin decreased 5 basis points to 3.73%, which was entirely attributable to the $40 million of sub-debt that we added in preparation for the Alpine acquisition. Looking ahead, excluding accretion income, we expect our net-interest margin to be relatively flat. Once we add Alpine's balance sheet and complete the purchase accounting adjustments, we will provide an update on our margin expectations. Moving to our noninterest income beginning on Slide 5.

Total noninterest income decreased $1.4 million, or 9%, from the prior quarter. The decrease was primarily due to lower revenue from our commercial FHA and residential mortgage banking businesses. Residential mortgage had $1.6 million in revenue this quarter, which reflects the typical decline we see in the fourth quarter due to seasonally slower period for home buying. As we have indicated, we are in the process of rebuilding our residential mortgage production team by adding originators that focus on our core markets of Illinois and Missouri.

We made several additions to the team during the fourth quarter and our goal is to have our staffing back up to its prior level, heading into the seasonally strong period for home buying in the second quarter. Turning to Slide 6, I'm going to review wealth management. We had a strong quarter as we added approximately $50 million in assets under administration, reflecting market appreciation as well as net new business. As a result of the growth in assets, our wealth management revenue increased 3.2% from the prior quarter.

Measuring the organic growth on a year-over-year basis, excluding the assets added from CedarPoint, our total assets under administration increased by 12% as of 12/31. When the Alpine acquisition is closed, our wealth-management revenue will substantially increase, as our assets under administration will increase by approximately 50%. Turning to Slide 7 and looking at Love Funding. We originated $99 million in rate lock commitments during the quarter and had total commercial FHA revenue of $3.1 million.

Our average servicing deposits were $295 million in the fourth quarter, up 9% from the same quarter last year. Our weighted average cost on servicing deposits was just 10 basis points. As we mentioned on our call last quarter, due to the size of the loans originated by Love Funding, which can cause large swings in originations and revenue on a quarterly basis, we evaluate the performance of this business on an annual basis. Overall, for 2017, Love Funding was at the low end of the $18 million to $20 million in annual revenue that we projected for this business, while exceeding the high end of the 20% to 25% range of profit margin.

Turning to Slide 8, we'll take a look at our expenses and efficiency ratio. We incurred $2.7 million in integration- and acquisition-related expenses in the quarter as well as $400,000 in losses -- in loss on the mortgage-servicing rights that were moved to held-for-sale. Excluding these items, our noninterest expense decreased $3.4 million, or 9%, on a linked-quarter basis. The decrease was primarily attributable to a couple of factors.

First, we had lower salaries and benefits expense due to a 5.7% decrease in FTEs during the quarter, resulting from the continued integration of Centrue. And second, we had lower variable compensation within the commercial FHA and residential mortgage businesses. In early January, we completed the sale of the mortgage-servicing rights that we had moved to held-for-sale, which freed up $10 million of capital that will be used to support the Alpine acquisition. Moving to the balance sheet on Slide 9, we'll take a look at our loan portfolio.

Total loans increased at an annualized rate of 9% in the fourth quarter. Compared to the end of the prior quarter, commercial loans were up 8% -- commercial loans were up 10% and consumer loans were up 8%. The growth in these areas offset a 2% decline in commercial real estate loans. Turning to Slide 10, we'll take a look at our deposits.

Total deposits were up approximately $17 million from the end of the prior quarter, although we saw a much stronger growth in our core deposit categories. We utilized the sub-debt we recently raised to decrease our holdings of brokered CDs by $43 million. When brokered CDs are excluded, our total deposits were up $60 million. The increase was driven by growth from our commercial, retail, and servicing portfolios.

Moving to Slide 11, we'll look at our asset quality. We recorded $6.5 million in net charge-offs during the quarter, which were largely related to two commercial real estate loans. We charged off $5 million on a credit that we had modified to a TDR in the third quarter of 2016. As you may recall from our commentary at that time, the tenant in the underlying property was performing well and they continue to perform well.

However, the building is part of a retail development that hasn't progressed as expected. As a result, our borrower has had to service a larger share of the municipality-issued debt. The additional share of this debt that the property is now burdened with resulted in a lower valuation upon reappraisal, which triggered our charge-off. This loan is now being carried at approximately $5 million on our books.

It's a unique situation and unfortunately given that the cash flow generated by the tenant continues to be more than enough to service the original terms of the loan. The second significant charge-off in the quarter was $1 million related to a retail mall property in Central Illinois. The property was recently sold for a price lower than the amount outstanding on the loan. These were the two credits in the portfolio that we were most concerned about and now that we have taken these charge-offs, we don't see anything else in the portfolio that we think will drive an outsized level of provisioning in the foreseeable future.

As a result of the charge-offs, our nonperforming loans decreased by $6.6 million from the end of the prior quarter. Due to the growth we had in the portfolio this quarter as well as the higher level of charge-offs, we recorded a provision for loan losses of $6.1 million. This provision brought our allowance to 51 basis points of total loans as of December 31. And our credit marks accounted for almost 51 basis points.

With that, I'll turn the call back over to Leon.

Leon Holschbach -- President and Chief Executive Officer

Thank you, Jeff. I'll wrap up on Slide 12 with some comments on our outlook. We expect to close the Alpine acquisition by the end of February. This will have a significant impact on our business mix.

Within our fee income, we're projecting our wealth-management service charges and interchange will represent approximately 47% of fee income in 2018, while commercial FHA and residential mortgage banking will comprise just 41%. This is significantly lower than the 61% of fee income that commercial FHA and residential mortgage banking accounted for in 2016. Within our total revenue mix, net-interest income, wealth management, and service charge and interchange are projected to account for 82% of our total revenue in 2018, up from 65% in 2016. With a greater percentage of our revenue being derived from core community banking and wealth management, we believe we'll have a higher quality of earnings and less volatility in our financial results.

We'll also gain valuable scale with the addition of Alpine's operations and we will be highly focused on capturing all of the synergies that we're projecting for this transaction. We're currently targeting the system conversion for mid-July and that will lead to the bulk of the cost savings from the combination being seen in the fourth quarter. With the additional scale and cost savings from Alpine, we expect to see an improvement in our efficiency ratio as well. Another key focus for Midland in '18 is focusing on those lending areas that generate the most attractive, risk-adjusted returns.

One of those areas is the equipment financing, which is a business we got into with the acquisition of Heartland Bank at the end of 2014. We've grown that portfolio by nearly 80% since then. We like this business a lot, as it generates attractive yields and has strong credit quality. Recently, we had a unique opportunity to significantly expand this business through the addition of Fred Van Etten.

Fred was the president of Scottrade Bank Equipment Finance prior to Scottrade's sale to TD Ameritrade. Fred has brought over a group of equipment-finance professionals that worked with him at Scottrade, and in addition to increasing the size of the team that we have in this business, Fred and his group will provide the expertise to expand our offerings to include loans, leases, and hybrid products that will enable us to capitalize on more financing opportunities. The timing couldn't be better for the expansion of this business -- with the recently passed tax reform, companies will have an increased capacity to invest in new equipment, while also being able to take advantage of accelerated depreciation on their taxes. The combination of these factors and the strong track record that Fred has leading highly productive teams makes us very bullish on the outlook for this business.

Of course, we will also benefit from the tax reforms through a lower tax rate as well. For 2018, we expect our effective tax rate to be approximately 23%. With the additional earnings coming from our lower tax rate, we expect to generate more capital. We have two priorities for the use of this capital.

First, we'll be using it to rebuild our capital base following the closing of the Alpine acquisition. And second, we intend to continue our 15-year track record of increasing our dividend by at least 10% annually. In summary, we're very excited about our positioning as we start 2018. We believe that it will be a year of strong organic growth as well as seeing the initial benefits of a highly accretive acquisition, and we believe it will be a year that significantly enhances the value of our franchise.

And with that, we'll be happy to answer any questions that you might have. Operator, would you please open up the lines for call please?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press the * then the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. Again, that's * then 1 to ask a question.

To prevent any background noise, we ask that you please place your line on mute once your question has been stated. And our first question comes from Michael Perito of KBW. Your line is now open.

Michael Perito -- KBW -- Analyst

Thank you, Jeffrey, and good morning.

Jeffrey Ludwig -- Chief Financial Officer

Good morning, Michael.

Michael Perito -- KBW -- Analyst

A few questions for me. I wanted to just start with the credit in the quarter. Can you maybe give us a little bit more color, Jeffrey, on about additional kind of retail strip center or mall-type exposure either direct or indirect in the portfolio?

Jeffrey Ludwig -- Chief Financial Officer

Yes. So total portfolio on that retail commercial real estate side is roughly just a little over $200 million. We don't have properties like these properties. So in a retail mall, this was like the only property we had in the portfolio as well as this retail development property that we have.

We don't have those types of loans in the portfolio. So we feel pretty good that that portfolio will perform well as we move forward.

Michael Perito -- KBW -- Analyst

Have there been any other instances in that portfolio of even like modest charge-off or move to classified status, anything else worth noting?

Jeffrey Ludwig -- Chief Financial Officer

No, I think we've actually -- I think that portfolio, we have risk ratings actually a little lower than the total portfolio. So we don't see any issues going forward.

Michael Perito -- KBW -- Analyst

OK. And then how are you guys thinking about the, I guess, taking into consideration, what seems like decent organic loan growth aspirations next year? How are you guys thinking about kind of the provisioning rate for 2018?

Jeffrey Ludwig -- Chief Financial Officer

Yes. I think with the acquisition of Alpine, that will drive a little more forward provisioning as well. So I think anywhere in that $1.5 billion, probably $2 billion range would be a reasonable place to start.

Michael Perito -- KBW -- Analyst

OK. And then maybe sticking with you, Jeff, for a second, just moving on, I know the Alpine deal is closing a little sooner now into February, it sounds like, which is good, but curious if we could just talk about the expense starting point for '18, maybe excluding Alpine? Where you kind of see the Midland expense rate starting in the first quarter of '18 excluding any merger charges and the Alpine expenses, just to kind of give us a better sense what the starting point is moving forward?

Jeffrey Ludwig -- Chief Financial Officer

Yes. So we saw a nice decrease in the fourth quarter in -- on the expenses excluding integration acquisition. The first quarter, we'll see an uptick. I mean, a couple of those -- a big part of that decrease was related to what we call permanent items with the Centrue synergies but some of that was more variable related to the mortgage business variable compensation plan.

So, yes, I would expect the expenses to move up from that $33 million number. We brought a larger leasing team on and right at the end of the fourth quarter, so that will drive a little bit of additional expenses. I think something more in that $36 million range, more like where the GAAP number was would be a reasonable starting point.

Michael Perito -- KBW -- Analyst

Got it. Thanks. And then, I guess, Leon, just any thoughts on -- you made the general comment about strong organic loan growth, can you maybe give us a sense of this team that you brought over from Scottrade, what type of booking production levels they were doing? And any other more specific thoughts, I guess, overall on what you kind of think are realistic expectations on the organic growth side? I mean, it seems like the Alpine deal will give you a little liquidity to deploy, so just curious what you guys think you could do with it?

Leon Holschbach -- President and Chief Executive Officer

Yes. I'll give you a couple of comments, Mike, and then, Jeff, jump in on this if you want to. But, looking backward at Alpine's recent growth, the last few years, they've had good solid loan growth in their own portfolios. They are positioned in one of the larger MSAs in the state.

I mean, they are a lead, the lead bank in that market. So my expectation is that -- and bringing the sales force with them, my expectation is that they will continue a good trajectory of growth in that stateline market. The leasing company -- and I'll let Jeff add some flavor to what we're thinking about for numbers, but we expect the leasing team to produce a nice lift itself. The combination of those two and good growth across the company, but, Jeff, what are we looking for ballpark from the leasing companies in terms of new production?

Jeffrey Ludwig -- Chief Financial Officer

Yes. So it was a good team that Fred brought on with a good number of salespeople. So I think we're looking at $125 million to $150 million worth of production out of that team this year. So pretty good -- yes, pretty good production.

Michael Perito -- KBW -- Analyst

Got it. And then just one last quick one for me. Just the -- you have the closing number on the resi platform, I think it was $63 million last quarter? And what percentage of that was purchased?

Jeffrey Ludwig -- Chief Financial Officer

Are you talking about mortgage-servicing rights?

Michael Perito -- KBW -- Analyst

No, no, just the residential mortgage scale, like the closings you had in the quarter, and what percentage of that was purchase? I didn't see it in the slide deck.

Leon Holschbach -- President and Chief Executive Officer

Yes. We'll get it for you.

Michael Perito -- KBW -- Analyst

All right. Perfect. Thanks, guys, appreciate it.

Jeffrey Ludwig -- Chief Financial Officer

We're looking for it.

Michael Perito -- KBW -- Analyst

No problem. Thanks.

Jeffrey Ludwig -- Chief Financial Officer

Thanks, Mike.

Operator

Thank you. And our next question comes from Terry McEvoy with Stephens. Your line is now open.

Terry McEvoy -- Stephens -- Analyst

Good morning, guys.

Jeffrey Ludwig -- Chief Financial Officer

Good morning, Terry.

Terry McEvoy -- Stephens -- Analyst

Maybe let's just start with credit. Could you talk about watch list, delinquency trends within the CRE portfolio ex the retail segment that, call it, $1.2 billion portfolio?

Leon Holschbach -- President and Chief Executive Officer

I don't know about the breakout, but the global delinquency trend has been real solidly stable in that 45-basis-point range with real good stability for actually many quarters. We'll see if we can get you a CRE breakout number while we talk, Terry.

Terry McEvoy -- Stephens -- Analyst

OK. And then, I guess, on the commercial FHA and mortgage, have you made adjustments to the expense base at all to reflect the decline in revenue? I know you said you're adding to the mortgage-production side through new lenders, but what about just that core expense run rate?

Leon Holschbach -- President and Chief Executive Officer

Yes. So in both platforms, little tweaks in expenses. But on commercial FHA and Love Funding, a little bit here a little bit there, but we believe that we have an operating platform to operate and generate pre-tax profit margins in that 25% range, if the revenue is in that $18 million to $20 million. So I think we're -- we feel good about that expense rate in that business.

On the residential side, we've kind of -- we held -- I'll say, we held the back-office last year with the anticipation that we're going to be getting -- Alpine's coming in we have -- and we're going to begin to rebuild our business. So we didn't make -- last year, we didn't make adjustments to the back-office with the anticipation that we're going to kind of get back to where we were. So it's just -- you let people go for two quarters and hire them back, it gets a little tricky. So if we thought that long term, that this wasn't going to rebound, we would have taken the expenses out.

But I think -- we think the expense that we have in the mortgage business today supports our growth in next year without adding new back-office expense.

Terry McEvoy -- Stephens -- Analyst

OK. And then just my last question on Love Funding tax reform. Did that change the growth outlook, the profitability dynamics at all of Love Funding? And if so, to what extent?

Leon Holschbach -- President and Chief Executive Officer

Yes. So, Terry, this is Leon. So no, not in particular and I've appreciated that there's been a lot of focus on impact on the tax credit aspect of that business. So two points there.

One is that, within Love Funding, the tax credit-driven deals are not a big proportion of the business. But more importantly, and appreciating that most of the deals' structure are partnerships and LLCs, the beneficial impact of the tax return for the accelerated depreciation so, for example, of every piece of equipment that would be in an assisted-living center, for example, there's a benefit there, not a penalty, and to the extent that these are other than C corp entities and most of them are, that would be actual borrower that capping at, I think -- I'm not a tax expert, here is my tax disclaimer, I think the cap is at now 25% for pass-through from the individual investor in a multifamily or an assisted-living deal. It's actually a likely a net improvement in that tax law changes. So the high-level answer to your question is, no, not impacting projections, getting down into granularity, could very well be that it's a net benefit.

Terry McEvoy -- Stephens -- Analyst

Got it. Thank you.

Operator

Thank you. And our next question comes from Kevin Reevey with D.A. Davidson. Your line is open.

Kevin Reevey -- D.A. Davidson -- Analyst

Good morning, gentlemen. So, Leon, you mentioned earlier that line utilization was up. Can you provide us with kind of what the percentage was this quarter? And what was it last quarter?

Leon Holschbach -- President and Chief Executive Officer

No, no, no, but you are welcome to call the CFO back later and grill him on that. I'm sorry, Kevin, I don't have that at my fingertips.

Jeffrey Ludwig -- Chief Financial Officer

We can try to find it here in the next couple of minutes.

Kevin Reevey -- D.A. Davidson -- Analyst

OK. And then what was the split in the growth between new and existing customers on the commercial side, on the growth side?

Leon Holschbach -- President and Chief Executive Officer

Yes. Just that, increased line usage and winning new customers, just that.

Jeffrey Ludwig -- Chief Financial Officer

Yes, probably half-and-half type of rough percentages.

Kevin Reevey -- D.A. Davidson -- Analyst

And then as far as the mortgage lenders that you've been hiring, how many would you add in the fourth quarter? And how many more do you think you need to bring on board in 2018 to kind of get to where you need to be?

Jeffrey Ludwig -- Chief Financial Officer

Yes. So I think we brought on four, five in the fourth quarter and we're looking to bring on roughly 10 -- maybe 10 to 15 in the first quarter to get us to about where we were kind of pre losing that Colorado mortgage team in the second quarter of last year.

Kevin Reevey -- D.A. Davidson -- Analyst

OK. Great, thanks.

Jeffrey Ludwig -- Chief Financial Officer

Yup.

Operator

Thank you. And as a reminder, ladies and gentlemen, if you have a question at this time, please press * then the number 1 key on your touchtone telephone. And our next question comes from Andrew Liesch with Sandler O'Neill. Your line is now open.

Andrew Liesch -- Sandler O'Neill -- Analyst

Good morning, guys.

Leon Holschbach -- President and Chief Executive Officer

Good morning, Andrew.

Andrew Liesch -- Sandler O'Neill -- Analyst

Question on the loan growth here, just related to geography, is there any part of your footprint that's stronger than any other? Or is there -- or is it just broad-based across everywhere?

Jeffrey Ludwig -- Chief Financial Officer

Yes. I think it's pretty broad-based. We kind of cut our business into like four different regions and we see it coming from all areas. So we think that's a good design.

Andrew Liesch -- Sandler O'Neill -- Analyst

OK. And then the consumer loans, the GreenSky loans, they can be lumpy from quarter to quarter. Does that something you just turn on and off depending on your appetite for it? Or how do those loans come in on the balance sheet? Is there a way to easily model that?

Jeffrey Ludwig -- Chief Financial Officer

Yes. So it's the former part. So we kind of give them a target balance that we need -- we would like them to hit and they bring it to that balance and they maintain and then the next quarter goes by if we want to raise it, we raise it, they bring the balance up to that number. So we moved the number in the fourth quarter -- with the Alpine kind of this prefunding some of the Alpine liquidity, we moved the target up and it brought more balance in.

Andrew Liesch -- Sandler O'Neill -- Analyst

Got you. All right, thank you.

Jeffrey Ludwig -- Chief Financial Officer

Yup.

Operator

Thank you. And we do have a follow-up question from Michael Perito with KBW. Your line is now open

Michael Perito -- KBW -- Analyst

Hey, guys, thanks. Jeff, do you mind just repeating your margin guidance comment that you made in your prepared remarks? I just want to make sure I have it down correctly.

Jeffrey Ludwig -- Chief Financial Officer

Let me look. Real quick on the mortgage side where I'm getting back to that, Mike. About $60 million in secondary loan production and 72% of that production was purchased. Yes, so we said excluding accretion, we see margin relatively flat.

We'll see, there will be a little pressure on the margin with the tax change, because our margin is on a tax-equivalent basis. So, yes, there's a little bit of pressure there. So that's kind of one reason we say it's going to be relatively flat on an ex accretion. Alpine is going to roll in at the end of February, as we assess the credit mark and see how that's going to roll through the income statement moving forward.

It might be -- it will be fairly like the first quarter, because it's only been in here for a month and then in the next quarter it will start to kick in. Centrue is going to begin to roll down, that one is going to come in and by then roll down.

Michael Perito -- KBW -- Analyst

Got it. And then just future moving into short end of the curve, Fed fund hikes, any thoughts on what the impact is at this point? My guess is that benefit is becoming less and less, but is there still some benefit you think you would achieve if the short end keeps moving?

Jeffrey Ludwig -- Chief Financial Officer

Yes. We see the benefit as we have adjustable-rate loans that are adjusting based on short-term rate movements, and we're seeing and we continue to see that, but we're also seeing the creep on the deposit side as well. So we're not seeing big benefits in the margin. And where we're at today, we're out there generating core deposits, we have different rate promotions going on to bring those deposits in, so we're seeing a little bit of deposit rate pressure.

Michael Perito -- KBW -- Analyst

Got it. Thanks for taking my follow-up.

Jeffrey Ludwig -- Chief Financial Officer

Yup.Thank you.

Operator

Thank you. And our next question comes from Eric Grubelich with Bank Investor. Your line is now open.

Eric Grubelich -- Bank Investor -- Analyst

Hi, good morning. Could you refresh my memory on something? Your mortgage-servicing rights, the little bit of the mark you took in the quarter, was that purely rate-related? Or was there something else? And given the fact that 10 years up about, I don't know, 20 basis points or so from year-end, would you expect the existing portfolio that you have on balance sheet to be marked up?

Jeffrey Ludwig -- Chief Financial Officer

Yes, so with held-for-sale, it was sold early January. So the true-up, if you will, between the negotiated price and what was there when it was actually sold is the difference. So there -- if the --

Leon Holschbach -- President and Chief Executive Officer

Loan balance --

Jeffrey Ludwig -- Chief Financial Officer

Balances were down a little bit. That was a true-up in the sale price on January 3

Eric Grubelich -- Bank Investor -- Analyst

Some pay-off or amortization related to when it was actually sold. Those are gone now. It's -- we wouldn't see them next quarter. Yes.

Jeffrey Ludwig -- Chief Financial Officer

Yes. We still have a small piece of resi priced roughly $4 million of mortgage-servicing rights left. I mean, rates are moving up, I wouldn't pick anything there material on an up-rate movement. Because there's not a lot of balance there.

Eric Grubelich -- Bank Investor -- Analyst

OK. That's fine. Then just one other question I had for you on those -- the credits that you mentioned that you charged off in the quarter. I didn't -- I don't know if you've mentioned this or not, I got sort of temporarily disconnected or distracted at the beginning of the call, were those your own homegrown loans? Or did they come from acquisition -- acquisition of other banks?

Leon Holschbach -- President and Chief Executive Officer

Eric, this is Leon. So the one in Central Illinois, in fact, came -- these are both credits that have been on the books for a long time. The smaller one, the Central Illinois one, was acquired in the Amcore acquisition, which was eight years ago and that's what we acquired but had been on their books for a long time. It was sort of a 1980s-vintage retail mall between, about halfway between two central Illinois towns.

So that's been on book a long time. The second one, where, as Jeff was characterizing, the underlying tenant is strong, national franchise, continues to perform well, and that was booked by us about eight years ago as part of a larger commercial development at the state capital and just a classic stalled commercial real-estate development rolled out at the beginning of what we have become to characterize as the Great Recession. So -- but yes, both of those have been on the books for a long time, one originated by us, one inherited in the deal.

Eric Grubelich -- Bank Investor -- Analyst

All right. Thanks for that. Thanks for going over that again. Appreciate it.

Thank you.

Leon Holschbach -- President and Chief Executive Officer

Yup.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to management for any further remarks.

Leon Holschbach -- President and Chief Executive Officer

All right. So thank you all for joining us and we look forward to talking to you again in the quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.

Duration: 40 minutes

Call Participants:

Allyson Pooley -- Financial Profiles -- Senior Vice President

Leon Holschbach -- President and Chief Executive Officer

Jeffrey Ludwig -- Chief Financial Officer

Michael Perito -- KBW -- Analyst

Terry McEvoy -- Stephens -- Analyst

Kevin Reevey -- D.A. Davidson -- Analyst

Andrew Liesch -- Sandler O'Neill -- Analyst

Eric Grubelich -- Bank Investor -- Analyst

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