Old National Bancorp (ONB) 2006 Q1 法說會逐字稿

Welcome to the Old National Bancorp first-quarter 2006 earnings conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC's regulation FD. The call, along with corresponding presentation slides, will be archived for twelve months on a shareholder relations page at www.OldNational.com. A replay of the call will also be available beginning at 9:30 PM Central daylight time today through May the 4th. To access the replay dial 1-800-642-1687, conference ID code 6598887. Those participating today will be analysts and members of the financial community. At this time all participants are in a listen-only mode, then we will hold a question-and-answer session, and instructions will follow at that time. At this time the call will be turned over to Lynell Walton, Vice President of Investor Relations for opening remarks. Ms. Walton.

Thank you, Janice and again welcome everyone to Old National Bancorp's first-quarter earnings conference call. With me today are our President and Chief Executive Officer, Bob Jones; our Chief Financial Officer, Chris Wolking, Chief Credit Officer Daryl Moore, and our Treasurer, Jim Ryan. Before we begin I would like to refer you to slide three and point out that the presentation today will contain forward-looking statements that are subject to certain risks and uncertainties that could cause the Company's actual future results to materially differ from those discussed. These risks and uncertainties include but are not limited to those which are contained in this slide and in the Company's filings with the SEC.

Slide four contains our non-GAAP financial measures information. Various numbers in this presentation have been adjusted for certain items to provide more comparable data between periods and as an aid to you in establishing more realistic trends going forward. If you turn to slides five and six, you will see reconciliations for such non-GAAP data. We feel that these adjusted numbers provide a more meaningful comparison and better picture of financial trends as they are calculated as if hedge accounting had been allowed in 2005. And thus are consistent with 2006 presentation. We will be using these adjusted numbers throughout our discussion today.

Slide 7 is our agenda for the call. First, Chris Wolking will present an overall picture of our first-quarter earnings results, specifically discussing some significant balance sheet trends. Next, Jim Ryan, our Treasurer, will discussing components of our net interest margins and provide details as to the various divers affecting the margin for the quarter. This analysis will show the progress that we have made as a result of our 2005 strategic initiatives and how these initiatives have positioned our balance sheet for future growth. As the margin is a focal point for us in '06, Jim will also highlight various initiatives on both the asset and liability side of the balance sheet that are aimed at improving the margin this year.

Daryl Moore will then lead the analysis of our improved credit quality picture and provide details regarding those statistics. Finally, Bob Jones will discuss the various management changes that have recently occurred, as well as detailing our top five areas of emphasis in '06 and our financial outlook. With that I will turn the call over to our CFO, Chris Wolking.

Thank you, Lynell, good afternoon everyone and thank you for joining our conference call today. I am really pleased to report a good beginning to 2006 for Old National, certainly the $0.31 per share we earned in the first quarter meets our expectations for the quarter. Beginning with slide nine, I've noted some highlights to our first-quarter performance. As I mentioned, we earned $0.31 per share for the quarter, a 10.7% increase over adjusted earnings for first-quarter 2005 and a 6.1% decrease over last quarter's adjusted earnings per share number. The net interest margin improved two basis points to 318 compared to our adjusted net interest margin of $3.16 in the fourth quarter of 2005. As Lynell mentioned Jim Ryan, our Treasurer, will again provide you a detailed analysis this quarter again of the margin, but I would like to say we are particularly pleased with the improvement in our margin this quarter in this challenging rate environment. The improvement was driven primarily by our ability to re-instill discipline in our deposit pricing during the quarter.

Non-accrual loans declined to $51.4 million in the first quarter compared to $55.6 million in the fourth quarter of 2005. This is the first decrease in our non-accrual loans since the second quarter of 2005. Slide 10, you will see that fees, service charges and other revenue declined $8.6 million from fourth quarter 2005, but recall that the fourth quarter included the $14.6 million gain on the sale of our Clarksville, Tennessee franchise. The first quarter of 2006 includes a gain of $3.0 million on the sale of our O'Fallon Illinois branch, which we closed on March 17th and a $2.4 million increase in insurance revenue driven largely by higher contingency revenue in the first quarter.

Of note, too, is a $1.6 million decline in deposit service charge revenue during the first quarter. We are focusing right now a significant amount of attention in this area, particularly challenging our regional managers to reduce the waivers of fees. Noninterest expenses declined $1.3 million from fourth quarter 2005. The fourth quarter included a $5 million contribution to the Old National foundation. Salary and benefits and employee benefits charges increased during the first quarter due to higher incentive and benefit accruals and approximately $1 million in severance expenses. Also in the quarter we continued to buy back stock at a fairly aggressive pace buying back 400,000 shares for the quarter.

On slide 11 I listed the $2.5 million in unplanned expenses we absorbed during the quarter. That largely neutralized the $3 million gain from the sale of the O'Fallon branch. The $1 million severance expenses I had mentioned related to the departure of five managers during -- departures of five managers during the quarter. We also took several other expenses in the quarter, including write-downs related to the disposition of several pieces of surplus real estate and higher accountant's fees from the work related to the 2005 restatement of earnings.

We were happy with our first-quarter earnings. But I wouldn't say we were pleased with our loan and noninterest deposit growth during the quarter. On slide 12 you'll see a detailed side-by-side comparison of our average balance sheet for first-quarter 2006 to both fourth and first quarters of 2005. Commercial and commercial real estate loans declined $97.8 million on average compared to the fourth quarter. Most of the decline in average loans can be attributed to the large amount of line paydowns we had in late December. You will see that evidenced if you look at the end of period numbers for the quarters.

Non interest-bearing deposits declined $24.1 million on average during the quarter, driven partially by the loss of about $11 million in balances related to the sale of the mortgage servicing portfolio. These were not escrow balances. These were related to the servicing activity itself. Non interest-bearing deposits and quality loan growth are really key to our success in 2006. As you'll note from Bob's comment in today's earnings release we believe that the strategies and plans that we have in place will show results.

While we are not pleased with our first quarter loan and deposit growth, I think it's very important to note the progress we've made during the last 12 to 15 months. We made many decisions during the period that impacted our balance sheet, but we continue to believe that these decisions were appropriate and consistent with our strategic imperatives, strengthening our risk profile, improving discipline around our management decision-making and providing consistent quality earnings to our shareholders.

On slides 13 and 14 I have made some key comparisons of our March 31, 2006 balance sheet to the balance sheet of March 31, 2005. These are end of period statistics that won't tie directly to the previous slide, but I wanted to draw your attention to the significant improvements we made. Our wholesale bank declined from first-quarter 2005, our investment portfolio accounted for 31.6% of total assets at March 31, 2006 compared to 33.9% of total assets at March 31, 2005. Perhaps more importantly borrowed funding decreased to 19.3% of total assets compared to 23.1% at March 31, 2005.

While total loans declined $140.5 million based on end of period balances, the sales of Clarksville and O'Fallon accounted for $142.2 million of the change. Additionally, criticized and classified loans declined to $19.2 million during the year largely through moving these credits out of the bank. Nonearning assets declined $43.5 million, and driven by lower goodwill and intangibles due to the sales of Terrill Insurance and Fund Evaluation Group.

Additionally, we sold our mortgage servicing rights in 2005. If I can go back to a point I may have misspoken here, criticized and classified loans declined $90.2 million. Thank goodness we have a lot of edit checkers around here. Shareholders equity without OCI adjustments declined $15 million as we were able to buy back shares and increase our quarterly dividend and during that period average diluted shares declined $1.47 million from first quarter 2005.

And finally, although core deposits declined over $107 million during the period our branch sales accounted for -- almost $195 million of deposits, and our escrow balances declined -- and our escrow balances, due to the sale of mortgage servicing rights caused core deposits to decline another $21 million. Again, I think obviously we would have preferred a stronger first-quarter balance sheet growth. When we look at the balance sheet compared to a year ago we are very pleased with our progress and feel that we have executed according to our strategic imperatives. We believe that our plans and strategies are appropriate and position us well for future growth. With that, I will turn it over to Jim.

Thank you, Chris. Slide 16 shows the expansion of net interest income to $59.5 million in the first quarter. However, hedge accounting would have been applied in the fourth quarter of 2005; net interest income declined a modest $600,000. The net interest margin increased 9 basis points to 3.18% in the first quarter of 2006. Again, assuming hedge accounting would have been in place during the fourth quarter, the margin would have expanded only 2 basis points. Later in the presentation I will provide a reconciliation of the margin expansion.

Slide 17 shows how borrowed funding costs dropped 13 basis points, 4.87% during the quarter. Our funding cost declined as a result of one, our ability to include net swap income from certain received, fixed and paid floating swaps related to brokered CDs and junior subordinated ventures in the margin; two, the benefit of the early termination of a high cost $50 million federal home loan bank advance in late December; three, the exercise of a call option on $20 million of high cost brokered CDs in middle February; and four, the maturity of a $25 million federal home bank advance early in March.

Core deposit costs only increased 18 basis points to 2.87% from the fourth quarter of 2005 to the first-quarter of 2006 despite two increases in the federal funds rate during the first quarter. This is favorable when compared with a 25 basis point increase in core deposit costs from the third quarter of 2005 to the fourth quarter of 2005. The smaller increase in core deposit cost was due to one, the intentional reduction of certain special account pricing, mostly related to public fund customers; two, the de-indexing of money market fund account that was previously indexed to U.S. Treasury bills; and three, the disciplined management of pricing NOW and savings accounts.

Next, slide 18 will provide a reconciliation of the net interest margin for the fourth quarter of 2005 to the first quarter of 2006. As previously mentioned, the net interest margin increased 2 basis points to 3.18% assuming hedge accounting would have been in place during the fourth quarter of 2005. The repricing of assets was enough to offset increases in interest-bearing liabilities. However, the margin was hurt by a fewer number of days during the first-quarter of 2006 versus the fourth quarter of 2005, and the fourth quarter margin was impacted by the early termination cost of federal home loan bank advance, which is now benefiting the margin today. The margin trended upward during the quarter as a result of the benefits from the more disciplined core deposit cost management and the benefits from the previously discussed wholesale strategies.

Slide 19 details some of the Company's initiatives to improve the margin. Our entire company is engaged and rewarded for improving the margin. One of the quickest ways to improve our net interest margin is to manage interest-bearing deposit costs and grow free funding accounts. Previously, as I have mentioned, we have reduced special pricing for certain public fund customers and have successfully de-indexed a previously treasury bill indexed account to manage exposure to rising rates. Initiatives to grow free funding include one, the changing incentive plans to make demand deposits the highest payout of all business development; two, the creation and significant promotion of a new brand of checking named "unbeatable checking." This new brand makes the statement that Old National is truly unbeatable, unbeatable service, convenience, choices and benefits.

All associates, both frontline and backroom have participated in the training to ensure understanding of checking, product features and benefits as well as a fierce focus on checking account acquisition and retention. ONB rewards its new referral, ONB is a new referral incentive program encouraging all employees and existing clients to refer friends and neighbors to Old National for "unbeatable checking account." Employees and existing clients can earn ONB rewards redeemable for gifts by successfully referring a new checking account. Four, integrating our checking referral program we have initiated an intense and comprehensive direct-mail program that targets prospects that live in close proximity to existing clients. Five mail drops are planned for 2006.

And lastly, we have made significant investments in our small-business and corporate cash management areas. We have implemented a state-of-the-art cash management system and have made significant investments and talent to execute this important, low-cost deposit acquisition strategy.

Slide 20 continues our discussion on ways we are engaged in improving our margin. We continue to look for opportunities to reduce lower yielding assets and have implemented a competition program for commercial relationship managers that only rewards them for meeting certain return on economic capital hurtles when pricing a commercial loan. As Bob will mention later in the presentation, we have increased our management attention to the small-business sector. We are intensely focused on increasing relationships with small-business customers.

Lastly, as mentioned in the previous conference call, we have been developing a fixed-rate home equity product to meet the needs of our consumers. Next, Daryl will update you on the credit quality of the organization.

Thank you, Tim. As you can see on slide 22 nonaccrual loans at quarter's end were $51.4 million, down $4.2 million for the quarter and $3.8 million lower than March 31, 2005 levels. Non-accruals, as you can see, have been in the $50 to $60 million range for the last six months, which is roughly half the level of where we were during our most challenging period for better quality. We continue to chip away at the nonaccrual levels and in the quarter we saw lower non-accruals in both commercial and retail areas.

To give you some color on our commercial non-accruals at the end of the quarter we had only two nonaccrual accounts in the portfolio that had exposure in excess of $5 million, and only an additional 8 loans with exposure in excess of $1 million. Our top 20 nonaccrual relationships now total roughly $31 million, down almost $6 million over the last two quarters. The largest nonaccrual exposure currently in the portfolio is now $7.2 million.

As slide 23 shows, classified and criticized loans remain relatively unchanged for the quarter, showing just a slight increase of $1.6 million during the period. Now we have anticipated for several quarters now that the pace of reduction in classified and criticized loans would begin to slow at some point in time and the current quarter seems to bear that out.

At this point in time we do not see the long-term trendline of declining classified and criticized loans reversing, but we will probably see the steepness of the line change over time as the rate of reduction begins to slow. I will comment that the small increase in classified and criticized loans for the quarter was mainly the result of moving the grades down on about $6.7 million in low income housing tax credit loans we hold in our portfolio. Banks that have participated in this type of financing are beginning to see weaker fundamentals, and we are told that this is particularly true in the Indiana and Illinois markets. That having been said we only have a total portfolio in these types of loans of roughly $33.5 million. So there is not great exposure to our organization in this segment.

Turning to slide 24 net charge-offs for the quarter were $5.5 million, a decrease of $3 million from the last quarter, but at an annualized run rate of 46 basis points, about 9 basis points higher than where we were through the first quarter of 2005. The charge down on our previously largest commercial non-accrual account of $2.8 million in the quarter was the driving factor for the slightly elevated charge-off rate in the quarter compared to the same period last year. Alternatively, net charge-offs in the retail area were much improved with the quarterly net charge-offs down roughly $3.5 million from the last quarter and down $1.5 million on a quarter to quarter comparison to the first quarter of 2005.

I do want to make a comment on where we stand relative to the adequacy of the allowance for loan losses. Given that our net charge-offs for the period exceeded our provision, our reserve for loan losses saw a decrease of $2 million for the quarter reflecting our net charge-offs of $5.5 million against a provision of $3.5 million. We continue to feel very comfortable that we have an appropriate reserve set aside, and would point out that ALLL coverage of both underperforming and nonaccrual loans improved in the quarter. As you have heard, every quarter for sometime now we are very focused on continuing to improve our credit quality numbers. We do continue to work hard at identifying loans that are showing deterioration early on in the cycle so that they can either be rehabilitated in the short-term or moved out of the bank. This is particularly important in these times where both elevated borrowing and energy costs continue to challenge our borrowers.

With that update I will turn it over to Bob for his comments.

Thanks, Daryl, I thought I'd begin on slide 26 with some discussion on some recent management changes that were announced at Old National. As you all saw in both the release and I am sure in the 8-K that we filed last week, Mike Hinton has resigned as the Chief Operating Officer of Old National Bancorp. Many of you on the phone have had the opportunity to deal with Mike and I am sure, like we do, we wish Mike the very best. I'm sure you join us in those wishes.

As we think about how we replace that position on a go forward basis what I have done on an interim basis is I have formed three super regions. We are not changing the nine regional structures we operate in, but I've moved the regions underneath three of our regional Presidents. They will report directly to me, as will Lori Danielson, our Chief Marketing Officer. I've asked Barbara Murphy to work closely with our two product managers for commercial and retail, and I will tell you that I look forward to getting closer to the regions; as you know in our community bank strategy the regions are the linchpin of our success on a go forward basis. I look forward to working very closely with our regional Presidents as well as the Board and the executive leadership group to determine the appropriate organization for Old National. We will begin searching very quickly, and we will look forward to having some fresh eyes work with us to continue to take our banking operations to a higher level of performance.

In addition, we are pleased to announce that Randy Reichmann has joined us as President of our Indianapolis region. Randy joined us from the Huntington, has an extensive banking career with both the Huntington and Banc One. He has hit the ground running, and we're very pleased with Randy and the efforts that he has put forth. As you all remember on last time we were together our last call, I expressed some disappointment with where we were in our commercial lending pipeline. That pipeline has more than doubled over the first quarter, under the leadership of John Travis and Bill Denton our two commercial loan executives. And I think a lot of the hard work that Randy has put in place. Randy's predecessor, Dan Doan has moved to Evansville. Dan will take his over 30 years of experience in banking to help us on the commercial credit product management and a line of our specialty products like leasing and other products. So we think the two combinations of those moves work very well for us.

In addition, we just stripped out a layer of management in our mortgage company. We continue to work on improving the performance of our mortgage company. We've moved the originators, the sales folks in the mortgage area back to the regional structure, and we've centralized the operations underneath Annette Hudgions who is our Chief Administrative Officer. We believe these moves will continue to improve the performance of our mortgage company, and we will continue to focus. The aggregate of all those moves are the positions that Chris referenced; we did have five positions eliminated in the quarter, which were reflected in the severance.

Moving to slide 27, I think Chris and Jim and Daryl have done a very good job of kind of reflecting back on a twelve-month view of Old National and the positioning that we've done, both on our balance sheet and our focus on our margin. The actions that we've taken over the last 12 months we believe have positioned this Company very well for the future, and clearly for us it is all about growing revenue at this stage. We think the balance sheet is properly structured at this stage. We think we've got the proper emphasis on margin, and Daryl and his team continue to improve the credit portfolio to the point where we believe we can focus on growing our balance sheet. To do that we really are focused on five primary areas, both with the regional banks, myself and the rest of the management team. Jim has done a very good job of expressing our foremost priority, which is the net interest margin.

Intense is a word I heard him use three times. I will tell you that our focus on growing non-interest DDA is extremely intense. It is reinforced on a daily basis. We do believe that is a linchpin to the success of both relationship and consistency with our vision, but also in terms of improving the margin. I believe if you asked any employee that works here there has probably not been the emphasis on DDA growth as we've seen it over the last six weeks that we have today. And we believe it bodes very well for the future.

In addition we do believe we have opportunity and service charge particularly when it comes to waivers; I have asked Barbara Murphy in her role of working with the product groups to take a hard look at our service charges and our waivers. We believe there is some impact for us on a go forward basis with that. And as well we're focusing on continuing process improvement. Anytime a company goes through as significant a transition as we have over the last few years you inherently build processes that need to be refined and streamlined. Annette Hudgions is leading that effort for us, and we believe again that is a significant opportunity for us as we go forward.

Product innovation, we've talked in the past about our challenges within HELOC, one thing I will tell you is we have not been a very good bank at bringing new products to the market. We tend to be very reactive. We are committed to try and improve the way we manage our products. That is why Dan has taken on the commercial banking product management role as well as [Steve Witting] in their retail banking. Carrie Ellsperman is supporting them through a leadership group, but we do believe we need to be little more innovative in our product management. The caution I would give all of you on the phone is we will not move to a line of business mentality. We are a geographically driven organization, but we do believe we need to support our geographies with better centralized functions when it comes to pricing and product management.

And finally near and dear to my heart is small business. I've been in small business off and on for the 27 plus years of my banking career. We're going to work very hard to move Old National from a middle market dependent company to one that has a greater focus on small business. We believe that as you will reflect on the markets that we serve in our desire to be a relationship oriented institution with a higher margin and a greater return on equity that small business is really a key to that strategy, and we will continue to move forward with strategies to become stronger in executing a small business relationship mentality. Beginning with looking to move our branches from not serving small businesses to really getting out making calls and developing small-business relationships. Daryl is working on enhancing our centralized underwriting and will continue to look for product ways to grow our small business. But we think these big five initiatives as we've laid out on this chart really bode well with when you combine it with the comments that Jim and Chris and Daryl made.

Slide 28 I simply would say that we are comfortable with the current range of estimates. Clearly for us its all about execution at this stage, and I do believe we have the team in place and we are comfortable that we will hit the range of estimates for this year. With that, I would be glad to take questions.

(OPERATOR INSTRUCTIONS)

Charles Ernst, Sandler O'Neill Assets.

Your current guidance, is that actually a little bit of a lower guidance? I guess in the last quarter you all were guiding to $1.35 to $1.40, and I think the current consensus range is $1.30 to $1.36.

We are comfortable with the range The Street has got it at today. We think there is an intersection there that we're comfortable with.

So I guess that implies a little bit lower comfort level; is that fair to say?

I don't know that I would get to that level, Charlie. I would just tell you that we think the range that is there and there is an intersection between where The Street has and where we gave our original guidance. I guess, if anything, we'd say we're more comfortable to the lower end of our original guidance.

And the last quarter you provided some kind of line item guidance. Is there any update to those, or how do you stand there?

We view those as 12-month guidance and, Chris, I think we're comfortable at this stage. Obviously, the one that probably is focused on is really the growth on the loan side. But at this stage, we're still comfortable.

So the margin is still in the $3.25 to $3.40 range, you're still comfortable with?

Yes.

This quarter's mortgage line, what was in there? It was up a little bit from last quarter, I think, and I might have been backing some out of there. But is that a good representation of your run rate and revenue there?

It is a good representation for the first quarter. Fourth quarter we had some anomalies, so the $1.2 million is probably a better proper representation of our revenue from that business.

Great. Thanks a lot.

Fred Cummings, KeyBanc Capital.

Good afternoon. Bob, two things. One, can you speak to on the small-business side staffing requirements? I just wanted to make sure I understand how you plan on executing there. Do you have branch managers going out and doing the calls or where you have small-business specialists with -- inside the branches?

It is a little early, Fred, to give you the definitive structure. But I will tell you that it is a combination of what you just said. We are very inconsistent in how our branch managers call on small businesses. In some regions they do it, some regions they don't. All of our branch managers will have calling requirements as well as portfolio growth requirements. And we hope to get that; in fact, we're going to begin training branch managers in the next couple of weeks. But those will be supported by small-business specialists. What I can't tell you, Fred, is the number I need right now, because we're still working through the potential that is existing in the market. We are working through some of these centralized support areas to know where we can get on efficiencies. But clearly it is going to be requiring our branches to be more active in a calling basis, as well as having those small-business relationship managers in the market as well.

Secondly, as it relates to the intensive focus on this interest and non-interest bearing demand non-interest-bearing demand and maybe even interest-bearing demand accounts, what is the anticipation in terms of marketing spend? I think Jim mentioned that you guys are going to do five direct-mail campaigns or something. Maybe that was with respect to home equity. But how much money do you think you need to spend on marketing relative to last year in order to generate this new account growth on the checking side?

I'm going to ask Steve Witting who is our product manager for retail to answer that.

Fred, we've got a program in place where we are going to do about five direct-mail drops, as we mentioned, with hundreds of thousands of pieces per mail drop. We have committed a low seven-figure amount to that program and overlaying our refer-a-friend strategy with that in a moderate six-figure amount.

Which if you put those together, it is about 20% of our budget, marketing budget.

All right. Thank you.

Troy Ward, AG Edwards.

Can you give us -- Bob, can you give me a little bit of color on the insurance piece? I know if you look at -- there is a lot of seasonality in that line item, but if we assume Flynn is fully on board and the year-over-year comparisons start to look normalized, say third or fourth quarter this year, what kind of growth can you expect out of that line item once the year-over-year comparisons start to normalize?

Actually, I'm going to let Chris answer that question, because one of our strategies we have actually given Chris responsibility for insurance. So will see how well he does as the lead person in insurance.

No pressure.

Troy picked up some good information there, obviously. Flynn is on board this quarter, full quarter, compared to last year obviously when it wasn't in the first quarter. A very good organization, very strong organization. We are focused as much this year on improving our operating margins as we are at improving or continuing their revenue growth. I think and a lot of the quarter-over-quarter growth from the fourth quarter, as I mentioned, was related to that seasonality. First quarter is always a good quarter in the insurance business and there was a lot of contingency revenue there. But again, this year I am really focused on helping them improve their operating margins. And we will see where the revenue falls out but we were very happy with the first quarter performance.

Thanks.

(OPERATOR INSTRUCTIONS) David Konrad, KBW.

A quick question, you've kind of refreshed my memory with all the accounting changes because of the margin but the gain from derivatives line added just under $0.02 to the quarter. Is that just a mark to market to a swap that you had on the balance sheet, or was it an effect of transaction or refresh my memory there.

David, that is a great question, and both Jim and I will tag team on this a little bit. There was really three components to that number in the first quarter. One was the ineffectiveness, of course, that we will continue to have on our hedges. Two was the mark to market when we did actually re-establish those as hedges. And three, there was a small component, about $300,000 of what now would be directed towards the margin that we still had early in the first quarter, so really three components to that number. It is difficult to say what will be recurring. Certainly the margin impact we'd expect to be an ongoing benefit, but the gains and the ineffectiveness a little up in the air, frankly we had a little more ineffectiveness than we anticipated went in our direction roughly $700,000. So I would be reluctant to encourage you all to build that into your models. We feel like there was some onetime benefit there in the quarter.

Okay. Thank you.

Kenneth James, FTN Midwest Securities.

Kind of had a question that ties into both your outlook for non-interest-bearing deposit growth and also the margin. Just given that it seems like you're hinging a lot of your margin bet on low-cost or non-interest-bearing deposit growth and that seems to be some really strong headwinds just industrywide there, if that doesn't come through this year, does the bottom end of your margin guidance range start to look suspect, or are there other levers that you could look at there?

Yes, I would say there are other levers. Jim can fill in but I would not underestimate our ability to be much more disciplined in our pricing. We, if you look historically we have always been a high priced in most of our markets, but we've got dominant market share in most of our markets so we do have an ability to pull the lever on pricing, and we saw that -- the effect of that in the first quarter. We also have got more discipline around our public sector in our public funds and not putting on assets that don't give us the proper spread. So there is that ability. There is also the volume side and a number of other points. And then there is the work that Jim does on a daily basis within treasury within the investment portfolio. Jim, maybe you want to --

No, I think you hit all the points.

There is certainly no doubt, though, that core deposits growth is an important element of that strategy, too, Kenneth. All of us work in tandem.

Okay. Thank you.

Charles Ernst, Sandler O'Neill.

The net charge-offs have been a little bit volatile. Is there any guidance that you all can give to us? I mean MPAs have come down a lot. Where do you feel most comfortable now?

We do probably see the charge-offs continuing to bounce a little bit up-and-down from quarter to quarter, although probably in a narrower range than what you've seen in the past. We gave some guidance I think at the end of last year in terms of net charge-offs, 40, 50 basis points. And we still feel very comparable that were going to be somewhere in that range.

Okay, and then you all mentioned earlier in the call paydowns in December affecting the averages for the quarter. But I think the period and number was below the average for the quarter. Could you just add a little bit more color? I know you also said that the pipeline feels pretty good, but can you add some color behind your period and number at the end of first quarter?

We can, but don't forget the O'Fallon numbers are in that first quarter, too, the sale of O'Fallon.

I think its 27.9 million of (multiple speakers)

That would get you to -- what we had in the fourth quarter, really in our Evansville region we had a number of our large clients that were cash rich and paid down their lines. These are all clients that we are confident will be back in their lines sometime in the future. The positive is we didn't lose the relationships. The negative is they took the cash that were in their checking accounts and they paid down their line, so we get a bit of a double whammy. We know who all those paydowns were. We are very comfortable that they will be back in borrowing. And it's a matter being a little more predictable next year, but we can't always tell you what our clients are going to do with their cash.

Okay.

It ran the gamut from a large contractor to utilities to manufacturing. It really cut across a number of economic cycles and a number of companies.

Okay. Thank you.

There are no further questions at this time. Are there any closing remarks?

Other than to thank you for attending; if you have any further questions clearly Lynell, Chris, Jim, Daryl or I are open to answering those. Just give us a call, and thanks for your support.

This concludes Old National's call. Once again, a replay along with 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 1-800-642-1687, conference ID code 6598887. This replay will be available through May the 4th. If anyone has additional questions please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call. You may now disconnect.