Old National Bancorp (ONB) 2009 Q2 法說會逐字稿

Welcome to the Old National Bancorp second 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 1.00 PM Central Time today through August 10.

To access the replay, dial 1-800-642-1687, conference ID code 19229312.

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, for opening remarks.

Ms.

Walton?

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

We appreciate you joining for Old National Bancorp's second 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'd 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 these adjusted metrics to be helpful in understanding Old National's results of operations and core performance trends.

If you turn to Slide five, you'll see our agenda for the call today.

First, I'll recap Old National's strategic imperatives and their key role in our position today as a stable financial institution.

Bob will then review our second quarter earnings, providing key highlights of the quarter, followed by Barbara Murphy, who will describe the current economy and our footprint and its impact on our local banking environment.

Barbara will also provide an update on our Charter One Indiana branch acquisition, which was completed in March of this year.

Daryl will then provide commentary on our ever important credit quality trends and our continued cautious outlook on these trends going forward.

Next, Chris will illustrate Old National's focus on strong capital management, items impacting our net interest margin, and the areas of risk within our investment portfolio.

Bob will provide you his closing remarks, after which time we'll be happy to open the line and take your questions.

Please turn to Slide six, where you'll see the three strategic imperatives by which Old National has been guided by for the past five years -- strengthen the risk profile, enhance management discipline, and achieve consistent quality earnings.

It is indeed fitting to illustrate our imperatives as a triangle as each imperative builds upon the one beneath it and ultimately contributes to the success of the one above.

Critical to the achievement of the strategy is the base or the foundation upon which a successful path is laid.

At Old National, it is to strengthen our risk profile.

Given the current operating environment, it remains increasingly important for us to focus on that base -- the risk factors impacting our Company, be that interest rate risk, credit risk, or liquidity risk, and ensure that we take the appropriate amount of risk in each of these areas.

Given this relevance, during the call today we hope to provide you with sufficient commentary regarding our strong capital position and stable credit metrics.

You'll hear Chris speak to interest rate risk and capital management as we look to deleverage the balance sheet by reducing non-core assets and wholesale funding while improving upon our already strong capital ratios, and Daryl will illustrate how our conservative consistent underwriting standards have positioned us with manageable credit metrics during this challenging period.

The second imperative, enhanced management discipline, is something we continually strive to achieve at Old National.

Key to this imperative is accountability, the trait that is at the core of our value system.

The top of the triangle is to achieve consistent quality earnings, as we strive to provide excellent service to our clients and a proper return to our shareholders.

As important as these imperatives are individually, it is their consistent application that has positioned Old National as a stable financial institution.

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

Thank you, Lynell.

Lynell did a great job of reinforcing our strategic imperatives and our focus on credit and capital.

I'd just emphasize one key point -- these strategic imperatives have guided us for five years and we've been consistently focused on achieving them.

Today they seem even more important as we guide Old National through what continues to be a very difficult economic environment, but these imperatives were in place five years ago when the economy was strong and we as an industry were in banking heaven.

The point being, today while it's good to be focused on these critical elements of banking, the key to Old National's future performance will be the consistency to which we continue to focus on these imperatives.

I'll start my remarks on Slide eight by reviewing Old National Bank's second quarter performance.

For the quarter we are $9.6 million or $0.15 per share.

This compared with $0.30 per share in the second quarter of 2008 and $0.08 in the first quarter of 2009.

The theme of the quarter was continued economic turbulence, which put pressure on our existing credit portfolio and in the second quarter began to seriously affect loan demand across all sectors of our borrowing base.

As Lynell mentioned, our focus is on capital and credit.

Given that focus, we were pleased to report we increased our tangible common equity to 5.51% at quarter end.

In addition, Tier I capital was 10.2%.

Chris will devote a large portion of this presentation, focusing on both current and future strategies around our capital structure.

In addition, Daryl will review our credit metrics.

While we were pleased to see our non-performing assets virtually flat with last quarter as well as a decrease in classified loans, this performance is not reflective of an improvement in the overall economic environment, but more a reflection of our conservative portfolio and the structural improvements we've made over the last five years.

We cannot guarantee that this trend will continue, but we do feel comfortable we have a good understanding of the inherent risk in the portfolio.

We were pleased to see the appropriate increase in our allowance to total loans, but to be fair, a portion of that increase was due to the movement of our lease portfolio to held for sale, a strategy we will cover later in discussing our capital.

But even without this reclassification, the allowance coverage would have improved.

The quarter did see continued growth in our non-interest bearing deposits, partially as a result of the positive integration of our acquired Charter One branches and their strong sales efforts.

Barbara Murphy will provide you with more details in her presentation.

Finally, our net interest margin declined as a result of plan changes we've made to our investment portfolio and as a result of the good growth in our core deposits.

Chris will add additional color later in the presentation.

Now turning to Slide nine, let me cover a few more highlights for the quarter.

We did have net security gains for the quarter of $2.4 million, mostly as a result of the changes to our investment portfolio which are intended to reduce the leverage in the balance sheet.

Included in net security gains is $7.9 million of other than temporary impairment we experienced for the quarter.

The quarter also included additional merger related costs related to the successful conversion of Charter One of $1.4 million.

This amount is consistent with the guidance we gave you when we announced the transaction and we still expect the full year conversion cost to be in that $8 million to $10 million range.

In addition, we accrued a special assessment for FDIC insurance of $4 million and it is our belief that there will be additional assessments later in the year, as we do see FDIC activity picking up in the next quarters.

As part of our capital strategy, we did move a large portion of our lease portfolio to held for sale.

Our intent is to sell this portfolio during the third quarter.

Because we were actively marketing this asset at the end of June, accounting guidelines required us to move it to held for sale asset at fair value, resulting in a reduction in the loan loss allowance associated with this portfolio.

Chris and Daryl will give you further detail later.

Finally, at the beginning of the quarter, we did successfully purchase our warrant related to TARP.

My only comment is this -- it was great to be first and we are pleased to have that behind us.

We view this as a reflection of the strong quality of our Company.

Now let me turn the presentation over to our Chief Banking Officer, Barbara Murphy, to discuss the economy and our markets and how they are affecting our relationship efforts.

Barbara will also highlight our Charter One acquisition.

Barbara?

Thank you, Bob.

With the rise in unemployment nationally and regionally, we thought it might be helpful to have a view of local unemployment contrasted against our strength in deposits.

While our three state area of Indiana, Illinois, and Kentucky all have unemployment levels over 10% and over the national rate of 9.5%, our unemployment rates are somewhat better than our Midwest neighbors in Ohio and in Michigan.

If you look at the map of Indiana provided on Slide 11, you'll see that we've divided the state into six major areas.

Each area on the map has two primary measures.

The one on the left is the proportion of ONB deposits in Indiana and the one on the right indicates the area unemployment rate.

From the southwestern part of the state where we have 51.5% of our statewide deposits, the unemployment rate is at 8.8% and is below the national average.

If you move north on the map to the center of the state, we have the central part of Indiana, which includes Terre Haute in the west and Richmond to the east with Indianapolis at the center.

In this central part of Indiana, we have 42.5% of our ONB deposits, with the area unemployment rate at 9.7%, just a bit above the national average.

Please note that we have no distribution network nor deposits in the most northwestern part of the state or in the far southeastern parts of the state.

In far central northern Indiana, where we have our South Bend, Mishawaka, and Elkhart offices, we have 4.7% of our statewide deposits and the highest unemployment statewide.

And in the northeastern part of the state, where we have a few offices in the Fort Wayne area, we see low deposits and higher unemployment rates.

Our strong presence in the southwest and central parts of the state with lower unemployment levels has insulated us somewhat in the last quarter of last year and in the first quarter of this year.

In the second quarter, our resilience is beginning to erode a bit as we experience some lower volumes in some parts of our business.

If you turn to Slide 12, you can see that year-over-year, we've maintained our C&I balances with some modest increases of $34.2 million, and our growth in leases has been very strong at $50 million or 15.2%.

By design, we've reduced our commercial real estate balances by $94 million or 7.7% as we've previously communicated.

Within the second quarter, we've begun to experience a slowdown of production in our lending products and our commercial pipelines are down almost 15% in some of our regions from the first quarter levels.

On Slide 13, we see that our indirect business line has also had healthy growth over the same time period last year.

This business remained strong until the middle of March, which kept our balances up $35 million or 6.9%.

But in April, May, and June, we are taking in fewer applications and the production balances have been decreasing.

Our direct installment applications for loans we take in the branch network for cars, closed end home equity loans, and home equity lines of credit have been hit hardest since the beginning of the year.

With consumers deleveraging, we've seen 35% fewer applications and our balances are down $50 million over the same time period last year.

Mortgage lending on the other hand is quite strong.

While refinance activity is the major source of activity, we have $200 million in production year-to-date and our purchase volume is increasing.

It was only 18% of the volume in the first quarter and is now 25% on average throughout all the regions.

In the southern region, it was 30% in the second quarter, which is another indication of our resilience in this part of the state.

On Slides 14 and 15, I'd like to begin a brief update on our acquisition of the previous Charter One branches.

You may remember we purchased 65 banking offices within grocery stores, Wal-Mart, and Starbucks locations.

Since our conversion on March 20 of this year, we've decided not to renew 11 of the leases which were to expire between April and year-end.

Four of these offices were closed in June and July and we'll be closing another seven offices by the end of October.

Our lease expiration schedule has 11 more offices whose leases will expire in 2010.

Three of those leases we will renew.

The other eight are not yet due and will be reviewed later as the lease date arrives.

This quarter was the first full quarter for our new associates to offer and sell our ONB products and services.

We are very pleased with the results overall.

If we look at the total number of checking accounts open throughout the entire network, these new offices opened 28% of all personal accounts and 26% of all business accounts.

The average number of accounts per office during the quarter was quite strong in Fort Wayne with 106 accounts, Lafayette with 86, and Indianapolis with 69.

If I reviewed DDA account openings in the Indianapolis market a year ago at this same time with our existing 10 ONB offices, we opened in total 1,338 personal and business accounts.

During this past second quarter, the previous Charter One offices and the 10 existing ONB offices opened a combined total of 4,835 personal and business accounts, an increase of 3,497 accounts over the same time period last year, which is an increase of 261% and is a fine lift for the Indianapolis market.

Finally on Slide 15, our attrition has exceeded our original expectations overall and we've lost $70.6 million.

A couple of factors should be considered when reviewing these numbers.

The product which experienced the highest run-off in balances was the money-market account with $57.6 million.

This account type prior to the sale on the conversion was paying a rate of 3% and had never been adjusted for the changing market conditions that occurred in the fourth quarter.

This 3% rate was significantly higher than the very few basis points we at ONB were paying and are now paying on this product.

In addition, Charter One had run a CD promotion in the fourth quarter and in the first quarter where they raised some high price short-term CDs and brought in an additional $25 million CD balances we were not expecting and that are now running off.

Some of these money-market account funds and CD monies have transferred into our savings product, but some have left the organization as well.

We've seen a nice lift in our DDA balances in the short timeframe we've had these branches open as ONB facilities.

We've not changed our original expectation through this transaction and do expect it will have an $8 million to $10 million negative impact on pre-tax earnings this year.

I'll now turn the program over to Daryl Moore.

Thank you, Barbara.

I'd like to begin my part of this quarter's presentation reviewing the charge-offs for the quarter shown on Slide 17.

Net charge-offs in the quarter were $13.6 million or 118 basis points of average loans compared to $12.6 million or 107 basis points of average loans in the first quarter of 2009.

When comparing net charge-offs in the quarter to last quarter, we saw decreases in loss rates in the commercial real estate portfolio, the one to four family residential portfolio, and the consumer loan portfolio.

More than offsetting these improvements, however, was a significant increase in losses in the C&I portfolio.

Losses in the commercial Real Estate portfolio were down roughly $650,000 from last quarter's writedowns.

The largest loss in the current quarter related to a retail commercial real estate borrower.

Consumer loan losses were $2.7 million in the just ended quarter, down from the $3.6 million in losses in the first quarter.

That having been said, however, if you look back at the losses in the consumer portfolio in the first half of 2008 of $3.8 million and compare them to the $6.3 million in losses in the first half of 2009, you can see that they're up 65% on a year-over-year basis.

This increase is certainly reflective how economic conditions have deteriorated during that period.

In the one to four family residential mortgage portfolio, losses remain relatively well controlled with the second quarter annualized loss rate in the 15 basis point area.

In the C&I portfolio, losses were $7.1 million compared to losses of $4.4 million in the portfolio last quarter.

We had four relationships with writedowns in excess of $0.5 million in this portfolio in the quarter that helped fuel this increase.

The provision for loan losses for the quarter totaled $12 million against charge-offs of $13.6 million for the same period.

As you know, we moved $370 million in lease outstandings to the held for sale category in the quarter, which had the effect of releasing $1.6 million in allowance for loan loss need.

In absence for this portfolio move, the provision for the quarter would have been roughly equal to charge-offs.

If you recall, at the beginning of the year we gave full provision guidance of $40 million to $60 million, so we're at the very high end of that range if you analyze the first half provision for the loan losses of $29.3 million.

With net charge-offs of $26.3 million for the first half of the year, the allowance for loan losses has grown by $3 million since the end of 2008.

This growth, combined with lower loan outstandings, has resulted in allowance to total loan coverage of 1.69% at June 30, up from 1.41% at December 31, 2008.

Keep in mind that this coverage number is calculated on loan balances which do not include the lease outstandings moved to held for sale status in the quarter.

As Slide 18 reflects, non-accrual loans rose marginally in the quarter, up 4 basis points from 1.67% to 1.71% of total loans.

This increase represents roughly $300,000 in elevated non-accrual balances.

Decreases in the C&I and commercial real estate areas were slightly more offset by increases in the one to four family mortgage and consumer loan areas.

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 19 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 fell by one in the quarter.

Total exposure as well as total outstandings of this subset of loans were both lower during the period, but not inconsistent with the deteriorating collateral values we are observing, impairment associated with these loans rose in the quarter.

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

Exposure in these relationships totaled $33 million and the impairment associated with those relationships was $11.7 million.

In looking at the composition of these largest non-accrual exposures, you can see from the slide a majority of these large loans continue to come from the commercial real estate portfolio.

In terms of geographic distribution of these largest non-accrual loans, $14.9 million or roughly 45% of the non-accrual outstandings of $2 million or greater were originated out of our Indianapolis area.

As Slide 20 shows our 90 plus delinquent loans remained relatively stable in the quarter and continue to stand at 5 basis points of total loans.

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

As Slide 21 shows, other real estate owned and repossessed property as a percent of total loans decreased in the quarter, falling 5 basis points to a level of 10 basis points at quarter's end.

While we are pleased with the decrease in the OREO in the quarter, if default rates continue to decline, we would anticipate OREO and repossessed asset levels will also increase.

Moving to slide 22, classified loans which include non accrual loans, fell in the quarter to 4.21% of total period ending loans.

This decline of 9 basis points from the first quarter represents a $8.5 million decrease in this category, with classified loans now standing at $191.3 million.

It is important to note that non-investment grade securities with the book value of $145.3 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 three of the 10 largest loans in this category having been added in the period.

Of these three large downgrades, all are from the C&I portfolio.

Slide 23 shows our criticized loan trends.

Criticized loans increased to 2.22% of total loans in the second quarter up from the 1.87% level at the end of the first quarter.

In terms of dollars, this represents a $14.4 million increase.

In this category, too, there was a fair amount of movement in the quarter, with seven of the 20 largest loans in this category having been added in the period.

Of these seven large downgrades, four are from the commercial real estate portfolio and three are from the C&I portfolio.

Because we believe the 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, especially in light of this quarter's increase.

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

As slide 24 shows, since the beginning of 2007, our overall delinquencies have remained fairly constant, running in the 60 to 70 basis point range.

In two of the last three quarters, however, delinquencies have popped up into the 80 basis point range and stood at 82 basis points at the end of the second quarter.

With regard to specific segment delinquencies, slide 25 shows our 30 day and greater delinquencies across the different portfolios.

As you can see, all of the categories posted some deterioration in the quarter, with fairly sizable jumps in the one to four family mortgage portfolio as well as the consumer loan portfolio.

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

As you can see from the chart at the bottom of the slide, there was little change in our loan type mix during the quarter.

The home equity line portfolio was obviously a portfolio we are all watching closely as loss rates are up compared to the same period last year.

As you can see on slide 26, we've 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 line with the original loan to value ratios of 80% or greater.

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

Credit bureau scores remain generally unchanged.

Moving to slide 27, large dollar exposures in our home equity line book are broken out for your review.

As you can see, commitments of $0.5 million or greater represent only 4% of our total commitments, and total commitments of $100,000 or greater including those of $0.5 million or more collectively represent only 28% of total commitments.

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

Slide 28 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 size and community bank sets, although that gap has narrowed over the last several quarters.

The timing of that gap has come not as a result of significantly higher commercial real estate outstandings, but mainly from lower risk-based capital levels.

The final slide in the credit section shows Old National's construction and land development loans as a percent of period end 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'll wrap up my section of the presentation with a statement that we continue to expect that the current significant economic difficulties will persist through 2009 and into 2010.

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

Thank you, Daryl.

I'll begin on slide 31.

As Bob described in his opening comments, we focused on reducing our leverage during the second quarter by selling non-core assets, reducing wholesale funding, and building tangible common equity.

Total investments declined $224.8 million from March 31, 2009 through calls, sales, and maturities and we moved approximately $370 million of lease assets out of our loan portfolio into assets held for sale.

We intend to sell these assets, which are primarily tax exempt leases, before the end of the third quarter.

We continue to reduce our wholesale funding during the quarter.

Short-term borrowings, primarily federal funds purchased, declined $284.7 million and brokerage certificates of deposits declined $39.5 million by June 30 from March 31.

Finally, as we announced in April, we reduced our second quarter common stock dividend paid in June to $0.07 per share from the $0.23 per share dividend paid in March.

The reduction in the dividend conserved approximately $10.6 million in tangible common equity in the quarter.

On slides 32 and 33, you can see the trends in our tangible equity ratios over the last two years.

On slide 32, note that both tangible equity to tangible assets and tangible common equity to tangible assets increased from 5.23% at March 31 to 5.51% at June 30.

For the fourth quarter of 2008, the only quarter ended which we held TARP preferred equity on our balance sheet, our tangible equity to tangible assets ratio equaled 7.08%.

Recall that we closed on our purchase of 65 Indiana branches from Charter One just prior to the end of the first quarter, which brought our tangible common equity to tangible assets ratio down to 5.23%.

On slide 33, I've shown our tangible common equity as a percentage of risk weighted assets ratio as compared to the average of our peer group.

Our ratio increased to 7.79% from 7.50% at March 31.

When not impacted by cash acquisition, Old National has historically maintained a higher than peer tangible common equity to risk weighted assets ratio.

Our relatively low second quarter 2007 ratio reflects the cash acquisition of St.

Joseph Capital.

The first quarter 2009 ratio reflects the acquisition of the Charter One branches.

As you can see from the graphs, we rebuilt our capital position relative to peers after the acquisition of St.

Joseph Capital and expect to do the same in the quarters following our first quarter 2009 acquisition.

We believe that the first quarter tangible equity to tangible assets ratio of 5.23% was our low point for the year.

Our target range for this ratio is 5% to 6%, and we expect to build this ratio to the higher end of this range.

With the sale of our lease portfolio, and if we continue to reduce our wholesale funding and investment portfolio as planned, we believe our tangible common equity ratio will increase for the remainder of 2009.

Moving to slide 34, note that net interest margin declined 4 basis points to 3.59% in the second quarter from 3.63% in the first quarter.

Lower asset yields caused the margin to decline 12 basis points, while the decline in interest bearing liability costs lifted the margin 7 basis points.

We were still somewhat asset sensitive during the second quarter, due in large part to the significant shift in our loan portfolio to one and three month LIBOR based repricing at the end of 2008 and early in the first quarter of 2009.

As we discussed in our first quarter call, we took several steps to reduce our asset sensitivity.

We added investment securities in the first quarter, shortened the repricing of our wholesale funding with interest rate swaps and higher federal funds purchased, and implemented actions in our commercial lending business to ensure loan yields reflect the current credit environment.

All of these steps helped prevent further deterioration in our margin as LIBOR rates declined during the second quarter.

The change in mix volume other of our earning assets caused the margin to decline 8 basis points.

As noted earlier, average loans declined $95 million during the quarter and average investments increased $313.4 million.

Our highest yielding loans at 7.24% direct and indirect to consumer term loans declined $32.5 million on average from the first quarter and accounted for about 34% of our decline in loan balances.

Conversely, federal agency and treasury investment securities yielding 4.52% accounted for most of the increase in the investment portfolio.

This shift in earning asset mix from high-yielding loans to lower yielding investments contributed to the decline in the margin due to mix, volume, and other.

The lift of the margin due to mix, volume, and other of liabilities was due to the significant increase in core deposits, largely non-interest bearing, savings, and NOW accounts due to organic growth in the branch acquisitions combined with a decrease in long term borrowed funding.

Non-interest bearing, NOW, savings and money-markets deposits increased on average $259 million over the first quarter of 2009.

The average rate on the interest bearing portion of our core deposits was 1.43% for the second quarter.

In comparison, long term borrowed funding with an average rate of 5.11% declined $24.7 million on average for the quarter.

This shift in funding to higher core deposits and lower long term borrowed funding contributed to the 8 basis point lift in margin due to liability mix, volume, and other.

On slide 35, you'll see the monthly trends for net interest margin for the quarter.

June margin was 3.54%, up slightly from May but down from April's margin of 3.69%.

We began reducing our investment portfolio late in the second quarter.

Compared to March 31, 2009, the investment portfolio was $224.8 million lower at June 30.

Additionally, loan production was soft in May and June.

At June 30, 2009, total loans including our leases held for sale were $94.5 million lower than March 31.

Both of these factors contributed to the falling margin during the quarter.

On slide 36, note that our bankers continue to do an excellent job managing deposit costs.

For the first quarter of 2009, our interest bearing deposit costs including brokerage certificates of deposit were 35 basis points lower than our peer group and we were able to reduce our cost 10 basis points further in the second quarter.

As Barbara said, we did experience modest attrition of Charter One branch deposits during the quarter, but I believe our bankers did an excellent job bringing the newly acquired deposits in line with Old National deposit pricing.

I added slide 37 this quarter to track our average loan yield compared to the average yield of our peer group.

Historically, we have tracked closely to our peers.

I don't have the second quarter comparison yet, but note that in the first quarter of 2009, our average loan yield was 45 basis points lower than the average yield of our peer banks.

We believe the contributing element to the fact that our loan yields were relatively close to our peers in the past was the fact that we had a higher percentage of fixed rate loans in our portfolio than our peers.

As our loan repricing shifted to floating rate in late 2008, we saw that our credit spreads were lower than peers, which impacted our overall loan yield.

Recapturing this credit spread and yield differential to our peers is an important goal of our banking business unit.

Slide 38 recaps the factors that will impact our net interest margin for the remainder of the year.

Our focus for the remainder of the year is to reduce our leverage and maintain sufficient tangible common equity to allow us to both absorb loan growth as it materializes and to take advantage of likely acquisition opportunities.

While we acknowledge that reducing our investment portfolio and wholesale funding and selling our lease portfolio will likely reduce margin and net interest income in the near term, we believe this is the correct strategic approach.

Contributing further to pressure on our margin and net interest income, unfortunately, is the fact that loan demand softened significantly in the second quarter and remained soft thus far in the third quarter.

We expect third quarter margin to be in the range of 3.55% to 3.60% with fourth quarter fully taxable equivalent margin of 3.50% to 3.55% depending on the outcome of our lease sale.

Slides 39 and 40 provide you with an update of our investment portfolio.

This quarter, we charged $7.9 million in other than temporary impairment to earnings, compared to $2.4 million in OTTI in March.

Recall that we adopted the FASB staff positions related to the recognition of other than temporary impairment in the first quarter of 2009.

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

The $7.9 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.

Year-to-date, our OTTI related to credit impairment is $10.3 million.

The $7.9 million realized credit loss for the second quarter is attributable to six of our pooled trust preferred securities.

Three of these securities sustained OTTI in the first quarter.

These six pool trust preferred securities have a book value of $23.3 million and a market value of $9.8 million at June 30th.

We define book value as our purchase price plus any accretion of discount or amortization of premium, minus any credit writedown related to OTTI.

Slide 39 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 portfolio of investments treated as classified has a book value of $145.3 million, up from $96.5 million at March 31.

Book value is the amount carried in classified assets.

The amount of the classified asset portfolio attributable to non-agency mortgage backed securities increased approximately $57.1 million in the quarter due to downgrades by S&P or Moody's.

We are monitoring the portfolio of non-agency CMOs closely.

While we have not taken OTTI on any of our non-agency mortgage backed securities in 2009, it is likely that we will have OTTI in this portfolio and future quarters.

Slide 40 provides detailed information related to our entire investment portfolio, including the change in market value since March 31, 2009.

With that, I'll turn the call back to Bob for final comments.

Great.

Thanks, Chris.

Our closing slide on page 42 is much like mom and apple pie, particularly as you look at items one through three, but it does serve us well to remind you this will be our focus and that we may be willing to give up some short-term earnings in order to meet those goals, much like the decision to reduce the leverage on our balance sheet and the sale of lease assets.

I would also highlight the last bullet point.

We have seen an increase in M&A opportunities in the markets we serve.

While we are very interested in improving our market position and our overall performance, we will be guided by these same three principles above as we look at potential partnerships and we will not do a deal just to do a deal.

It must make sense to our shareholders.

I'm sure there's more to come on that in the future.

Molly, at this time we'll be happy to take anyone's questions.

(Operator Instructions).

Your first question comes from the line of Scott Siefers with Sandler O'Neill.

Hi, Scott, how are you doing?

Good morning guys, how are you doing?

Great.

I guess a couple questions.

First, just on the move, on the lease piece from the portfolio to available for sale, was there any charge related to that move or did it just go over as is?

It went over as is.

Okay, easy enough and then Bob, I was hoping you could expand on your capital thoughts a bit more.

It sounds from going through the presentation like you're still pretty comfortable with the 5% to 6% range you've given in prior quarters.

I guess a couple things have, well maybe one thing has changed between last quarter and this, which is that a number of other banks have gone out and raised capital to boost their own ratios.

And then just with Old National in particular, it certainly seems you guys would be open to M&A opportunities.

So just any additional color you could give on the way you're thinking about capital levels would be appreciated.

You must have been talking to your investment bankers, Scott.

You're not supposed to do that.

You know we can't do that.

No, in all seriousness, we do look at capital and we do balance the need to build the capital with the dilution to our shareholders, and I think our approach is if we see the right opportunity, we think we have the ability to raise capital.

At this stage, we're comfortable that under our organic means that we can meet our targets, and then if the right acquisition would come about, we'll see where we go from there.

But we balance, Scott, the dilution with our shareholders with our need to build that.

And it's good to be in that position right now, but it's one you've got the continue to struggle with.

Okay, thank you very much.

Thanks, Scott.

Your next question comes from the line of Eileen Rooney with KBW.

Hi, Eileen, how are you?

I'm doing well.

Good morning, everyone.

I had a couple of questions.

I think probably mostly for Barbara.

I missed at the end of your comments -- you said there was an $8 million to $10 million negative impact, and I didn't catch what that was from.

Eileen, those are the conversion costs and the acceleration of the intangibles that we have for --

Those will be the ones we talked about when we made the announcement of the deal, Eileen.

Okay, got it.

And then could you just break down for us what the impact from Charter One was on the fees and expenses?

On the what expenses?

The fees and expenses.

Eileen, let us get back to you and we'll get that for everybody as we break that out on an individual and at Charter.

We don't have that available right now.

Okay, and an other quick Charter One question.

The branches that you're closing -- are they in any specific markets or is it just more location driven?

It was more location driven.

It was where there was direct overlap with ONB offices.

Okay.

There are multiple markets where that's occurred, Eileen.

Eileen, let me go back to your question on Charter One.

Joan Kissel, our controller, has a good breakout for you.

So let's give that so everybody gets it at the same time.

Okay.

Hi, Eileen.

Basically, at Charter, you'll see the most significant impact in the salary and employee benefit line.

That's -- about $4 million of that increase is attributable to Charter.

And you'll also see in our occupancy line and then the data processing; those are the most significant items that were impacted.

And do you have that for the fees side also?

Yes, on the service charges and deposits, that was up considerably.

Over half of that was related to Charter.

Charter also impacts our ATM fees.

Primary amount of that increase is also related to Charter.

Eileen, this is Chris Wolking.

I think as you probably recall, the first year expenses -- the net impact from Charter One is that $8 million to $10 million as Bob referenced.

And then going forward the numbers we shared was about breakeven in the first full year of operations.

And everything is tracking just as we had expected.

And I think the biggest impact again as we mentioned last quarter was a fact that we decided to accelerate our amortization of intangibles from originally what we had at 10 years to seven years, which would have given an additional $1 million expense impact.

But everything is moving along just as we expected.

Great, and then just one quick question and then I'll get off.

NPA, I guess non-accrual in flows this quarter, what was that number?

Eileen, this is Daryl.

We don't break out the inflows from the outflows.

I will tell you that generally, they were a tad bit slower than what we would have expected, and probably going forward probably lower than what we expect over the next couple of quarters.

Okay, all right, thanks a lot.

Thanks, Eileen.

Your next question comes from the line of Jeff Davis with FTN Equity Capital.

Hi, Jeff.

Welcome back.

Well, thank you.

A couple questions.

I think the answer is no, but Chris, let me ask it.

On the sale of the lease book, are you expecting a gain or loss?

It's too early to tell right now.

It's a good portfolio, good quality portfolio and I think as Bob noted, an element of the net chargeoff moved over with that.

So we would be back at -- or pardon me the NPA, the allowance.

But a good portfolio, we will just wait and see, Jeff.

Safe to say though it's going to have to make economic sense.

Okay, sure and then second, this is -- Barbara, this is probably best for you.

Two part is -- what's your sense in terms of you all are no different from really anyone else in terms of the deleveraging of the loan book.

What's your sense in how much longer does that run?

And then secondly as it relates to deposit flows, what are you seeing out of the majors in your footprint Nat City/PNC and Fifth Third in particular.

Have they settled down or are they still hemorrhaging?

Okay, Jeff, on the first one in terms of deleveraging, I don't anticipate any change this year on that.

I think it's going to maintain where it is where it's just going to be very slow for us, just not anything happening there.

And in terms of deposit flows, we're still seeing some inflows of deposits from the other major banks.

This disruption has been very good for us, very favorable and continues to be so.

So as more of that occurs, I think we will still be the recipient of some good inflows to deposit.

Okay, along the same lines, are you all thinking there's going to be any major shakeup in Indianapolis with one of the major Midwestern banks?

(multiple speakers).

Now, Jeff, do you really think we can answer that question?

There are two or three of them, so we wouldn't be nailing it down.

You keep writing about them in your writeups, it's going to happen.

I hear, and one of them is out of Birmingham too.

And then lastly for Chris, the [COLI] line was down $300,000 linked quarter.

Anything of note there?

If not, no need to note anything.

Yes, with the BOLI, I think especially if you look year-over-year, Jeff, you'll see that we significantly reduced the amount of income --

Right, when you restructured it.

When we restructured the BOLI, really no change quarter-over-quarter.

We continue to monitor that asset.

It's certainly performing better after the restructuring.

But no material changes from the first quarter.

Thank you.

Thanks, Jeff.

Your next question comes from the line of Stephen Geyen with Stifel Nicolaus.

Good morning.

Hi, Stephen, how you doing?

I'm doing okay, thank you.

Just wondering -- any NPLs transferred with the lease sale?

No.

And the lease business, is there any change in plans for the leasing business?

No.

Okay.

And a question for Daryl.

The increase in classified criticized loans -- just wondering if there's any I guess real high level opinion that you can give on the change quarter to quarter?

The classifieds were actually down a little bit, and I think that's just a matter or a function of just a couple of credits moving out.

So I don't think that we should see that as a trend.

The criticized -- it was interesting, the criticized came generally both in the CRE as well as the C&I.

Our probably projection going forward is like many banks we would expect to see higher criticized from the C&I probably start to outweigh the CRE as we get by having identified a number of those problems.

But in this quarter, there wasn't a significant leaning to either CRE or C&I.

Just kind of across-the-board.

Okay, thank you.

Thanks, Stephen.

Your next question comes from the line of Joe Stieven with Stieven Capital.

Hi, Joe.

Good morning.

Almost all my questions have been answered.

But I will ask one.

You say that every call, Joe.

If you look at your loan yields, your loan yields are below peer averages.

However, you've got much higher -- better asset quality than your peer group.

Do you think you'll have more repricing power on loans coming up in here and just your big picture view on that?

Thanks guys, and again good quarter.

Absolutely, we have more power for repricing.

I will tell you that's probably the thing that keeps Barbara awake the most and it's the one thing she's really focused on.

And I think her four regional CEOs have got the message and we're going to work very hard at that.

Okay, so there could be some potential room for improvement even without movement in rates, just to start moving those up a little bit?

This is probably going to come out wrong, but come hell or high water I'm sure Barbara is going to do all she can to get that done.

Okay, good.

Thank you.

Thanks, Joe.

(Operator Instructions).

Your next question comes from the line of John Rodis with Howe Barnes.

Welcome, John.

Thanks, Bob.

Just a follow-up question on service charges.

The increase I think you said was related -- over half -- was it half of the increase was related to Charter One branches or was it half of the balance was Charter One branches?

Half of the increase was related to Charter One.

Okay, and would you expect to sustain that kind of current level of $15 million to $16 million going forward?

It's hard to know.

We're just too early with them to know what the experience level will be.

A lot of it is based on their behavior and we'll need a couple of quarters to understand that behavior a little bit.

The initial -- our policies were probably a little more onerous, and we'll have to see how their behavior changes over time.

Second question, just on the tax rate -- what's the appropriate tax rate to use going forward?

Well, I think, John, as you see in our trends, with our mix of taxable versus tax exempt income, we've effectively got a negative tax rate in there.

We're still in an AMT position.

It's tough to say -- once we move the leases off the books, it's going to change a little bit.

I'm probably reluctant to give a tax rate going forward.

Again, I think we'll have more color on that after the third quarter and after the transaction.

But suffice it to say we're certainly in an AMT position and that's one of the reasons for us looking hard at selling some of our tax exempt assets.

So you expect that to continue into the --?

The foreseeable future, yes, it's a focus for us.

Okay.

Thanks guys.

Thanks.

Welcome.

There are no further questions at this time.

Great.

Molly, as always, if anybody has a question, feel free to call Lynell.

We appreciate everybody's interest, and if there's anything else we can do for you, let us know.

Thanks.

Thank you.

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 19229312.

This replay will be available through August 10.

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

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