Old National Bancorp (ONB) 2004 Q4 法說會逐字稿

Thank you for standing by and welcome to the Old National Bancorp fourth quarter earnings conference call. This conference is being recorded and has been made accessible to the public in accordance with the SEC's regulation FD. The call along with the corresponding presentation slides will be archived for 12 months on the shareholder relations page at www.oldnational.com. A replay of the call will also be available beginning at 5:30 PM central time today through 12 PM midnight on February 10th. To access the replay dial 888-203-1112 and use conformation code 741258 . Those participating in today's call will be analysts and members of the financial community. At this time all participants are in a listen-only mode, after that we will hold a question and answer session and instruction will follow at that time.

With us today is Old National Bancorp's President and Chief Executive Officer Bob Jones, Senior Executive Vice President and Chief Operator Officer Mike Hinton, the Chief Financial Officer, Chris Wolking, the Chief Credit Officer, Daryl Moore, and Vice President of Investor Relations Lynell Walton. Now, at this time I would like to turn the call over to Ms. Walton for some opening remarks.

Thank you, Mike. I'd like to, again, personally welcome you to our conference call this afternoon I'm very excited and pleased to be here with members of our executive leadership group as we continue on our commitment to you to provide open and honest communications and frank earnings guidance. Just as a reminder our presentation slides are available on our website and we will be following through with them during the call this afternoon. I'd like to direct you to slide 3 which is our standard forward-looking statement. During the call we will be making forward-looking statements regarding our outlook for the future, our earnings and expectations, expected trends, et cetera. For these statements Old National claims the protection of the Safe Harbor for forward-looking statement contained in the Private Securities Litigation Reform Act of 1995.

Slide 4 is our non-GAAP financial measures statement. Certain numbers during the call this afternoon will be adjusted and given on an operating basis and are intended to provide comparable data between periods to see realistic trends. Slide 5 contains our agenda for today. We have a lot of information to provide to you. You received our earnings and financial trends this morning. Our new CEO, Chris Wolking, will provide more color and detail about impacted areas for the fourth quarter and the full year. And then we're going to discuss our progress against our strategic imperatives of improving our risk profile, leveraging our expense discipline and providing consistent quality earnings.

Daryl Moore will speak on our greatly improved credit quality that occurred in the fourth quarter and during '04. Mike Hinton will then speak about the ASCEND project, where we stand on that, provide an update as we leverage our expense discipline. And then Bob Jones will provide details about the strategic initiatives announced last week that address all 3 of our strategic imperatives. Bob will then give 2005 earnings guidance trends we see continuing and our expectations for 2005. And as a reminder, all data has been adjusted for the 5 percent stock dividend that was declared in December. At this time it's my pleasure to turn the call over to Bob Jones, our President and CEO.

Great ,thank you, Lynell, and again, like Lynell, I welcome all of you on the phone. Before I begin my remarks, I'm sure all of you join me in congratulating Lynell on her promotion to Vice President. Well deserved and I think it is a reflection to our commitment to all of you to provide you with the best in service. I'd also like to make you all aware that today our board of directors appointed Joe Barnette to our board. Joe, who's currently the President of the Sexton Companies out of Indianapolis. Many of you may know him as the retired Chairman of Bank One of Indiana. Joe's appointment, I think, is very reflective of our role as Indiana's largest bank and we are very pleased to have Joe joining us on our board and we look forward to his guidance

As we begin today's call, I want to give you an overview of the key messages for the day. I continue to be optimistic about Old National Bancorp. We've made great progress in improving the platform for which we will build consistent quality earnings. Most notedly, as you'll hear from Daryl Moore, within our credit area and within our compliance area The new strategy we laid out for all of you in the fourth quarter has been extremely well received and we are confident this is the strategy for the future growth of Old National Morale amongst our associates is improving. One thing I would tell you after 4 months is I am confident that we have very, very good people committed to doing the right thing day in and day out.

But I also want to caution all of you on the phone that we still have a great deal of hard work to do. We are lacking in quality revenue growth particularly in our commercial lending area, as we move from an internally focused organization to one focused on the client. Secondly, we must and will do a better job of forecasting our earnings. Chris and I are both deeply committed to doing this for you, the analyst community, as well as our own board. Finally, we do have an opportunities to continue to monitor and control expenses. As Chris will mention to you, expense control at Old National needs to move from a activity-based method to one that's cultural in nature. And I think we are making great progress towards that.

At this time I'd like to introduce Chris Wolking, who as all of you know, last week we promoted to Executive Vice President and Chief Financial Officer. Before Chris begins talking I'm sure I join all of you again in thanking John Poelker, who unfortunately could not be with us today, and thanking him for his years of service to Old National and his interaction with each and every one of you. We will miss John but we are very, very happy to have Chris Wolking as our CFO. Chris.

Thanks, Bob. I want to share with everyone how delighted I am to be the CFO at Old National. It's a great Company, a great community. I'm very much looking forward to getting to know every one of you and to work with you. I'm pleased to report a solid fourth quarter for Old National Bancorp. The highlight, which was the significant reduction in the provision for loan losses. The zero provision in the fourth quarter gives us a provision of $22.4 million for the year, the lowest annual provision since 1999 when our provision for the year was 14.7 million. Offsetting the reduced provision , however, was a $7.2 million decline in net interest income compared to the fourth quarter of 2003.

The major contributor to the decline in that interest income and the margin was the $537 million decline in the average loan balances from the fourth quarter of 2003. Rising short-term rates and the flattening yield curve also contributed to the decline in the margin. Had we not experienced a decline in loans we estimate our net interest margin would have been unchanged from the fourth quarter of 2003. If you go to slide 9, you'll see that we engineered much of the decline in loans through sales, including a very successful sale of non accrual loans in November. Daryl will provide you with the details of this transaction during his presentation. On slide 10, I think it's very important to point out another extremely positive change in our balance sheet. We had a significant improvement in our core deposit mix. Although core deposits declined approximately 24 million from the fourth quarter of 2003 transaction account balances grew by about 10 percent.

The decline in core deposits was truly a result of the decline in consumer CD's. And our deposit pricing strategies in 2004 were really intended to reduce our CD balances and increase transaction accounts. These strategies helped to reduce our costs on interest bearing deposits 32 basis points from the fourth quarter of 2003. So, we're obviously very pleased with the success of that strategy and you can expect similar strategies in 2005. On slide 11 if we just look briefly at results compared to third quarter 2004, you'll note the same themes we already discussed, lower provision and lower net interest income. But I would like to clarify the $6 million increase in operating expenses we saw in the quarter compared to third quarter 2004. In the fourth quarter, on slide 12 I've got it broken down. In the fourth quarter we incurred additional expenses of $2.7 million related to the management and organizational changes we announced last week and a $1.3 million increase in the reserve for unfunded commitments.

The accounting to manage this reserve requires that the expense be posted to operating earnings rather than through the reserve and this was to get our reserve back to within an appropriate range that we are comfortable with. Finally, we posted expenses of approximately $1.2 million related to restricted stock expense and compliance consulting fees. The charges for restricted stock in December were necessitated by a sharp move up in the share price that has since partially been reversed. If you move to slide 13 you'll see comparisons to the full year of 2004 to 2003 Net income was down $0.03 per share from 2003. Same themes, the provision was significantly lower than 2003 but operating expenses were higher driven by the first and second quarter charges related to ASCEND.

I think it's important to mention here some very strong fee performance in 2004. Even though mortgage revenue was down over 55 percent from 2003 we increased fee revenue 6.3 percent for the year. The increase is primarily due to the full year's impact of 3 insurance agencies we acquired in mid 2003 and a substantial increase in deposit service charges. While these categories had the most impact on fees, virtually all of our other fee revenue categories were up in 2004 and this is on slide 14. What I tried to do on slide 15 is to give you a picture of the fourth quarter with a more normal provision for loan losses and without the unusual charges. By happenstance, they virtually offset each other, so we'd feel a more normal fourth quarter number would have resulted in about the same earnings. Adjusted for our stock dividend normal fourth quarter earnings would still have been in the $0.26 to $0.27 per share range. This is $0.03 to $0.04 less than the number we referred to as core earnings momentum when we discussed a number in November at our conference.

Before I close, I'd just like to circle back to the strategic imperatives that Bob referred to and certainly that you're familiar with from our conference in November. First and foremost, we are absolutely committed to strengthening the Company's risk management infrastructure and Bob has said this many times, without the right risk management whether it's related to CRA or BSA compliance, credit we really can't hope to succeed in our other commitments. And these certainly come at a cost. We'd estimate that Old National spent very close to $4 million to improving this risk management infrastructure in 2004. Secondly, leveraging our expense discipline is extraordinarily important and Bob -- I've heard this phrase from Bob several times since he's come to the Company, expense discipline is a culture it is not simply a project like ASCEND I certainly, and I think we reiterate our intention to move towards that 55 to 60 percent efficiency ratio target that again we talked about in November. Thirdly and finally, we remain committed to generating quality consistent core earnings. And certainly non-interest revenue is important but for an institution like Old National consistent core earnings means a stable and improved net interest margin really generated by high quality core assets and funded by core deposits.

So I'd just like to add my commitment to these imperatives just like the rest of the executive management team did in November and, again, certainly look forward to working with you folks in the future. With that I'd like to pass the baton to Daryl Moore, our Chief Credit Officer, to share some details on the very positive credit developments of the fourth quarter

Thank you very much, Chris. I'd like to direct your attention to slide 18. I want to talk just briefly about the results from the loan sale that we conducted in the fourth quarter . As all of you know we offered roughly $43 million in nonperforming commercial loans to the secondary market. We had about $11 million plus impairment assignment to those loans. We had a very successful sale. We sold all or the loans and took a corresponding write down of $3.4 million. So we actually had impairment $8 million less than what we had anticipated. That's very good news for us, obviously, although we recognize that further reduction in the non-accrual loans is necessary but that they're now at a more manageable level.

What I want to make a comment is I'm sure that a lot of you, when you looked at our fourth quarter provision, looked and wondered by we had a zero fourth quarter provision. I will tell you it comes twofold. One is the very successful loan sale that we had. The fact that you have $8 million less in impairment than you had anticipated in your formula certainly gives you some flexibility In addition, you'll see we reduced problem loans significantly during the quarter. The combination of those 2 led us to a conclusion that a zero provision in the fourth quarter was appropriate. I would caution you this is not -- I would not expect zero provisions in 2005. It really was driven by this very successful loan sale and so I wanted to bring that to your attention.

Slide 19, we look at the trends in the total non-accruals. You can see in the second quarter of 2003 we were at our all-time high with about $146 million in non-accruals. At the end of 2003 we had reduced that to 104 and at the end of 2004 that level is now down to about $55 million. We do have a target in the 25 to $30 million range so we do have some additional work to do to get us down to where we want to be in terms of total non-accruals. Slide 20 looks at our non accrual coverage. Obviously with the significant reductions in non-accrual in the fourth quarter, that coverage ratio has increased significantly up to about 156 percent Our target is in the 250 to 275 percent range. If we were hit the $30 million in non-accruals at 275 coverage, that'd put us about where we are today in terms of total balance.

Slide 21 looks at our problem loans. Again you can see the trend is pretty positive Second quarter 2003, again, our highest level, roughly $425 million. Reduce that down to 345 million at the end of the year, and then at the end of 2004, we reduced it down to $192 million. These are our problem loans. They do not include what would normally be call criticized loans and we also had pretty significant reductions in those loans over that period also. My final slide deals with annualized net charge offs. Obviously the picture here is not as bright as the prior slides. We ended the year at 61 basis points in net annualized charge offs. Obviously much less than where we were last year but still higher than where we want to be. Our target is 40 to 50 basis points going forward.

And as I've said before, one of the other imperatives in this area is to reduce the volatility of those charge offs from period to period. With that I'll turn the conference over to Mike Hinton.

Okay, thank you very much, Daryl. In these next 2 slides, we're going to give you a picture of where we stand with the ASCEND process. This comes to you in the same format that we showed it to you last quarter with a status summary on the ASCEND ideas. You see there that we would note that 48 percent of the targeted dollars on the original portfolio of $77 million is represented in complete ideas. That translates to about $36.5 million. And while I say those are complete, I caution you again that not all of those have been validated and some of those take time for us to realize the work that was put in in actually completing and implementing those ideas. They are nonetheless certified as being completed.

Another 36 percent of the targeted portfolio would fall into ideas which we categorized as on time or in progress. They're tracking with the schedule that we set out originally. They are 4 percent of the targeted dollars that are in ideas which are currently late. Those, however, still look like ideas that we should be able to complete, although that being a little late. The last 2 categories represent the problems that we've run into as we've implemented this. You have 6 percent of the targeted dollars in ideas which today we recognize are at risk because those ideas look like they may not be able to be accomplished or that they may not be accomplished at the same value that we thought they would be 7 months ago when we completed a portfolio.

Finally then we have withdrawn and discarded 6 percent of the targeted portfolio and those withdrawn ideas. The last 2 categories in total represent $9.4 million and the ideas at risk and the ideas withdrawn. I would want to comment to you that our initiative has been to try to replace discarded ideas, withdrawn ideas with new replacement ideas. To date our portfolio holds another $3.5 million of new and replacement ideas and I would tell you that those are of good quality, right at $3 million of those new ideas are in the expense reduction classification which gives us a greater degree of comfort about our ability to get those done. Just in commenting about what we're finding with the nature of these ideas, we're getting a very high rate of capture on the expense ideas. They are extremely well defined.

We are able to identify pretty quickly that we get them done and that we can see the potential benefits out of those. Expense ideas represented 57 percent of the original portfolio value. Those ideas represent 66 percent, two-thirds of what we have completed to date. The revenue and pricing ideas are tracking well with few exceptions, probably the most notable being a reversal we made on a debit card fee for Pen transactions. Nonetheless, revenue ideas represented 30 percent of that original portfolio, represents 32 percent of the completed ideas. The growth and investment ideas which are just frankly less predictable. That was 13 percent of the original portfolio, only 2 percent of what is in completed ideas at this point in time. Among our associates, I would be remiss if I didn't tell you that we continue to pursue the full portfolio target of $77 million, including insistence upon new replacement ideas for those that are discarded.

Nonetheless, I think we we would want to stress that we want to be very candid in acknowledging that 7 months into this process there are elements of the original portfolio which we have had to discard and to confess that the great majority of the growth in investment portfolio is yet to be implemented and the value of those ideas is not as precise as the expense in revenue ideas. With that I'll turn it back to Bob Jones.

Thanks, Michael. Daryl covered our risk imperative and Mike's given a good update on ASCEND and the building of our expense culture. What I want to do beginning with slide 26 is give you an overview of the third strategic imperative which is consistent quality earnings, one of our commitments to you. As Chris said early on, we're not there yet. We acknowledge that but we are aggressively making the appropriate changes to move towards that -- achieving that strategic imperative I want to cover some of the announcements that we made last week which are consistent with driving consistent quality earnings. But are also done in conjunction with our work on ASCEND.

On slide 27 we've talked earlier about our investment in our core risk profile. We've expanded our compliance group to ensure that we have the proper controls in place. We have hired a Chief Compliance Officer, Ray Rictoc [ph] who joins us from Wachovia. We are very pleased with Ray and the work that he has put in place. We've also hired an additional 12 FTE's dedicated to the compliance area, all this at a cost of about $600,000. We do have 5 more positions to be filled into compliance to ensure that we have built a proper platform from which we can grow. Also in 2004 we did incur fees of $1.6 million to ensure that we had the proper processes and procedures in place for compliance. We've also expanded and invested heavily in our commercial credit area. We've hired 21 additional FTEs in the credit underwriting.

We've also enhanced our overall salary base to ensure the retention of our best quality performers both on the lending side and on the underwriting side. This comes at a cost of about $1.7 million. We've also, as we've said to you prior, we've tied the lending incentives to the credit quality of the portfolio. We believe strongly that this builds the base for long-term quality growth and we believe the cost of this pales in comparison to the benefit we will get as the long- term Slide 28, we've also re-focused our mortgage strategy from one that was a regional metro based strategy to one that is more consistent with our vision for Old National to community-based relationship banking. In doing this we did eliminate the senior executive in charge of the mortgage area.

We've also concluded that the sub-servicing arrangement would continue rather than insourcing our servicing. We've also closed a non-footprint production office and also -- are not going forward with any of our other metro expansions. We believe this is consistent with driving quality, consistent earnings. We weren't comfortable with the use of capital in the mortgage area outside of our footprint. Slide 29, we talk about the restructuring within our banking operations. These where really designed to improve our execution and to drive more accountability at the local market. As we noted last week in our release we did eliminate the position of the executive in charge of banking as well as 6 additional folks that were driving administrative support.

After many visits in the field and conversation with folks that are facing off with our clients, it is clear that we had become too bureaucratic in our decision making and were making it difficult for our folks with the clients to perform their jobs. We are confident both Mike and I, that these changes will allow us to drive more consistent revenue from our clients. We've also reorganized our administrative and support areas to improve efficiency. We did announce the retirement of Tom Clayton, the executive prior in charge of this. We wish Tom well as he ventures on to his retirement. And we did eliminate another support position. Want to now turn to slide 31 and begin to give some guidance for 2005. I want to begin with talking about core earnings and the momentum which have really slowed. I'm the first to tell you that we were overly optimistic as we began our preparation for the conference in November and ratified our earnings on our revenue side.

Clearly we've not achieved those revenue targets. Some of that driven by the mortgage changes but we were overly optimistic. As I said early on, we need to become much better at how we do our forecasting. We have seen our core earnings momentum slow pretty significantly in the second half of the year. I think as a result of being internally focused with ASCEND and other changes that the Company went through, we under estimated that impact. We're confident we're beginning to emerge from that but I want to caution you that we still have work to do in driving core earnings momentum. We continue to to see no commercial loan growth. We continue to see the portfolio decline in part driven by the quality changes we are making and in part driven by the fact our lenders are operating in a new risk environment that they continue to try to adapt to. We are beginning to see our pipeline fill and are confident over 2005 we will make the proper changes to get growth in our commercial loan portfolio.

As Chris eluded to we have seen a contraction in the margin driven mostly by earning asset decline but also by the rising rates. Mike mention we've seen a decrease in our ASCEND growth and investment ideas predominately within the mortgage area, again, as we've made a decision not to expand in the metro markets. And as I said early on, we made a significant investment in our risk profile. We think these benefits far outweigh their costs. And we are confident in 2005 that we will see reduction in expenses through ASCEND. Given that, we are projecting our first quarter 2005 earnings in the range of $0.27 to $0.29 and we're comfortable with the range of $1.33 to $1.41 for the full year 2005. With that we're glad to take any questions and we appreciate your support.

[Operator instructions] We'll take our first question from Scott Severs from Sandler O'Neill.

Hi guys.

Hi Scott.

A few separate questions. First of all as it relates to credit, just in an attempt to get down to your, I guess, longer term target for non performers. Would you be looking to actively sell more loans? Then second, on the ASCEND project, I think the effect for the stock dividend would have been previously anticipated about $0.45 a share in ASCEND benefits for 05. Is that still a good number or should we maybe back off that a little. And then finally, just on the margin as you look through your guidance for '05 does that mean contractions from the fourth quarter level or from the full year 2004 level, which is I think up near around 330 or so and that's it.

Daryl will take the first part.

Scott, with regard to your question about future loan sales. We intend , because of the success we have had, to offer loans from time to time in the market for sale. I don't think that you'll see or we do not anticipate anything to the level that we've had in the past. We would use this as just 1 of our options on a quarterly basis to sell 1 or 2 off through the channels that we have had success with. So, yes, we will -- we possibly could be selling loans but I don't think it would be of a material nature where you might not even pick it up from quarter-to-quarter unless you specifically would ask that question.

Okay, thanks.

Scott, this is Mike Hinton Relative to your question about ASCEND. I can only give that to you in -- answer that a little subjectively. In giving you the numbers and what you see in terms of discarded and at-risk ideas and given that most of the growth in investment ideas are yet to be implemented, I'd say I'd probably be comfortable that you could discount that original number somewhat. Nonetheless, I still think we'll come within that range within a couple of cents or so.

Scott, do you want to repeat the margin question?

Yes. I was just curious what point of reference we should be using for your guidance of contraction from the margin, the fourth quarter number of roughly 320 or the full year 2004 number which was closer to 330.

You know, Scott, it's certainly hard to tell given our current core asset issues. But 321, the fourth quarter number, is certainly on a low end of that range, given what we'd expect, we'd hope and expect to see some improvement for that margin number.

Okay. Great. Thank you very much.

Thanks, Scott.

Next up we'll hear from Fred Cummings of KeyBanc Capital Markets.

Good afternoon. Congratulations, Chris. Chris, a question for you. With respect to capital management, the bond market has rallied somewhat here. Is there any chance for you all to shrink the securities portfolio in order to free up capital and then therefore buyback more stock? I haven't heard you talk about your appetite for buying back stock.

Fred, you're absolutely right. We haven't talked about that specifically. We haven't formulated targets there other than what we released previously, but you're certainly right that as the opportunities for our investment portfolio continue to decline, there certainly may be other opportunities to improve the leverage situation there, so that's something we will probably talk about further.

We're going to actively look at that, Fred. I think, as you know the board's authorized up to about a 5 percent stock buyback and we will actively continue to look at that portfolio and look at buying back our own stock. We're still confident it's a good investment.

Bob, a follow-up on the loan side, we've seen in general a resurgence in loan growth. I don't know if it's, Bob, unique to the Evansville market and some of your primary market areas that you guys are not going to pickup in demand or is it more of a function, as you said, being maybe too internally focused and the calling officers not being out there in the field calling on customers.

Freddie, I don't think it's any reflection on the economy in the tri-state area. It's clearly a reflection on our folks being far to internally focused. We worked very hard over the last 60 to 90 days to get them out calling. Senior management's been out calling. We're beginning to see the pipeline build but I think we under estimated the internal focus of our lenders and the challengers they faced working through a new credit environment that they all agree with. But, whenever you change the rules it takes time to learn how to play the game. We're starting to see it work better, but clearly it's an internal issue versus a market issue.

Okay, thanks, Bob.

Thanks, Freddie.

The next question will come from Troy Ward with A.G. Edwards

Couple questions. Chris, if you could just maybe walk us through just a little bit on -- from a financial perspective what you saw in, not necessarily Q4, but full year 2004. What would you say was the core growth in the business versus the impact of ASCEND? If we just try to look at the assumptions you gave us for the breakout of ASCEND, the impact of '04, '05, '06, how close did you come to that -- to those assumptions?

Troy, I'll actually take that. I can tell you that we saw nominal, if any, growth in our organic engine. Almost all of our increase was based on ASCEND. We're confident that the ASCEND process worked. What it also did is it really significantly slowed our core organic growth. Almost all of the benefit we got was from ASCEND.

If you just redimentally just -- you look at the numbers you gave us back in June, you looked at basically 4 percent of ASCEND kind of coming to fruition in '04 and 61 percent in '05, and 100 percent through 06. If that was all from ASCEND it would seem to me that things like the fee income were actually higher than I would have anticipated. Would you agree with that?

You've got the acquisition of the insurance agencies in there, Troy, that caused some of that higher growth.

Okay. I'll work more on those type of numbers. Bob, if you could make a few comments from an executive standpoint, is the old Signature Group, as you had them grouped together, is that kind of disbanded? I know, Chris left about a year ago and then Thomas Clayton was in charge. How should we look at that group as a whole now?

There is no Signature Group left. We have really reformatted that group. We've combined our trust and investment area with our private bank to form a wealth management function. We've taken the retail brokerage and have that as a separate function that strongly supports our retail bank. To have a separate entity under the name of Signal just doesn't play consistent with our brand building nor does it work well with our relationship strategy.

I was under the impression when, you know, the excitement really bringing these all under one umbrella was because of the synergies you could get through cross sell and all of that. It seems a little premature, almost, to take those apart so soon.

I wasn't here when all that excitement happened, but I will tell you that it really added a layer of bureaucracy and management that wasn't necessary to focus on the client. I think you all know my background at my prior employer prior to this was running the wealth management group and the model we're putting in place here is very consistent with that model and one that I feel is the right one for a relationship strategy and that is consistent with an overall brand versus a singular brand that I just don't have the resources to build.

I see. Can you make a few comments on the new executive brought over from Wachovia. Ray, what was his -- ?

Ray Rictoc?

Yeah. What was his function at Wachovia and -- ?

He's a compliance veteran. He's been in compliance for over 20 years. He lives and breathes compliance, not my cup of tea, but he's very good at it. He's done an awful lot of good work with Annette Hudgions in getting us to a point where we're comfortable we can comply with all the necessary processes and procedures.

Will he be joining your executive leadership group?

No. He reports into Annette Hudgions for the current period of time. I think as you all know I am in the process of looking for a Chief Risk Officer. Once I find that right person, Ray will report into that Chief Risk Officer as we do a better job of an enterprise risk management system throughout the Company.

Thanks, Bob.

Thank you.

[Operator instructions] We'll next go to Karen Lamark with Merrill Lynch.

Hi, Karen, how are you?

Good, how are you.

We're doing great.

Couple of questions. Trying to understand what might be planned or what might be incremental expense with respect to retention payments or incentive payments for your lending people and also for compliance? And then I've got a separate question.

Really nothing planned in '05, Karen. We think the numbers I laid out earlier are sufficient both on the lending and credit side as well as the compliance side. So, you should not see any incremental expense other than the addition of those 5 FTs in compliance. We're comfortable that morale's coming back in the credit and commercial side and our compliance folks, we have a very good team there.

Okay. And then separately, was there a theme around the ASCEND ideas that you've qualified as being at risk or withdrawn ?

Yes. I would say to you, Karen, I think those are the ones that were less than customer friendly. I think a great example's the debit card fee which had a 7 figure benefit but the attrition that we felt was going to happen was far going to outweigh the benefit. So, we've taken a harder look at those that are not consistent with our mission and vision of relationship strategy. Those would be the ones. The other ones I would add in that category are those that were in the mortgage side that were related to expanding beyond our footprint. I couldn't get comfortable with the return on capital given the risk of moving outside a franchise on the mortgage side.

Great, thanks.

Thank you.

[Operator instructions] We'll next go to Mark Kehoe with Merrill Lynch.

I have a question. Just in terms of assessing your customers, whether your customers are surprised by the greater risk pricing that you're asking for, whether there's been any competitive attack?

That's a very solid question, Mark. We have seen some customer negative reaction to our pricing on risk base. I think we've had to educate our lenders to be a little more diligent in being flexible on that pricing. It's when we compete in the markets we do you have community banks that don't use risk-based pricing. We can't always price at the level they price at, so we have seen some pushback from our clients. We're doing a better job of educating our lenders. Daryl and Mike are personally going to go visit many of our markets in the next couple of weeks to continue to work with that process. Anytime you put in new policies and procedures it takes a little bit of time to get comfortable with them and I think we're finding that with our lenders .

Thanks.

Thank you.

[Operator instructions]

Mica, anybody a question there?

There appear to be no further questions, sir.

Great. Well, folks, thank you so much for your time and your questions. As always Lynell and Chris, in his new role getting ready to answer any questions, we really appreciate your support today. Have a great day.

That does include Old National's call. Once again a replay along with the presentation slides will be available for 12 months on the shareholder relations page of Old National's website at www.oldnational.com. A replay of the call will also be available by dialing 888-203-1112 and using confirmation code 741258. This replay will be available until 12:00 midnight on February 10th. If anyone has additional questions, please contact Lynell Walton in the investment relations area at 812-464-1366. Thank you for your participation. You may now disconnect.