Old National Bancorp (ONB) 2009 Q1 法說會逐字稿

Welcome to the Old National Bancorp first-quarter 2009 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 12 months on the Investor Relations page at www.oldnational.com.

A replay of the call will also be available beginning at 1 p.m.

Central today through May 11.

To access the replay dial 1-800-642-1687, conference ID code 94832949.

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, Director of Investor Relations.

Ms.

Walton?

Thank you, Richard, and good morning to all of you.

We appreciate you joining us for Old National Bancorp's first-quarter 2009 earnings conference call.

With me today are Old National Bancorp management members Bob Jones, Chris Wolking, Barbara Murphy, Daryl Moore, and Joan Kissel.

Before we begin I would like to refer you to slide three and point out that the presentation today does 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 Old National'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.

Included in the presentation are the reconciliations for such non-GAAP data.

We feel that these adjusted metrics are helpful in understanding Old National's results of operations and core performance trends going forward.

If you turn to slide five, you will see our agenda for the call.

First, Bob will review our first-quarter earnings and discuss several other significant events of the quarter, all aimed at solidifying Old National's strong capital levels while positioning us for future growth.

Daryl will then provide commentary on our credit quality trends and his outlook on these trends going forward.

Next Chris will highlight several areas of key importance -- our net interest margin, our capital and liquidity positions, and the areas of risk within our investment portfolio.

We will then be happy to open the line and take your questions.

I also wanted to take the opportunity to note several changes we have made to our financial trends document you should have received via e-mail this morning or if not they can be found on our website.

In response to input from many of you we have broke out classified loans and other classified assets on the credit quality page.

In addition, we have added a final page to the trends which shows our all important tangible equity ratios.

Just as a reminder, our appendix does include regional balance sheet data as well as the major items impacting our non-interest income and expenses for the quarter that may be helpful to you in analyzing our results.

With that I will turn the call over to our CEO, Bob Jones.

Good morning and let me join Lynell in welcoming you to Old National's first-quarter 2009 earnings call.

I am going to begin my remarks on page seven recapping what has been a very busy quarter for Old National.

We completed many very important activities this quarter and believe that each of these activities continue to position Old National to withstand the challenging economic environment that we are facing today.

But more importantly, to position us to be one of the banks that emerges in a position of strength and able to take advantage of the opportunities that will exist when this economy turns positive.

As we have said all along, capital is king in both good times and bad.

It is our intent to continue to position Old National as a well-capitalized institution that can weather the current distress, but also take advantage of the market disruption that exists now and will continue to exist for a period of time.

We believe a strong, well-capitalized, liquid bank will be the best position to serve our existing clients and to be able to meet the needs of other clients whose financial partners are not in that same position.

We also believe that there will be consolidation opportunities for well-positioned banks and we clearly want to be able to grow both organically and by acquisition.

We took two steps related to our capital this quarter.

First, we did repay the US Treasury the $100 million we had received via the TARP program.

As we noted at the time of repayment, we did execute our own stress test with the assistance of a third party.

Using that test along with other data we supplied, both of our regulators along with Treasury validated that we had sufficient capital as well as additional levers to generate capital that will allow us to accomplish our goal of remaining well-capitalized and well-positioned after repaying the TARP funds.

To that point, we did announce a reduction in our common dividend today to $0.07 per share.

The net effect is that we will save approximately $10 million to $11 million in capital in the second quarter.

This action, while particularly difficult for our retail shareholders, is consistent with both our view of a continually deteriorating economy as well as consistent with our three strategic imperatives.

We will also continue to review our balance sheet and will appropriately delever it as we see the opportunity to do so.

We will continue to review the dividend on a quarterly basis and make the best decision for the long-term benefit for our shareholders.

This quarter also saw the very successful completion of the acquisition of the Indiana franchise of Charter One.

This improved our core deposit balances by $428 million, thus improving the liquidity of our balance sheet.

Total loans added after our due diligence and further reviews were only $5.9 million and were evenly split between commercial and consumer.

While we are very pleased with the liquidity and the locations that we gained in the deal, the real benefit is the quality of the associates.

We are very pleased with the level of engagement and commitment that we have seen early on and the integration was completed with few issues.

Following our remarks, Barbara Murphy will be happy to answer any specific questions that you have regarding either the integration or post-integration.

As you can see on slide eight, this morning we did announce net income of $9.4 million or $0.08 per share.

On a non-GAAP basis our earnings were $0.14 per share.

We have provided you with a reconciliation of our net income showing the impact of the dividends and the redemption related to our TARP preferred stock.

Overall, I would characterize the quarter as solid; not spectacular, but solid.

Turning to slide nine, I will review the key points of the quarter.

While credit continues to be top of mind, we do believe we are positioned to withstand the challenges of the current continued economic downturn.

But as we have said all along, we are not immune from these challenges.

Therefore, we were pleased to increase our allowance for loan loss coverage of total loans to 1.55%.

While we did see an increase in our non-performing loans for the quarter, we also at the same time saw some of our leading indicators, like delinquency, improve slightly.

While we are pleased with the positive results we saw, we are still of the opinion that it will be at least until 2010 until we see meaningful and sustainable improvement in the credit environment.

The real positive for Old National for the quarter was deposit growth.

Without the Charter One balances we saw demand deposit growth of $61 million for the quarter and we continue to see positive inflows for the quarter on deposits.

As Chris warned last quarter, we did experience an impairment charge for OTTI of $2.4 million.

We do feel that there is a possibility of further impairment through the year and Chris will speak to that later in the presentation.

We also reported net security gains of $3.2 million for the quarter, which included the previously mentioned OTTI charges.

Also, one-time costs for Charter One that we incurred in the first quarter were $3 million.

And there is the potential for other non-recurring costs related to the Charter One acquisition later in 2009, primarily related to potential branch closures and other related items.

Again, Chris will give you more detail later.

Finally, on slide 10, we have provided you with our non-GAAP reconciliation of EPS for the quarter.

As you can see in a non-GAAP basis, earnings were $0.14 per share as compared to our GAAP earnings of $0.08 per share.

The difference between GAAP and non-GAAP being the cost of the TARP dividend, which was $1.2 million after tax, as well as the cost of the redemption of the preferred stock related to TARP, which was $2.6 million after tax.

The combination of which is $0.06 per share and a reduction of net income available for common shareholders.

I might note that while we have repaid the TARP funds, we have filed our application for the repayment of the warrant.

We are still working with Treasury to finalize the purchase price and once that price is finalized we will let you know what the cost is.

Now it's my pleasure to turn the presentation over to Daryl.

Thank you, Bob.

I would like to begin my part of this quarter's presentation in reviewing the charge-offs for the quarter as shown on slide 12.

Charge-offs in the quarter were $12.6 million or 107 basis points of average loans compared to $13.4 million or 114 basis points of average loans in the fourth quarter of 2008.

In analyzing net charge-offs in the quarter we saw slight decreases in loss rates in the commercial real estate and consumer portfolios offset to a minor degree by increased losses in the one- to four-family residential mortgage portfolio.

In the commercial industrial portfolio losses were $4.4 million with a substantial portion of that loss coming in one agricultural-related credit.

On the commercial real estate side the majority of the losses came from residential development project write-downs, write-downs associated with retail commercial real estate projects, or losses associated with our one- to four-family investment real estate portfolio.

Consumer losses were $3.6 million in the just-ended quarter, slightly lower than the $3.9 million in losses in the fourth quarter of 2008.

That having been said, however, if you look back to the first quarter of 2008 consumer portfolio losses were $1.6 million.

On a first quarter to first quarter comparison this represents an increase of 120%, which certainly is reflective of how economic conditions have deteriorated during that period.

Finally, in the one- to four-family residential mortgage portfolio losses remained relatively controlled with the first-quarter annualized loss rate in the 31 basis point area.

Provision for loan losses for the quarter totaled $17.3 million.

If you recall, we gave full-year provision guidance last quarter of $40 million to $60 million so we are outside of that range if you annualize this quarter's provision.

We had charge-offs of $12.6 million for the same period.

The allowance for loan losses increased $4.7 million or 7% per quarter.

As slide 13 reflects, non-accrual loans rose in the quarter from 1.34% to 1.67% of total loans.

This represents $13.4 million in elevated non-accrual balances and came as a result of increases in the commercial and industrial and commercial real estate lending areas.

The one- to four-family and consumer loan portfolio showed little change from fourth-quarter 2008 levels.

Given our current outlook on the economic environment, we believe that we could see continuing increases in this category throughout the balance of 2009 and potentially into 2010.

Slide 14 gives a little more color on the exposure we have in our largest non-accrual relationships.

The number of non-accrual loans with exposure over $2 million increased by 3.25.

Total exposure, total outstandings, and associated impairment all were higher in the first quarter as compared to fourth-quarter levels.

As you can see, at the end of the first quarter we had 10 relationships in non-accrual with exposure of $2 million or greater.

The exposure in these relationships totaled $37 million and the impairment associated with those relationships was $10.5 million.

In looking at the composition of these largest non-accrual exposures you can see from the slide that the majority of these large loans came from the commercial real estate portfolio, although the percentage of C&I loans making up this category is increasing and now comprises roughly 35% of the largest non-accrual exposures, up from less than 30% only two quarters earlier.

In terms of geographic distributions of these largest non-accrual loans, $16.5 million, or more than 45% of the non-accrual outstandings of $2 million or greater, were originated out of our Indianapolis area.

As slide 15 shows, our 90-plus delinquent loans fell by $0.5 million in the quarter and now stand at 5 basis points of total loans.

Increases in the commercial and industrial and commercial real estate areas were more than offset by declines in the consumer book.

We continue to believe that these levels compare favorably to most peer groups against which you might measure us.

As slide 16 shows, other real estate owned and repossessed property as a percent of total loans increased significantly in the quarter rising 9 basis points to a level of 15 basis points at quarter end.

As we communicated last quarter, as commercial real estate default rates increase we anticipate that OREO levels will also increase.

We began to see this movement this last quarter as virtually all the increase in OREO in the period came from the commercial real estate portfolio.

Moving to slide 17, classified loans, which include non-accrual loans, rose during the quarter to 4.3% of total period ended loans.

This increase of 53 basis points from the fourth quarter represents a significant $19.7 million increase in this category with classified loans now standing at $199.8 million.

It is important to note that the investment securities with a book value of $96.5 million, which are categorized as classified assets, are not included in these totals.

With regard to our largest classified loans not in non-accrual, there was a fair amount of movement in the quarter with four of the 10 largest loans in this category having been added in the period.

Of these four large downgrades all are from the commercial and industrial portfolio.

Slide 18 shows our criticized loan trends.

Criticized loans decreased to 1.87% of total loans in the first quarter, down from the 2.61% level at the end of the fourth quarter.

In terms of dollars, this represents a $38.3 million decrease.

We think it's important that we not read too much into this quarterly drop at this point in time.

Given the current economic troubles, we believe we very well could see this reversal -- or reversal of this one quarter decline in coming quarters.

Because we believe that changes in the level of criticized loans can be a leading indicator of future credit risk trends, we continue to monitor this category very closely.

Another leading credit indicator is our 30-plus day delinquency rate.

As slide 19 shows, since the beginning of 2007 our overall delinquencies have remained fairly constant, running in the 60 to 70 basis point range until last quarter when the rate increased to 84 basis points.

We were able to bring delinquencies down 11 basis points in the current quarter, posting a 73 basis point 30-plus delinquency rate at March 31.

With regard to specific segment delinquencies, slide 20 shows our 30-day and greater delinquencies across the different portfolios.

As you can see, all the categories posted at least some improvement in the quarter.

That having been said, we do have a word of caution with regard to delinquencies in the consumer type portfolios.

Because we typically see improvement in delinquencies in the first quarter of each year as a result of tax refunds, comparing first-quarter numbers to last quarter's delinquency rates may be a bit deceiving.

In this regard, as is shown on the slide, a first quarter 2008 to first quarter 2009 delinquency comparison clearly reflects rising 30-plus day delinquencies in these consumer type portfolios.

As you can see from the chart at the bottom of the slide, our commercial real estate and residential real estate exposures as a percent of total outstandings have both fallen over the last four quarters, while the percent of consumer type loans in the portfolio has grown over the last several quarters.

The home equity portfolio is obviously a portfolio that we are all watching very closely as loss rates continue to rise.

As you can see on slide 21, we have broken out our home equity line of credit portfolio for you into loan to value bands.

It remains that roughly one-third of our current commitments are in lines with original loan-to-value ratios of 80% or greater.

With regard to actual outstandings, approximately 40% of the outstandings at quarter's end were on lines where the original loan-to-value ratio equaled or exceeded 80%, which is relatively consistent with the results from last quarter.

Credit bureau scores remain generally unchanged.

Moving to slide 22, large dollar exposures in our home equity line are broken out for your review.

As you can see, commitments of $0.5 million or greater represented only 4% of total commitments, and total commitments of $100,000 or greater, including those of $0.5 million or more, collectively represent only 27% of total commitments.

So the individual exposure levels in this portfolio are fairly granular.

Slide 23 shows Old National's commercial real estate exposure as a percent of bank risk-based capital compared to community, mid-size, and large bank group averages as provided to us by the OCC.

As has been the case over some quarters our exposure continues to be lower than that of both the mid-sized and community bank sets.

As you can see, though, our exposure as a percent of capital increased in the most recently reported quarter.

This increase came as a result of a slight increase in the commercial real estate book combined with the decrease in our risk-based capital position.

The final slide in the credit section shows Old National's construction and land development loans as a percent of period ended loans.

As you can see, our exposure in this very high-risk category continues to be significantly lower than that of our peer group.

I will wrap up my section of the presentation with this statement that simply reaffirms Bob's prior comments that at this time we expect the current significant economic difficulties to persist through 2009 and into 2010.

With those remarks, I will turn the call over to Chris.

Thank you, Daryl.

I will begin on slide 26.

Our net interest margin declined 33 basis points to 3.63% from 3.96% in the fourth quarter and is lower than the range of 3.85% to 3.95% that we anticipated for the quarter.

The yield on our loan portfolio declined 76 basis points during the quarter.

The yield on our commercial loan and lease portfolio, which represents approximately 39% of our total loan portfolio, declined 92 basis points during the quarter.

Average earning assets increased $308.5 million, all of which is attributable to the increase in investment portfolio securities.

Average core deposits increased $135.4 million with average CDs up $93.9 million in the quarter.

Even with higher earning assets during the quarter, the lower-than-anticipated net interest margin caused net interest income to decline $2.9 million from the fourth quarter of 2008.

Moving to slide 27, you will see that our balance sheet and net interest income are still asset sensitive.

Lower asset yields caused the margin to decline 56 basis points, while lower interest-bearing liability costs added only 23 basis points to the margin for the quarter.

Our C&I portfolio shifted more than anticipated to short-term repricing, primarily LIBOR-based repricing, early in the first quarter and this drove much of the 76 basis point decline in our loan portfolio yield.

We also experienced stronger than planned core deposit growth throughout the quarter and, as noted above, much of the increase came in the form of certificates of deposit.

In the first quarter the cost of our CDs was 3.29%, significantly more than the average cost of short-term borrowed funding at 24 basis points.

Because of the change in mix to longer maturity, higher-cost funding during the quarter, our funding costs did not decline as quickly as our earning asset yield and caused the decline in the net interest margin.

You will see on slide 28 that by March our net interest margin had increased to 3.72% from 3.69% in January.

During March we added longer maturity investment securities, terminated or swapped to floating rate certain brokerage certificates of deposit and Federal Home Loan Bank advances, and swapped to fixed rate a portion of our LIBOR-based loan portfolio.

Additionally, we instituted measures to ensure our yields on new loans and renewals properly reflect the current credit environment.

These actions served to move our asset sensitivity closer to our planned level and increase our asset yields and should help us maintain a higher margin during this second quarter.

For the remainder of the year I expect our net interest margin to be in the range of 3.65% to 3.80%, lower than the range of 3.85% to 3.95% we provided you at the beginning of the year.

Even with the higher than planned growth in our deposit balances you will see on slide 29 that we maintained our deposit pricing discipline during the quarter.

For the fourth quarter of 2008 the latest available peer group data shows that we maintained our strong deposit pricing relative to our peers.

Our deposit pricing on average was 41 basis points lower than our peers during the fourth quarter.

On slide 30 I have graphed both our tangible common equity as a percentage of tangible assets and tangible equity as a percentage of tangible assets ratios.

We have restated our tangible common equity ratio to include other comprehensive income.

Our tangible common ratio declined to 5.23% at March 31, 2009, from 5.81% at the end of the year.

Additionally, tangible equity as a percentage of tangible assets declined to 5.23% from 7.08% at the end of the year.

As you know, we repurchased the preferred stock issued to the US Treasury on March 31 and this accounted for a $97.4 million reduction in tangible equity.

Since we no longer have the preferred stock outstanding, our tangible and intangible common ratios were equal at March 31.

Our tangible equity ratios were impacted in two ways by the Charter One acquisition.

Goodwill and intangibles increased $19.8 million due to the acquisition and earning assets, which increased by $455 million during the quarter, were driven by the $428 million increase in deposits.

We recorded $8.6 million in goodwill and $11.2 million in deposit intangibles for the purchase.

Deposit intangibles are being amortized over seven years on an accelerated basis.

As you saw today, we reduced the second-quarter dividend to be paid on June 15 to $0.07 per share from our first-quarter dividend of $0.23 per share.

Based on our current shares outstanding of 66.4 million shares, reducing the dividend will conserve $10.6 million in capital this quarter.

The Board will continue to set our dividend quarterly and base its decision on its evaluation of the risk on our balance sheet, the economic outlook, and the outlook for balance sheet growth.

While we seldom discuss liquidity on our earnings conference calls, given our recent decision to repurchase the TARP preferred shares I thought it would be appropriate this quarter to highlight liquidity considerations at Old National.

Slide 31 has several points related to liquidity.

At the Bank we continue to experience strong organic deposit growth.

Also, the acquisition of the Charter One Indiana franchise contributed $428 million in deposits in the quarter.

The Charter One branches contributed about 38% of the increase in average core deposit balances for the quarter.

Based on $135.4 million in total growth in average core deposits for the first quarter, organic growth accounted for approximately $84 million in average core deposit growth.

Additionally, we have $846 million in term auction facility and discount window borrowing capacity at the Federal Reserve and our large investment portfolio generates $50 million to $75 million in cash flow per month in the current interest rate environment.

At the Holding Company we closed in April on a new $30 million line of credit facility with SunTrust and Wells Fargo.

We currently have zero borrowing on the line and have approximately $15 million cash on hand.

And, of course, reducing the dividend to $0.07 per share will conserve over $10 million in cash this quarter.

Slide 32 lists our current debt ratings from Moody's, S&P, Fitch, and DBRS.

We maintained investment-grade ratings from all agencies at both the Bank and Holding Company and were recently removed from negative watch by Fitch.

Slides 33 and 34 provide you with an update of our investment portfolio.

This quarter we charged $2.4 million before taxes in other-than-temporary impairment to earnings.

We early adopted FASB staff positions related to the recognition of other-than-temporary impairment.

These FSPs require us to isolate the credit and non-credit components of impairment for securities that we do not intend to sell.

Te $2.4 million charge for the quarter is the realized credit loss of the total impairment.

The non-credit component of impairment continues to be included in other comprehensive income.

The $2.4 million realized credit loss is attributable to three of our pooled trust preferred securities.

Slide 33 provides more detail on the securities that are included in our classified assets portfolio.

Bonds must be included in classified assets if one ratings agency considers the bonds non-investment grade.

The total portfolio of investments treated as classified has a book value of $96.5 million.

We define book value as our purchase price plus any accretion of discount or amortization of premium.

The book value is the amount carried in classified assets.

The three pooled trust preferred securities that accounted for the credit charge in the quarter are included in this portfolio.

Specifically, the portfolio of investments in the classified portfolio includes corporate bonds with a book value of $4.8 million and a market value of $2.3 million, pooled trust preferred securities with a book value of $45.2 million and a market value of $10.2 million, and non-agency, mortgage-backed securities with a book value of $46.5 million and a market value of $35.1 million.

Slide 34 provides more information related to the entire investment portfolio including the change in market value since December 31, 2008.

Recall that 95% of our investment portfolio is treated as available for sale and unrealized losses are included in our tangible equity ratios.

My last slide, slide 35, provides additional earnings information related to our Charter One acquisition.

We closed and converted these branches late in the quarter on March 20, so it will be second quarter before we can provide you an accurate assessment of the ongoing earnings impact.

Primarily because we don't yet have a full quarter of operating expenses on these branches.

Our estimate for the full-year impact of the transaction in 2009 is in the range of negative $8 million to $10 million.

We adopted a seven-year life for the core deposit intangibles and will amortize this intangible on an accelerated basis.

In November we had anticipated 10-year straight-line amortization.

These could result in additional costs of $1 million to $1.5 million in 2009 compared to our original assessment last November.

However, these costs will be offset somewhat by higher than anticipated net interest income from the balance sheet impact.

At this time we will take your questions.

Richard, I will turn it back to you to moderate the Q&A.

(Operator Instructions) Erika Penala, Banc of America Securities.

So my first question is on Charter One.

I know you just told us that you are going to have to wait until the second-quarter call to give us better guidance, but could you give us sort of an estimate, ex the branch closures, on what you think the quarterly run rate for both expenses and additional branch fees could be?

It's really too early, Erika, to do it because this will be the first full month.

One of the challenges we had in that it's just a branch purchase rather than a bank purchase is we are not sure how much double counting we got in the feeds we got on an ongoing basis.

So it's really too early.

We can get it to you once we get a full month or two.

But right now I would be -- it's a bit of a guess and I would hate to do that for you.

Okay.

Going back to how you broke down the resi portfolio including home equity, Daryl, could you give us a sense on what the lien positions are both for the $270 million home equity and for the resi real estate portfolio?

The resi real estate portfolio is all first lien, so that is the easy one.

The HELOC portfolio, we really don't have great numbers on that.

We don't have any purchase money, home equity lines so we don't have any of that type of product.

I would have to go back, Erika, and look at the prior numbers that we pulled on those first mortgages.

But I can't just off the top of my head, tell you what that is.

Could you give us what the average LTV is for that $488 million first lien resi?

I can't.

I don't have those --

But we will get that back for you.

Okay.

I know you have told us this before but I just wanted to clarify, the difference between your residential and real estate balances in the call report and what you provide for us are C&I or small business loans that is backed by a home as collateral?

Right.

Joan, do you want to add any color to that?

Not really.

It just depends on the collateral [on the call].

Okay.

One more question and I will step back.

In terms of deposit rates, ex brokered CDs, how much more room do you think you could ease that going forward or are we pretty much at a floor?

We are pretty much at the bottom, Erika.

Okay.

We are paying 1 basis point on a money market account right now.

Okay.

I will step back.

Thank you.

Scott Siefers, Sandler O'Neill.

Bob, the first question is for you.

The tangible common ratio, so you are within the 5% to 6% range but you are moving toward, I guess, the lower end.

Just as you look at things from a top-level standpoint, how, going forward, do you think you will balance the need for just, one, a higher capital cushion in times like this against the intent or desire to remain flexible and take advantage of any opportunities that come along?

Yes, that is a great question.

I think that is the point we also made in my remarks about looking at other opportunities to delever the balance sheet when appropriate.

Clearly, Scott, we want to be in a position to build that ratio, but at the same time retain some flexibility.

I think that is why the Board made the decision to reduce the dividend and I think that is why we will continue to look at assets as a potential delever and continue to look for opportunities to improve the capital position.

Chris, I don't know if there is any --?

Scott, I would just add when you look at everything we had going on this quarter, particularly the acquisition, I think we would expect that as the acquisition comes online, that all other things being as planned, that we might be at the low water mark of our current capital number.

So I think with the reduced dividend and, as Bob pointed out, we continue to look at opportunities.

We have to rationalize capital appropriately, look at our strongest earning assets, and deploy capital accordingly.

Okay.

Then, Chris, I guess this second question is for you.

The jump in COLI revenues, up $2 million or so from the prior quarter; one, what caused the jump and, two, will it stay at this level or if not what is a more appropriate level on a run rate basis?

I don't have a significant increase there, Scott.

We see a pretty flat number from fourth quarter.

I am sorry, I might have looked year-over-year.

Yes, it's actually down, Scott.

You will remember on the last call we talked about we restructured that portfolio.

So in quarter-over-quarter we are flat, but on an annual basis it's down slightly.

Okay, sorry.

I think I must have misread that.

We will chalk that up to one error for you.

That is no good.

I guess, Chris, one final question for you.

You gave the margin guidance, and I appreciated the monthly guidance as well.

Can you talk a bit more about just sort of the dynamics at play just as you look at deploying the funds from the Charter One acquisition?

What are sort of your options?

I guess you could pay down borrowings.

Then I guess in the absence of a better macroeconomic environment it might be tough to deploy those all straight into loans.

How are you thinking about those dynamics?

I will add a little bit here and then I will ask Barbara to add a couple of points too.

I think, first of all, I would like to say we are still asset sensitive.

We just got a little more asset sensitive going into the quarter than we had anticipated.

I think that is important to note.

We are still positioned for rising rates ultimately.

You are right.

In terms of deploying those deposits into earning assets, right now those were deployed into investment portfolio assets and accounted for the large growth.

With that large portfolio, Scott, we are still seeing $50 million to $75 million in cash flow from that portfolio.

So it gives us the opportunity to on a more gradual basis redeploy the loans as we get opportunity or, as Bob noted, to just reduce the leverage on the balance sheet and prepare for some additional opportunities.

But all of those tend to have a little bit of a negative impact on our margins simply because earning asset yields will be a little bit lower than we had anticipated.

But, importantly, and this is where I would like Barbara to chime in to talk about loan yields and some of the important things that we have done this quarter.

Scott, this is Barbara.

We early in the first quarter recognized that we needed to do as little bit more work on the pricing of our loans.

And we have taken a very aggressive posture in making sure that any loan now has a review of its pricing.

If it is not within our expectations for spread thresholds, we have to have management signoff on those thresholds.

So we would expect over the next several months as the pipeline moves through to see spreads actually improving on the pricing of those loans.

In addition, we have been a little bit more consistent in the application of fees with those loans.

We were a little bit more liberal before and we have been a little bit more standardized in the last several months.

Just one other point, we have also seen some more rationality coming to our competition and some pricing as well, which has helped those as well.

Okay, perfect.

Thank you very much.

Joe Stieven, Stieven Capital.

My question was sort of just addressed regarding the loan pricing and margin.

I guess my question is have you guys gone to -- if you were pricing loans today, a loan today up for renewal compared to what it was a year ago, on average how much better or higher are you being able to price right now just because of the environment?

We are probably pushing it somewhere in the neighborhood of 50 basis points.

Okay.

On all your renewals right now, are you able to get floors in most cases?

Yes, we are.

We have worked that into the standard for looking at renewals.

Okay, good.

All my other questions were addressed.

Thank you.

Jeff Davis, Howe Barnes.

Erika may have touched on this on her Q&A, so I apologize if I am covering something that Daryl touched on.

But, Daryl, I was wondering if you could comment on the -- I guess, at least on our side of the fence, don't formally know what the numbers the government is using in terms of expected losses for our various loan categories.

I guess maybe 4% for base on C&I, 8% in the adverse case, and then second mortgage 8%, adverse 16%.

Daryl, you have had a good perspective the last couple of years on how this credit cycle was going to play out.

Could I get you just to comment on maybe your perspective on at least the loss numbers, the cumulative loss numbers that are being bantered about in terms of stress testing?

And maybe if you could weave that back into your own stress testing of the ONB portfolio.

Sure.

When we looked at what came out by the government on stress testing, let me just kind of share with you a little bit about how we looked at this.

First of all, we took a three-year scope instead of the two-year.

So we looked at 2009, 2010, and 2011, and that really is because maybe we have just a little longer view of how these losses might play out.

Then looked at a long-term cumulative loss and placed a fair amount of emphasis on that.

Looked at our earnings, looked at our provision, and came back to see whether we had adequate capital to support the losses that we estimated in our portfolio.

I would tell you without sharing numbers with you generally we were more conservative than what we are seeing in what the government has done.

I think that when you read what came out, our loss rates may be just a little bit higher; our unemployment assumptions may be just a little deeper.

But I would also say that we are not as sophisticated as many of those models are.

Chris would tell you and I would probably agree with him that we probably know the credit a little better because we are not as large an organization, so there was that bit of a trade-off.

But, generally, I would tell you that we are looking at things just a little more conservative than what we have kind of read the large 19 bank stress test we are looking at.

Daryl, in terms of the numbers being thrown out for second mortgage, which I guess that there can be a lot of play in what that really means in terms of what type of credit was originated, piggyback, HELOC, was it brokered or not, etc.

Does the 16% under the adverse strike you as high or low?

Same thing on the C&I, and for that matter, if we used 12% for commercial real estate under adverse do these -- I guess what I am hearing you say then maybe they strike you as a tad light if ONB is a little bit more conservative?

Jeff, I would have to go back and reconcile your numbers on that 16%, because I don't know that I can readily go back to -- are you talking about a long-term cumulative loss (multiple speakers)?

Yes, and I guess it would be the context of how the regulators are doing it, maybe a 2.5 year beginning -- at least if that is my understanding -- second half of 2008 and then 2009, 2010.

If we need to we will go back and kind of reconcile.

I hate to make comments based upon what they are doing without really knowing the basis on how they are doing those calculations.

Okay, that is fine.

I will follow up with you off-line.

Then last question, Chris, risk-weighted assets for the quarter or the period end since you bought the -- well, either?

Yes, let me --

And if you want I can find -- if you don't have it, I will follow-up with Lynell.

I don't have that right at my fingertips here.

That is fine.

Well, actually, I do.

First-quarter risk-adjusted assets were $5.6 billion.

Okay, great.

Thank you.

It's in the back of the trends, Jeff.

Yes, we have added a non-GAAP reconciliation in that trends number to kind of help go through that.

Call if you need anything else; be happy to provide it to you.

Thank you.

Erika Penala.

Actually I wanted to follow up with regards to the duration of your loan book.

What is it?

I don't have that.

I am speaking from the net interest income, the modeling perspective.

I don't have that but again we would be happy to provide that information to you as part of our liability asset sensitivity, net interest income sensitivity, Erika.

We will e-mail that out to everybody.

And in terms of what your C&I loans are priced off of, what is the division between LIBOR and prime?

Right now we are going forward with prime.

I can't tell you what it has been in the past.

We can get that for you, Erika, but we are going forward with prime.

I think it is fair to say, Erika, that our floating rate loans are higher than they were and changed quite a bit at the end of the fourth quarter and the beginning of the first quarter.

Most of those loans did move to LIBOR pricing so that contributed to our margin, the reduction in our margin for the first quarter.

We will get both of those to you.

Anything else?

One more, one more.

Of the commercial real estate loans that are classified as non-accrual, how much of it is cash flowing versus C&D?

Let me look at that real quick.

So the CRE non-accrual?

Yes.

I will walk down in the top 20 exposures in non-accrual, our 20 largest, $47 million in total exposure.

I am looking at the C&D in that and looking at -- I am just adding these up in my head, so you know me just be careful about the numbers I give you -- maybe $10 million of that is C&D.

The balance would be traditional kind of cash flow loans.

Thanks again.

Dan Bandi, Integrity Asset Management.

Thanks for taking the question.

Just say a few questions for you.

One, I was curious on the capital plan that you guys filed for the TARP repayment was the dividend reduction assumed in that capital plan?

No.

Okay.

And then the new C&I delinquencies that you are seeing, is there any significant industry concentrations or anything interesting there pattern-wise?

I don't think in the delinquencies there is, but as you look at kind of the classified and the non-accruals I would say nothing real new, although they would be industries that would not surprise you.

And just let me give you just a flavor for them.

If you take a look at, again, our largest 20 at the end of the quarter in our classified loan portfolio they would include auto dealers.

They would include, again, things associated with construction, especially residential construction.

Those are the two categories that really kind of -- as you look at the C&I stuff flowing through that is the first of what we are seeing.

Now we do think that there is a possibility going forward that it's going to spread, obviously, to other industries.

But this kind of first lump coming through probably would not be a surprise to anybody that you are seeing it in those types of industries.

Okay.

Then maybe I misunderstood what Chris was saying and talking about the asset sensitivity, but you were talking about it in the quarter.

I think you said something like the C&I portfolio shifted more towards short-term LIBOR-based repricing than you had thought.

And maybe I am misunderstanding, but did your terms in the loan allow borrowers to at some point shift how their loans are priced in terms of what index or how that works?

Really, Dan, it was more related to renewals of loans.

They took the index change from a prime-based to a LIBOR-based.

I would say that was really more in the beginning of the quarter and that it affected us -- as you know, LIBOR has been kind of squirrelly here for awhile.

We saw a lot of clients moving to that LIBOR.

That is why Barber has put the change in some pricing and we are focusing much more on prime.

So it's really more of the renewable base.

Do you have a feel for what kind of dollar value of loans did reprice during the quarter?

We do, Dan, but I don't have it right at my fingertips.

I would be happy to provide that information to you.

Okay.

Thanks, guys.

I really appreciate it.

Stephen Geyen, Stifel Nicolaus.

Good morning.

This is really a question for Daryl.

I apologize if I missed you going into this, but the criticized loans -- I know it jumps around a bit quarter to quarter -- but any particular reason that drove the decline this quarter?

A couple of things.

One, we actually had some upgrades based upon 2008 results.

A little bit of what we are seeing, Stephen, is the fact that some of the businesses in 2008 saw things coming, reduced expense levels.

And so, ultimately, at the end of 2008 the financials were a little better than what we had anticipated.

Now whether they can continue to generate top-line revenue through 2009 and 2010 to still generate good cash flow at those expense levels is yet to be seen.

But we did have some upgrades.

Some of it though, Stephen, was just migration into your classified category.

So it was a combination of both of those things.

Okay.

And regarding the Charter One branch acquisitions, just wondering do you have all of the people or have you fully trained the people to look at investment and insurance products?

When can we look back -- look back a year later and say you had the people in place for a year and this is the traction you gained over the last year?

Early on to be able to do that we have I would say probably 75% to 80% of the people on the investment side.

We are still looking for some key markets.

Barbara, any color you want to add?

It's just a little early.

The training has been done.

We are a little light staffed, but as you well know in the investment world it's not hard to find people.

It's just finding the right people at this stage.

I think if you look back maybe three quarters, hopefully, or if you look forward three quarters hopefully we will have that traction in place.

Okay, thank you.

(Operator Instructions) Charles Ernst, Sandler O'Neill Asset Management.

I do like the campaign that you have got going on, analysts' accountability.

Quick question for you on the -- I noticed the capital target that you have on your slide is 5% to 6%.

Is that -- and I think that that is a new target and previously you were at 6% to 7% -- is that a function of the deal?

No, it's actually a function of including the OCI.

As you remember, Charlie, we did not include OCI in our tangible common before.

We got a lot of feedback from people like yourself saying that we ought to include OCI.

So this new target really reflects the inclusion of OCI and it gets us -- it's common.

If you took OCI, we would be back in that 6% to 7%, so yes the OCI it's 5% to 6%.

Okay.

So we should be thinking about it in the same way that we have in the past?

Yes, yes.

But as Chris said, there was some reduction in that number based on the goodwill and all we received with Charter, but look to 5% to 6%.

Great, thank you.

And there are no further questions.

Great.

Operator, thank you so much.

As always, any follow-up questions let Lynell know and we are happy to respond.

Appreciate your support.

Ladies and gentlemen, this concludes Old National's call.

Once again a replay along with the presentation slides will be available for 12 months on the Investor 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 94832949.

This replay will be available through May 11.

If anyone has additional questions, please contact Lynell Walton at 812-464-1366.

Thank you for your participation in today's conference call.

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