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Operator
Welcome to the Old National Bancorp second quarter 2007 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 the corresponding presentation slides, will be archived for twelve months on the shareholder relations page at www.OldNational.com. A replay the call will also be available beginning at 1:00 PM Central today through August 13. To access to replay, dial 1-800-642-1687, conference ID code 606-8328.
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 of follow at that time. At this time, the call will be turned over to Lynell Walton, Vice President of Investor Relations, for opening remarks.
Lynell Walton - VP-IR
Thank you, [Dennis], and good morning to all of you joining us today and welcome to Old National Bancorp's second quarter earnings conference call. With me today are Old National Bancorp's President and Chief Executive Officer, Bob Jones, our Chief Financial Officer, Chris Wolking, and our Chief Credit Officer, Daryl Moore. Before we begin I would like to refer you to slide three and point out that the presentation today contains 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 the 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. Included in the appendix to this presentation are the reconciliation for such non-GAAP data. We feel that these adjusted metrics providing meaningful look at our second quarter performance as well as ongoing financial trends.
Slide five is our agenda for the call. First, Bob Jones will provide an overview of our improved second quarter earnings results and the positive impact we saw from our first quarter initiatives. Daryl Moore will then lead the discussion of our improving credit quality metrics and given the current environment, he will discuss the risk mitigants we have in place that should lead to continued improvement in our risk profile. Chris Wolking will then detail the positive impact of our first quarter initiatives on our net interest margin for the second quarter as well as providing financial analysis of other segments of our second quarter earnings, including non-interest income and expenses as well as our capital management. Bob will then conclude with our expectations for the remainder of 2007, then we will open the call for questions.
With that, I'll turn the call over to our President and CEO, Bob Jones.
Bob Jones - CEO, President
Thank you, Lynell. Let me add my welcome to everybody that is on the phone with us today. I will begin my presentation on slide number seven, where I am pleased to announce this morning we released earnings for the second quarter of $0.30 per share. This is up significantly from the first quarter of 2007, when we have reported earnings of $0.16 per share and remember, we had one time charges of approximately $0.08 per share.
While the earnings are equal to our 2006 reported second quarter -- just to refresh everybody's memory, in the second quarter of last year, we did get the benefit of approximately $3.2 million in incentive and other HR-related accrual reversals -- all in, I would say we're pleased with the quarter from a number of perspectives, which I will cover on the next slide. One of the most positive aspects of the quarter was our continued trend of positive credit metrics, which drove the fact that we did not need to provide for a provision this quarter. Daryl will give you the highlights of those improvements plus our view for the next few quarters as it pertains to credit, particularly in light of the heightened attention credit has taken on this quarter.
Let me turn to slide eight and give you will more detail on the positive highlights for Old National for the quarter. The theme for us would be the benefits we've gained for sticking to our game plan of executing against our three strategic imperatives over the last two-plus years and in addition, the proactive actions we took in the fourth quarter of 2006 and continuing into the first quarter of 2007 with the acknowledgment that 2007 was going to be a challenging year for both the industry and then particularly within the Midwest. We were aggressive in putting plans in place that would enable us to meet expectations, but as I think about it, actually, this proactive action goes back to earlier in 2006 when you might remember that on our second quarter call of that year, 2006, both Daryl and I talked about our cautious approach to commercial real estate and then particularly, development lending.
Again to highlight the quarter, we were very pleased with our continued improvement in credit and still believe we should benefit on a going-forward basis with our credit metrics. A caveat to all of this is the depth of the slowdown in the Midwest economy and how much deeper it will get, but at this stage, we do remain optimistic that you should continue to see our credit metrics improve for the balance of this year.
We were also very pleased with the expansion of our net interest margin in the second quarter. On a reported bases, our margin did improve 20 basis points, but within that number, it included a large -- approximately six basis points from recovery of a commercial real estate loan. Chris will give you a little more detail later on the call in the margin and at the end I will give you our thoughts on how the margin should perform for the balance of the year.
Chris will also discussing greater detail our efforts to control expenses in light of the difficult operating environment we are all participating in. It is safe to say that until we see a more robust economy, expense control will be critical towards hitting the guidance that we've given for the full year.
Let's turn slide nine and look at the growth of our commercial loan portfolio. Our traditional CI loans grew 3% in the second quarter as compared to the first quarter of 2007. In addition, we saw 5.1% growth as compared to the second quarter of 2006. Highlights for the quarter was really Evansville, our largest market, which saw $34 million in growth, or 7.2%. We also saw continued good growth in Western Kentucky, Carbondale, Illinois, and Louisville, Kentucky. Indianapolis did show an $11.6 million decline in our C&I portfolio. This is largely due to resolution of a number of criticized and classified credits within that market and you have a similar story in our Bloomington market. Overall, we are encouraged by the growth of our C&I portfolio, particularly in light of our conservatives credit standards.
Commercial real estate is really another story, whereas compared to the first quarter of 2007, we did see a decline of 5.1%, or just short of $75 million. Year-over-year, we are seeing a 6.1% decrease in this portfolio. I really attribute this to a number of factors. As I mention before, we put a slowdown in commercial real estate approximately one year ago and we have also been working on moving some of these credits out of the bank as we see weaknesses develop within individual credits. Again, Daryl will give you a little more detail on that during his presentation.
Turn to slide ten to discuss our consumer loan results. In consumer loans, we are beginning to see the benefits of the sales management and discipline that are recently appointed Chief Banking Officer, Barbara Murphy, is putting into place. Consumer loans for the quarter grew 1.1%, but it is important to note that this number does include our HELOC portfolio, which when you back back that out, our traditional consumer loans actually grew 3.3% as compared the first quarter of 2007. I've got to tell you, this represents the best growth we've seen in consumer loans in well over a year.
More importantly, we are seeing better sales activities out of our branches and feel very positive about the changes that Barbara has put in place. During the second-quarter, consumer loans were the highlighted product for many of our markets and again, those efforts paid off for us. Leading the way was our Louisville market and our Indianapolis markets as we continue to see the benefit from our investment in those key growth markets.
Home equity loans did decline quarter-over-quarter by $18 million. This continues a trend that we've seen over the last year-plus. This is due in part to lack of demand as well as what I would say are tightening of credit standards that Daryl will, again, address later. We remain cautious toward this product and it is our belief there may be some spill-over from subprime and the other housing challenges within the Midwest.
Turning to slide 11, let's take a look at demand deposits. Overall demand deposits were flat as compared to last quarter in part due to the significant seasonal buildup that always occurs in the first quarter for us, but also as opposed to our consumer loans side, slightly decreased sales activities, as there was not as much focus on this product in our sales grew. Again, our new branches in Louisville and Indianapolis led the way. Just to give you a figure, our total DDA sales for the second quarter for all of our branches were 11,569, which compares 12,140 for the first quarter of 2007. On a net DDA basis, we are still at positive 551 accounts year-to-date.
Let's turn to slide 12 and look at our performance of our new branches. On a whole, you can see that we've seen a reduction in core deposits at most of our new branches. This is in strong part due to the re-pricing of many of our introductory high-rate deposits and their migration out of the bank. Chris will speak a little more about that later. This was a planned activity, an initiative that we executed in the first quarter and it was in conjunction with this and many other activities that led to the expansion of our net interest margin. It also reflects a stronger execution on our part of our large market share in most of our other markets and our ability to drive deposit costs down. We believe that you should see this number stabilize.
Just as a side note, you'll remember that we closed seven branches and I'm pleased to note that five of those branches have exceeded their retention goals and the two that did not were the smallest of the branches we closed.
Now, let me turn the presentation over to Daryl Moore.
Daryl Moore - Chief Credit Officer
Thank you, Bob. I would like to begin my part of this quarter's presentation reviewing the trends in our classified, criticized, and non-accrual loans. As slide 14 shows, classified loans fell during the quarter, showing a decline of slightly more than $34 million in the period, and now stand at $131.8 million, eliminating what now appears to be a temporary bump in the fourth quarter 2006 and the increase in classified loans associate of the acquisition of St. Joseph Capital Bank at the end of the first quarter.
This quarter continues our general trend of decreasing classified loans of the last 10 quarters. Year-to-date, we've decrease classified loans $21 million, representing a 14% reduction in those outstandings since the end of 2006.
Slide 15 shows our criticized loan trends over the last 14 quarters. As we have discussed in prior calls, our trendline showed good progress resulting from our efforts to reduce criticized loans up until the third and fourth quarters of 2006, where we posted elevated levels. We're pleased to be able to report to you that in the second quarter we continued progress we made in the first quarter 2007 by reducing criticized loans by another $8 million in the period. Year-to-date we have reduced criticized loans by $30 million, representing a 25% reduction from 2006 year-end totals.
As the next slide shows, 90-plus delinquencies in our portfolio were up slightly in the quarter for one basis points to two basis point of total outstandings. Increase represented slightly less than $0.5 million in additional outstandings in this category in the prior quarter. As you can see, we have historically managed our 90-plus delinquencies season well and our results compared very favorably to the peer group against which we measure our performance.
As you can see on slide 17, non-accrual loans fell $2 million to $58.5 million at quarter's end. With respect to our large stunt accruals, we now have only three loans in non-accrual status of $2 million or greater. As you know, $12.3 million of the increase in non-accrual in the first quarter were associated with the purchase of St. Joe Capitol.
I think it is worthy to note that through the efforts of our associates in the South Bend/Elkhart banking operation, that total has now been reduced to under $11 million, representing a reduction of 10% in those totals in the first five months since the merger, all without sustaining any losses.
Turning to slide 18, net charge-offs for the quarter were $3.8 million, or an annualized 31 basis point of average loans. Within that total were $1.1 million in write-downs associated with $5.7 million in loans sold in the quarter. For the first six months of the year, net charge-offs stand at $8.4 million, or an annualized 35 basis points of average loans, compared to $9.5 million, or an annualized 39 basis point of average loans, for the same period last year.
With the reduction in classified, criticized, and non-accrual loans in the quarter coupled with our controls net losses, our allowance for loan and lease loss analysis indicated that no provision expense in quarter was warranted. Even without provision for losses in the quarter, we did move up just slightly in the range prescribed by our formula.
We have for two-plus years now been proactively managing and reducing risk in our lending portfolio and wanted to, using the next slide, refresh your memory on some of the steps we have taken over the past several years that we believe will help us manage risk and losses through the next credit cycle. First as we discussed last quarter, Old National does not have subprime lending operations, nor do we actively seek those types of loans. We, as with all banks, will put loans on our books that may have one or more of the traditional characteristics of a subprime loan, such as a lower credit score, but in these instances, these loans have come to us through our normal prime lending channels and are underwritten in a manner that attempts to mitigate the risk in the individual transaction.
Second, as Bob pointed out earlier, in last year's second quarter call, we discussed our conservative stance on commercial real estate, which continues today. We continue to believe that this stance, which has resulted in a decline in commercial real estate loan balances at our organization, remains prudent. In addition, we are currently undertaking an in-depth review of our residential acquisition and development portfolio as well as our portfolio of one to four family residential builders to ensure that we have properly identified risk in those segments.
The next two bullet points are related in that we recognized early on the increasing risk in the one to four family residential mortgage segment and sold in excess of $400 million of those loans from our portfolio in the second quarter of 2004. Since that time, the vast majority of our originations in this area have been sold into the secondary market.
The next bullet point is meant to remind you that we have very effectively used loan sales as a tactical tool in managing risk. As I pointed out earlier, we completed $5.7 million in loan sales in the current quarter. Finally, we have other -- finally, we have over the last several years developed and retained an experienced staff of special assets personnel who will be available to continue to work on troubled credits throughout the next cycle.
While we seem to have, at least at the present time, somewhat bucked the trend of increasing credit risk evidenced in a number of bank releases over the last several weeks, we are fully aware that we are not immune to continued weaknesses in residential mortgage area and a spillover of trouble into other segments. As I mentioned earlier, we are currently reviewing in more depth borrowers in our residential subdivision development portfolio. Additionally, we do have credit score refresh program we run quarterly over our home equity line of credit portfolio to identify potential weaknesses in that portfolio before they become delinquent payment or loss issues.
We know we have a responsibility to prove to the investment community that we now know how to manage credit risk effectively and will do a better job in the next economic downturn than we did in the past. We hope that our numbers this quarter prove to be just the beginning of that evidence that our relative performance should compare favorably to our peers throughout the next credit cycle.
With thtat, I will turn the call over to Chris Wolking.
Chris Wolking - CFO
Thank you, Daryl. In addition to the solid improvement in our credit metrics, we're pleased with the improvement in our net interest margin for the quarter. We will begin on slide 21. Our margin improved to 3.20% from 3% in the first quarter. This is our highest quarterly margin since the first quarter of 2003, when our net interest margin was 3.3%. Net interest income increased $2.6 million during the quarter. Without the lift from interest on a commercial real estate loan recovery, our margin would have been at 3.14%, a 14-basis-point improvement from first quarter 2007.
Slide 22, we have broken down the components of our margin improvement. We reduced our average investment portfolio $150.4 million from first quarter 2007, shrinking the portfolio as a percentage of total assets to 28.6% from 31.6% in the first quarter. Additionally, average loans increased $21.4 million from first quarter 2007. This helped lift the yield on earning assets from 6.51% to 6.61% for the quarter, not including the interest recovery. Recall that during the first quarter, we sold $148.2 million of low-yielding securities as part of our balance sheet restructuring. The improvement in our earning asset yield boosted margin by six basis points.
Interest-bearing deposits, without brokerage CD cost, declined from 3.56% in the first quarter to 3.52% in the second quarter. Through concerted effort by Barbara Murphy, our Senior Executive Vice President responsible for the Banking business line and the regional banking managers, we were able to reduce the costs of many of our most-expensive customer deposits.
For example, the average rate our money market accounts declined to 3.31% in the second quarter from 3.55% in the first quarter of 2007. The improvement in our interest-bearing deposit costs contributed to the two-basis-point increase in our margin related to interest-bearing liability costs.
Total borrowed funds declined on average $55.4 million in the second quarter from first quarter 2007. Again, recall that as part of our first quarter balance sheet restructuring, we terminated $163 million of wholesale funding. Average non-interest-bearing deposit balances increased $15 million from the average balances of the first quarter. Higher non-interest-bearing deposits and lower wholesale funding contributed to the six-basis-point improvement in the margin due to mix and volume. We expect to see continued modest improvement in our margin from 3.14% for the remainder of the year largely due to continued attention to our deposit costs.
Slide 23 shows the trend in our cost of interest-bearing deposits, including brokered CDs. The graph notes the reduction in our costs during the second quarter.
On slide 24, you will note that we are back within our targeted tangible common equity to tangible assets range of six point -- six to 7% and that we were able to buy back shares during the second quarter. On slide 25, you will note that at June 30, 2007, our tangible common ratio was 6.03%, up from 5.73% at March 31, 2007. While our tangible common equity increased slightly during the quarter, the improvement in the ratio was largely driven by our continued attention to eliminating assets from the balance sheet that do not have our desired risk/return characteristics.
Tangible assets declined $342.4 million at June 30 compared to March 31, 2007. The largest contributors to the decline in tangible assets were the decline in commercial real estate loans of $74.8 million and the $324.9 million decline in federal funds sold.
The smaller balance sheet did allow us to repurchase 220,000 shares of stock during the quarter. Future buybacks will be contingent upon our ability to generate high-quality assets. We remain committed to our six to 7% tangible common equity target.
We're also pleased with the continued improvement in our non-interest revenue. On slide 26, you'll note that fees, service charges, and other revenue was up $2.6 million over second quarter 2006 and $2.8 million over first quarter 2007. Mortgage, insurance, deposit service charges, and brokerage all showed improvement over second quarter 2006. First quarter of 2007 non-interest revenue included a one-time charge of $1.2 million for extinguishment of debt.
Non-interest expenses were $3.4 million lower than first quarter 2007 and $4.7 million higher than the second quarter of 2006. First quarter 2007 non-interest expenses included $2.0 million in one-time expenses related to the write-down of assets. The second quarter of 2006 included a $3.2 million savings from the reversal of costs related to incentives and performance-based restricted stock grants, as Bob noted earlier.
Of particular note is the fact that salary and benefit costs were up only $200,000 for the second quarter. The second quarter was our first full quarter with expenses from what is now known as our Michiana region, St. Joseph Capital. Our efficiency ratio is still higher than we desire, obviously, at 70.3% for the second quarter. We are keenly focused on reducing expenses where possible, but we're strongly committed to maintaining our risk management infrastructure and investing for growth.
Bob noted the performance for the quarter of our new branches in Louisville, Indianapolis, and Lafayette. We believe that these branches, while initially expensive, are important investments in the future performance of the Company.
Finally on slide 28, you'll see an update on the planned sale and leaseback of 85 of our branch offices. We anticipate closing the transactions during the month of August and expect that the transactions will be $0.02 to $0.025 accretive to earnings per share in 2007 and $0.03 to $0.035 per share accretive in 2008. We will provide full details of the transaction during our third quarter conference call.
I will now turn the call back over to Bob for final comments.
Bob Jones - CEO, President
Thanks, Chris. Let me kind of summarize what you've heard on the call and give you a little sense of our outlook for the balance of 2007. From a balance sheet perspective, you should continue to see growth rates comparable to what we did in the second quarter as you compare it to the first quarter of 2007.
We do believe that our defensive posture towards credit should allow us to see continuing positive trends in our credit portfolio, but as I said before and Darrell emphasized, the economy is the driver of any changes in that position. We do believe we are well-structured and well-positioned given the credit environment today and as a result of two-plus years of efforts in improving our own credit portfolio.
We do believe that our margins should continue to expand modestly for the balance of the year from the actions that we previously took and that we also continue to take, such as the re-pricing of our deposits and our strong focus on DDA. I would suggest for all of you on modeling purposes that you use the starting point of the 3.14 margin that is not reflective of the recovery. As I said early on, given the environment we are operating in, expense control will continue to be very critical for us.
Let's conclude with slide 31 before I take your questions. Given all the above, we continue to remain comfortable with the guidance that we issued at the end of last year and we reaffirmed in the end of the first quarter. That is a full-year range of earnings of $1.11 to $1.17. We appreciate your time and we will be happy to answer any and all of your questions.
Operator
Erika Penala, Merrill Lynch.
Erika Penala - Analyst
I had a question in terms of what we should look out for with corporate growth and consumer growth going forward, because both C&I and consumer growth beat my expectations, but the tone throughout the call was very much cautious in terms of future credit quality. You mentioned the consumer risk several times. Ex-HELOC and also talking about corporate trends, where -- is 2Q sustainable from this point on?
Chris Wolking - CFO
We think it is sustainable on the C&I side. On the consumer side, we're probably more in that one to 3% range. Barbara has put in a lot of programs and our sales management has gone from zero to five up to 90 in a fairly quick period of time. So 3% may be at the high end of the range, but we're probably more in that 1.5 to 3% for the consumer loans side. Again, both real estate portfolios, we do not see growth coming out of either one of those.
Erika Penala - Analyst
Also, with regards to the consumer, could you give us a little bit more detail in terms of if you're seeing more financial distress at the margin and that is what is causing you to get more worried? Where should we think about loss rates for the HELOC portfolio going forward?
Bob Jones - CEO, President
I will let Darrell answer the second part of that. I would not say we're seeing anything in particular with our consumer. We just see an overall Midwest -- you know, you've heard it frequently throughout the quarter. The Midwest is a little slower, particularly in Indianapolis, on the housing side, but we're not see any particular in our consumer that creates any significant angst for us. Again, we came at this two-plus years ago in trying to put in the proper controls and I think we get the benefit of that. Daryl, do you want to cover the second part the question?
Daryl Moore - Chief Credit Officer
Yes, Erika, this is Daryl. With regard to HELOC loss rates, I think that today we're at about 55, 60 basis points. I do not know that going forward we should see a significant increase in that. It all depends upon how much spill-over, as we have talked about earlier, we get from the mortgage markets, so we're not, as I said, expecting a significant increase, but we will just have to watch to see what happens.
Bob Jones - CEO, President
A key point there is what Daryl mentioned. We do go back in and re-score these home equity loans and we are pretty aggressive if we see some weakening on a scoring basis of asking to take it elsewhere. There still continues to be alternatives.
Erika Penala - Analyst
Is most of portfolio second lien?
Bob Jones - CEO, President
Yes.
Erika Penala - Analyst
Okay, thank you for taking my questions.
Erika Penala - Analyst
Jeff Davis, FTN Midwest Securities.
Jeff Davis - Analyst
Daryl, could you walk us through -- I think I caught 3 million credit -- or three credits over $2 million. Could you walk us through for the -- just what your top two or three larger credits are and whether they are new, whether they have been sitting there. You expected them to move out, they did not move out, they did move out, etc.
Daryl Moore - Chief Credit Officer
Jeff, I would be happy to. As I said, we do have the three credits over $2 million. All three of those credits have been with us for a fair amount of time. They are, for the most part, credits that were put on the books a fair amount of time ago. I think that with regard to maybe all three of them, we could see resolution in the third quarter or the fourth quarter.
They are all credits that really have -- we have put a lot of work into. We are working through them. We think we're on the last probably half of them, moving them out of the banks. We did not expect that they would necessarily be moved out this quarter. So they're just kind of tracking along as we thought they would.
Jeff Davis - Analyst
Okay, and can you walk us through -- I know you don't want to say names, but can you walk us through the dollar amount of one, two, three?
Daryl Moore - Chief Credit Officer
Yes, the largest credit is little -- about $9.1 million. Second credit is $5.7 million. Third-largest is about $5.2 million.
Jeff Davis - Analyst
Okay. And Daryl, what are you thinking in terms of when your model says you need to start taking provision expense? Again, I would assume if you get these three out with -- and would you expect to take much haircut in moving these three out?
Daryl Moore - Chief Credit Officer
That is always the question that you never know until you get to the final day. Today, we have a fair amount of impairment associated with these. We would -- obviously, we are all hopeful that we would recover these with less loss than our impairment, but you can just never tell until final day.
With regard to the allowance going forward, we have a lot of things working in our favor. Our loss rates, as our model calculates them, because we have lower losses, probably will continue to trend downward. I think as we reduce our classified and criticized non-accruals, we're going to get a lift there. So I think that going forward today as we sit, not knowing what the economy is going to do, I think we all should feel positive about trends over the balance of the year.
Bob Jones - CEO, President
Jeff, let me just pick up on a point on the three large non-accrual's. One of the areas we always focus on is the best benefit to the shareholder and we try to take as little haircut as possible on these. I think that is in part why these three have stayed at that level, because we do feel reasonably optimistic we can get some resolution without having to take a significant hit. So the alternative, we could have sold these and taken a larger haircut, but we've tried to do what is right for the shareholder over the long-term.
Jeff Davis - Analyst
Okay, very good. I may come back. Thank you.
Operator
(OPERATOR INSTRUCTIONS) Gregory DiMarzio, Century Capital Management.
Gregory DiMarzio - Analyst
Good quarter. A couple of questions here. One, the efficiency ratio, when do you think we start to see a decline there, I guess? As I look at it, every point you can take out is about a 3.25% increase in pretax operating income. The next question I would have would be your guidance for the year. Does that assume no provision for the rest of the year, some provision? You had to probably plug in an assumption there.
Bob Jones - CEO, President
I would say the guidance assumes some provision and so to answer your first question, our biggest challenge on the efficiency ratio, which by the way, drives me nuts, is really the revenue side. We are beginning to see some revenue benefit and we have just made a hire in our finance group, a new person to do forecasting and budgeting. Saying all that, you should see a continual trend downward on our efficiency ratio. It is really a very important part for us.
It is a combination, as you well though, of the revenue and expenses and one of the things we're doing in terms of looking forward in our budgeting and forecasting is to put in an operating leverage comparison. So for every x dollars of growth you get in revenue, you can have x number of dollars in expenses. We believe that is a better way to manage through the process, so a long-winded answer to say you should see benefit -- or see reduction over the next few quarters.
And we take a hard look. Our original target was 55 to 60. To be honest with you, I'm not so sure we weren't a little too aggressive with that and probably aren't a little more in that 60 to 63 range.
Gregory DiMarzio - Analyst
The next question I would ask and, Bob, we have talked about it, is in terms of how you guys are perceived using your peer group. You guys have the second highest dividend of anybody in that peer group, and yet when the market sells off, kind of because of liquidity you guys are selling off -- I have you guys in the last three months trading off the second worst among that peer group, yet you're buying back stock, but you can't buy yourself private. You can, but I do not think that is your intention. But what is the discussion like in terms of shareholder value? I know First Indiana, they got valued at over 20% of deposits and just last week, UBH did as well. I mean, how frustrated and what can we do to try to drive value?
Bob Jones - CEO, President
How frustrated, it is very frustrating. I would tell you that we believe and our Board believes that the creation of long-term shareholder value is our principal job. Saying that, we also believe the plans we have put in place, particularly in light of the operating environment we are in, should that give benefit to us over the next 12 to 24 months, but we are deeply committed to doing what is right for shareholders. As you said, it has been a very frustrating period of time over the last 90 days, but we continue to drive forward.
Gregory DiMarzio - Analyst
Thanks. Thanks for the candid answers and keep to it. Hopefully people are watching.
Bob Jones - CEO, President
Great. If you want a get any more people to watch, Greg, feel free to have them watch.
Operator
Stephen Geyen, Stifel Nicolaus.
Stephen Geyen - Analyst
Just a couple -- one follow-up question regarding loan growth. A lot of the loan growth came from the Evansville area. I was just wondering was there a change in strategy there or can you point to anything specific?
Bob Jones - CEO, President
I would not say it is change in strategy. About a year ago, we had a change in management and our commercial leadership became much more focused. We have gotten much more -- we actually have two co-leaders, both female, who have done a very good job at getting the team a little more focused.
I also think you're seeing the benefit of Evansville of being one of our first markets to work through their credit challenges. We have -- Daryl puts it model portfolio targets for each market. Evansville was amongst the first to hit there, so they've gone from a defensive posture to much more of an offensive posture. You see the benefits of that and we've got more and more of our regions hitting that model portfolio. Once you do that, it is a hell of a lot easier to go out and get loans than ask people to leave the bank. I think we're seeing the benefit that here in Evansville.
We have had some really nice wins as well and I think a real tribute to the team that we've got down there. We did have a recent change in leadership down there, but I'm sure he would like to take credit for the large growth, but Jim Sandgren is our new market president. He has only been on the job 60 days, so he can't take credit. Our prior regional president, John Stanley, became the athletic director at University of Evansville.
Stephen Geyen - Analyst
Okay, I am just wondering about the provision and the impact that economic variables had on the provision. Were there any changes? I know that there's different parts that go into the provision. Was there any change to the economic variables from Q1 to Q?
Daryl Moore - Chief Credit Officer
We did not change methodology. There were no significant economic changes to the model in terms of where we expect things to go forward. It was all really driven by loss rates and reduction in outstandings and especially in the classified and criticized area.
Bob Jones - CEO, President
Understand that we have been fairly conservative with our economic viewpoint witin the model as it has been.
Stephen Geyen - Analyst
Okay, and another question for Daryl. He had mentioned the residential subdivision developers and I'm just wondering the number of credits and the amount of loans that are out there.
Daryl Moore - Chief Credit Officer
We have roughly in outstandings today, in our acquisition development about $70 million in total outstandings and about another $50 million associated with spec builders -- not spec builders, but residential builders. So $120 million outstanding today in that portfolio, so it is not a big piece.
When you take and measure -- the regulators came out of the 100 -- 300% rule, with 100% of capital being kind of the threshold against which they're going to hold banks to higher levels of scrutiny and loan administration, and that deals with simply kind of your construction. We're at 25% of capital when we measure that. So our exposure there is not significant, but every one of those loans needs to be looked at very closely and we are in the process of doing that.
Stephen Geyen - Analyst
Thank you, and just a couple of quick more -- two quick questions yet. The insurance and commission income had decreased one million. There is a seasonal decrease and if you just look at the line item, it was done about $400,000 from Q1. Is growth picking up there or was there something else involved?
Bob Jones - CEO, President
Yes, remember the first quarter we get a lot of our contingency revenue in the insurance group, so our first quarter is usually our best quarter for the year. That is why you see the decrease there.
Stephen Geyen - Analyst
Right, but the contingency income was about $1.2 million and I think was $0.2 million, or $200,000, in Q2.
Chris Wolking - CFO
Property and casualty was up.
Stephen Geyen - Analyst
Was that it? Okay.
Chris Wolking - CFO
Sorry, yes.
Stephen Geyen - Analyst
Fee income had a $1.2 million extinguishment of debt charge that was -- how was that charge recorded? Was it in fee income, or was it in other income?
Chris Wolking - CFO
That was in other income (multiple speakers) in that first quarter. That was related to the restructuring and the FHLB advances and sundry items that we terminated in the first quarter.
Stephen Geyen - Analyst
Okay, thank you.
Operator
A follow-up from Jeff Davis, FTN Midwest Securities.
Bob Jones - CEO, President
I knew you couldn't get by with just one.
Jeff Davis - Analyst
Actually, I usually do not ask any on calls. Chris, to confirm, is the guidance of $1.11 to $1.17, that excludes the $0.07 or $0.08 of items that you incurred in the first quarter, correct?
Chris Wolking - CFO
No, it actually includes that number, so you take that first quarter number at $0.16 to get to that total year guidance, right.
Jeff Davis - Analyst
Very good, thank you.
Operator
Charlie Ernst, Sandler O'Neill Asset Management.
Charlie Ernst - Analyst
Can you just say, again, what your expectations are for balance sheet growth over the second half of the year?
Bob Jones - CEO, President
Yes, we'll see comparable growth that we saw second quarter over first in C&I and consumer loans in the range of one to 3%. That would exclude the HELOC portfolio. The C&I does not include the commercial real estate. And I will be honest with you, I have a hard time predicting our commercial real estate portfolio at this stage.
Charlie Ernst - Analyst
So given the declines in the bond portfolio, do you think that overall earning asset growth is flattish or how do you think that plays out?
Bob Jones - CEO, President
I would say flattish.
Charlie Ernst - Analyst
Okay, and then with regards to other fees, was there anything in that line this quarter? It seems a little bit heavy.
Bob Jones - CEO, President
No, nothing. This was a very clean quarter, nothing unusual.
Charlie Ernst - Analyst
Okay, great. Thanks a lot.
Bob Jones - CEO, President
I think part of it -- just, again, to not pick on Barbara, to emphasize Barbara, she has done a much better job of getting late fees collected and service charges, reversals approved, etc. I think, again, that's all reflective of the great discipline she has put in place in our bank and our brokerage unit, as well, has had a very strong quarter.
Operator
At this time, there are no further questions.
Bob Jones - CEO, President
Okay, obviously we are always available. Lynell can serve as a conduit for any questions you do have, 812-464-1366, and again, we appreciate your support and see you next quarter.
Operator
This concludes Old National's call. Once again, a replay along with the presentation slides will be available for twelve months on the shareholder relations page of Old National's web site at www.OldNational.com. A replay the call will also be available by dialing 1-800-642-1687, conference ID code 606-8328. This replay will be available through August 13. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call.