Old National Bancorp (ONB) 2010 Q2 法說會逐字稿

Welcome to the Old National Bancorp second quarter 2010 earnings conference call.

This call is being recorded and has been made accessible to the public in accordance with the SEC 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 o'clock PM Central today through August 9th.

To access the replay dial 1-800-642-1687, conference ID code 83759272.

Those participating today will be analysts and members of the financial community.

(Operator Instructions).

At this time, the call will be turned over to Lynell Walton, Director of Investor Relations, for opening remarks.

Ms.

Walton?

Thank you Sarah, and good morning everyone.

We appreciate you joining us for Old National Bancorp's second quarter 2010 earnings conference call.

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

As noted on slide three, I would like to remind you that as we proceed, our presentation today will contain forward-looking statements that are subject to certain risks and uncertainties that could cause the Company's actual future results to materially differ from those discussed.

These risks and uncertainties include but are not limited to those which are contained in this slide and in 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 will see our agenda for the call today.

First, Bob will provide a high-level overview of our second quarter 2010 financial performance, our view of the current economic and regulatory environment, as well as discuss our client activities surrounding Regulation E.

We will then provide more detailed financial data on our second quarter earnings, as Chris will highlight the progress we have made in reducing our non-interest expenses, reducing the risk in our investment portfolio, and maintaining our strong capital position, while Daryl will discuss our current credit quality trends and our outlook on these trends going forward.

Following these prepared remarks, we will be happy to open the line and take your questions.

And just as a quick reminder, the appendix to this presentation does include additional disclosures regarding our investment portfolio, credit trends, and net interest margin that may be also helpful to you in your review of our second quarter results.

I will now turn the call over to Bob.

Thank you Lynell, and good morning.

I am going to begin my presentation on slide number seven.

The theme of the quarter was one of continued pressure on the balance sheet as a result of the slow economic recovery that we are experiencing.

During this period of slow growth, we continued to execute against our aspirational strategy of achieving a 65% efficiency ratio by the fourth quarter of 2011.

We also took steps to continue to reduce the risk within our investment portfolio.

The other significant theme for the quarter was one of regulatory change.

To put this into context, we have implemented, on average, one new regulation per month since last July.

Obviously the biggest regulatory change facing all banks is Reg E, and there will be an update on our progress at the end of my presentation.

For the quarter we earned $10.5 million, which is a 9.2% improvement over the same quarter last year.

Our earnings were $0.12 per share, slightly behind the per-share earnings of last year, but as you all remember, we issued approximately 20.7 million shares in conjunction with our secondary offering in the third quarter of last year.

Highlights for the quarter included continued progress on our expense initiatives, the improvement of our net interest margin to 3.4%, as well as the improvement of our already strong liquidity and capital positions.

Chris will cover these items in more detail later.

And finally, Daryl will review our stable credit metrics, which continue to be among the strongest in our peer group.

Before I turn to the next slide, a few words on the economy.

As we mentioned on last quarter's call, we expected the recovery to be slow and extended.

That firm was clearly reaffirmed in the second quarter.

Employment and economic growth remained stagnant, and in conversations with our clients there still remains a tepid view towards the economy.

At the same time, there is an acknowledgment that businesses have potentially held out as long as they can without expending inventory or making capital investments.

As I will cover in a few minutes, we did see a few glimmers of hope at the end of the quarter, but not enough for us to declare an accelerated recovery.

As for the consumer, confidence is still at a low level with little positive momentum.

This is reflected in our consumer borrowings and still slightly elevated delicacies.

One final note on the economy.

Last week, the State of Indiana announced that it finished the 2009 budget in the black.

This represents the fifth straight year that Indiana has been in the black and we continue to maintain positive surpluses.

Clearly this is a positive step for the businesses in the State and serves as a point of distinction for our home State as compared to the balance of the Midwest.

Let's turn to slide number eight.

As I mentioned, we did see a few reasons for cautious optimism during the quarter.

Let me emphasize -- cautious optimism.

Before we view these signs with any permanency, we need to see more than a few months or a quarter trend.

Commercial loans did increase 1.6% or $18.3 million when measured at period end the second quarter versus the period end of the first quarter.

Growth came across most markets and sectors, with the strongest growth coming in Evansville and the Northeast markets.

Most of these loans were the result of the increased pipeline that we mentioned on last quarter's call.

The result of these closings has been a slight decrease in our current pipeline, but it is still higher than it was at this time last year.

We are working very diligently throughout the company on positioning Old National to get a higher percentage of at-bats than our competition.

We also have seen the level of cross-selling within the company at the highest level in some time.

This cross-sell effort in part resulted in our wealth management group having the highest level of new account sales in five years and a strong sales effort within our insurance group.

As you are aware, the impact of these sales will be seen in future quarters.

Also, as you can see on this slide, our business checking accounts had a net new account growth for the first time since the first quarter of 2009.

Before we move to the next slide, I should note that our commercial line utilization stands at 31.9% at the end of the second quarter.

In 2008 utilization stood at 40.6%, and in 2007 it was at 42.2%.

As the slide is titled, we are cautiously optimistic that over time we could get back to historical line utilization rates, which would provide another lever for growth.

Turning to slide nine, I will cover the proactive steps we have taken in relation to Reg E.

As you can see, we have been working on Reg E client communication since January.

We have conducted focus groups, tested a variety of contact methods to educate our clients on the regulation and what their options are under this regulation.

We continue to reach out to clients using a variety of methodologies and will continue to do so until we have we feel we have exhausted all means.

As of today, we have seen a blended opt-in rate of over 60% between existing clients and our new clients.

Our opt-in rates have been higher with our existing clients versus those with our new clients.

Until we get a few quarters of experience, it would be very difficult to give you an estimate on the impact of Regulation E.

Safe to say, we will see a reduction in fee income related to the regulation.

But I would tell you that it appears the net result will be less than what we expected when Reg E was announced.

Giving the potential negative impact of Reg E, have made the decision to eliminate the majority of our free checking products and move to a traditional tiered pricing product with fees that are based on balances kept within the checking account.

This change will take effect on September 21st.

There will be an update on next quarter's call of the net impact of this decision and Reg E.

A few words on Dodd-Frank.

We have had a task force looking at the impact of the bill and feel we are well prepared to implement the estimated 5,000 pages of new regulations.

Because many of the regulations that have the potential for significant financial impact are not targeted towards banks under $10 billion or they are focused on products or services we don't use, at this time we don't feel the financial impact to our company will be significant.

But clearly the time will need to devote towards implementing these changes will be significant.

Before I turn the call over to Chris, let me close by giving you a quick update on our M&A activities.

The FDIC volume in our target markets has been very light.

We continue to monitor these activities, and we are well prepared to participate should the right strategic opportunity come along.

We also continue to have many conversations with many potential partners for when the traditional M&A market returns.

But we don't feel any pressure to do a deal and will continue to be guided by what our Board and we feel is the best use of our capital for our shareholders.

Now let me turn the call over to Chris.

Thank you Bob.

Bob provided you our first quarter earnings highlights.

We are pleased but obviously not satisfied with earnings of $0.12 per share for the quarter.

While we are beginning to see early signs of loan growth and improving credit, the continued difficult economy, the regulatory environment, and the interest-rate outlook likely mean continued pressure on revenue for us for the foreseeable future.

The challenging revenue outlook demands that we continue to work to reduce our operating costs.

I have slides that show some of the progress we have made, and I will touch on the initiatives we currently have underway to sharpen the focus on improving productivity at the company.

Additionally, and as we have said in previous quarters, we are committed to maintaining a capital base which will allow us to grow organically as the economy improves, and through acquisition.

For this reason we have continued to reduce the potential impact on capital of the investment portfolio, and I've included slides that show the reduced duration and size of the portfolio during the quarter.

I will begin on slide 11 with detail on the changes in our non-interest expenses quarter over quarter and compared to second quarter 2009.

Noninterest expenses were $77.9 million in the second quarter, compared to $77.1 million in the first quarter of 2010.

While total expenses increased for the quarter, second-quarter expenses included approximately $900,000 for the closure of five branches in the Indianapolis market and $1.4 million related to the early termination of $49 million in wholesale funding, which we don't expect to be ongoing expenses.

It is important to note that salaries and benefits expense declined $1.3 million or 3% from the first quarter of 2010, even though second-quarter expenses included $700,000 in associate merit increases.

Noninterest expenses are $8.9 million lower when compared to second quarter 2009.

While lower FDIC insurance expense contributed approximately $4.6 million to this decline, salary and benefits expense declined $4.1 million, marketing expenses declined $1.2 million, and occupancy, supplies, communication and equipment expenses all declined somewhat from the second quarter.

Second quarter 2009 is a good quarter against which to measure our progress managing expenses, because second-quarter 2009 was the first quarter which included our Charter One branch acquisition.

Of the 65 branches we purchasing in this acquisition, we have closed 18 in total -- 11 in 2009 and seven in 2010.

Slide 12 shows the number of full-time equivalent employees at the end of each quarter since second-quarter 2009.

From the end of the second quarter of 2009 to the end of the second quarter of 2010, our total full-time equivalent employees declined by 229 FTE or 8%.

Most of the reductions in 2009 were due to the closing of acquired branches.

The staff reductions in 2010 are from virtually every unit in the company.

We expect productivity improvements to continue in all areas of the company as our associates further embrace the elements of what we call operational excellence.

Operational excellence uses techniques adopted from Six Sigma and lean manufacturing to help eliminate waste and redundancy in processes.

We are excited about the potential opportunities from operational excellence and will keep you apprised of our progress.

I noted earlier that we have seen reductions in marketing, supplies, communication, and occupancy expenses.

While improving productivity is receiving most of our attention, we have reduced expenses by tightening policies related to company expenses, renegotiating key technology and processing contracts, outsourcing aspects of our janitorial and facilities maintenance, and centralizing more of our procurement function.

It's important at this point to underscore the fact that we are committed to attaining expense savings that are sustainable over future quarters.

We're not deferring maintenance expense, and continue to maintain our facilities to a high standard.

We are investing in information technology to support risk management, regulatory change, and sales management, and we continue to invest in marketing, particularly in those geographic areas where we have made significant new investments, like Indianapolis, Louisville, and northern Indiana.

On slide 13 I have information related to the investment portfolio.

This slide shows the change in market value and book value of the various investments in the portfolio.

The total book value of the portfolio declined $137 million through sales, maturities and calls during the quarter.

Note particularly that tax exempt bonds declined $51.3 million during the quarter.

Much of the reduction in the municipal bond portfolio was due to sales.

On average, these are the longest maturity bonds we own, so sales of this portfolio had the most impact on duration.

Additionally, we reduced our holdings of Illinois state and local general obligation bonds during the quarter due to credit concerns.

Slide 14 shows the duration of the portfolio by sector.

The duration of the entire bond portfolio declined from approximately 4.5 in March to 3.4 in June.

Much of the shift in duration was due to the fact that the federal agency portfolio, which comprises nearly 40% of our total investment portfolio, is now more likely to be called due to the decline in interest rates during the second quarter.

The duration of this portfolio declined from approximately 3.6 to 1.7.

Additionally, as I noted previously, we sold long dated municipal securities during the quarter.

So the two primary drivers of our improved duration for the quarter were the sales of municipal bonds and shorter duration of the federal agency component of our investment portfolio.

With an average duration of 3.4, the future cash flows from our portfolio will likely accelerate.

We estimate that if interest rates were unchanged, cash flows from our investment portfolio could be $1 billion over the next 12 months.

Slide 15 provides detailed information on the $2.8 million other than temporary impairment charge we took in the second quarter.

$2.5 million of the OTTI charge in the quarter was due to higher delinquency and loss severity expectations in our non-agency CMO portfolio.

Approximately $300,000 of the total OTTI in the second quarter was related to our pooled trust preferred securities portfolio.

The $2.8 million OTTI was offset by the $6.0 million we took in securities gains for the quarter, so net, pretax securities gains were $3.2 million for the quarter.

In the appendix of the slide deck, I included a slide which recaps the OTTI in 2009 by security.

On slide 16 I've charted the improvement to our tangible common equities to tangible common assets ratio.

Tangible common as a percentage of tangible assets increased from 8.62% to 9.03% during the quarter.

Contributing to the higher ratio were $10.5 million in net income with a dividend payout of 58%, higher other comprehensive income due to a better market value of the investment portfolio, and lower tangible assets due to the smaller investment portfolio as of June 30.

As you can see from the graph, we continue to have higher capital ratios than our peers, and this positions us well for growth.

Slide 17 breaks down the components of the improvement in our net interest margin for the quarter.

Three drivers of the margin change are worthy of comment.

We continue to see the benefit of repricing of our retail time deposits.

On average, retail time deposits were 13 basis points lower in the second quarter, and this helped drive the change in margin attributable to lower liability costs.

The yield of the investment portfolio declined by 19 basis points in the quarter, partially due to the sale of the municipal bonds and the reinvestment of proceeds into lower yielding taxable securities.

Additionally, average loans declined by $100 million during the quarter.

These changes contributed to the 11 basis point decline in margin due to asset mix and volume.

Finally, average borrowings shrank by $43.6 million, and noninterest bearing deposits increased slightly, which contributed to the 12 basis point improvement in margin due to mix and volume of interest-bearing liabilities.

The outlook for our net interest margin is mixed.

We expect limited continued benefit due to retail time deposit repricing and lower wholesale funding.

Higher investment portfolio cash flows and lower interest rates available for reinvestment indicate that the investment portfolio yield will likely continue to decline.

However, we did see commercial loans grow at the end of the second quarter, and if the loan growth continues, we may see a lift of asset yields due to an improved mix of assets, even as investment portfolio yields decline.

At this time we expect net interest margin to remain flat to slightly lower for the remainder of 2010.

My final slide, slide 18, shows the trend of net interest margin over the last 12 months.

Growth in non-interest-bearing deposits and attention to interest-bearing deposit repricing has helped offset the decline in fully taxable equivalent margin caused by the third quarter 2009 sale of our municipal leases and the decline in loans.

The decline in the margin for June is primarily due to the impact from continued sales of investment assets and the reinvestment of cash flows into lower yielding investments.

As I noted when discussing the last slide, higher portfolio cash flows will likely continue to have an impact on the margin.

I will now turn the presentation over to Daryl for his discussion on credit.

Thank you Chris.

I'd like to start the credit presentation this morning on slide 20, where we show net charge-off trends over a 12-quarter timeline.

As you can see from the chart, net charge-offs in the quarter were $8.2 million or 90 basis points of average loans in the period.

Increases in losses in the quarter were centered in the C&I and commercial real estate areas, where we had two relationships in each area where we recognized losses in excess of $0.5 million.

Dollar losses in both the residential real estate area as well as our retail portfolio were down from first-quarter levels.

Slide 21 shows the trends in our criticized, classified nonaccrual loans.

As you can see from the trend lines, each of these categories have remained relatively constant over the last several quarters with modest declines in the criticized and classified categories in the current quarter, offset in small part by slightly higher nonaccrual outstandings.

As slide 22 shows, our 90-plus delinquent loans fell by approximately $800,000 in the quarter and now stand at only 1 basis point for total loans.

You would have to go back to the first quarter of 2007 to see 90-plus day delinquent loans at this low of a level.

Obviously our performance in this category compares favorably to our peers.

Finally, moving to slide 23, in the quarter we made a provision for loan losses of $8 million, which roughly matched net losses of $8.2 million.

With the increase in period-ended loans in the quarter, this dropped our allowance to total loan percentage from 1.94% to 1.93%.

With a slight increase in nonperforming loans in the quarter, our allowance coverage to that subset of loans fell slightly but still remains above the 100% coverage level.

While we would characterize the quarter as uneventful from a credit perspective, as Bob said earlier, we believe this recovery will be realized over an extended time period and do not expect to see significant improvement in credit metrics throughout the balance of the year.

With those remarks, we'll open the call to questions.

(Operator Instructions).

Jon Arfstrom, RBC Capital Markets.

A couple of questions for you, Bob.

Maybe to start with you -- I hear your comments on too early to declare victory, and I agree there are a lot of crosscurrents, but I see things like business account checking increasing, wealth management numbers starting to improve, and what I would call better than peer performance in lending, and I'm just understand you're cautious, but do you think that this maybe signals the beginning of maybe a bit more confidence in your markets?

If you use the word beginning, Jon, I think I could get comfortable, but I would have to see a few more positive trends, either quarters or months, to say that we've seen it.

But I think it's a result of increased activity.

We have been focused on, as I said, trying to get more at-bats, trying to get our sales people up on their toes, and I think we are getting advantage of that.

And there is disruption in our markets, as well, either through competitors that are struggling or integration, as seems to be playing our favorite for now -- but a little too early to be overly confident.

I think that there is -- as I said, glimmers of optimism.

Anything specific to point to on the commercial growth?

You know, really it was across the board, a good deal in Evansville.

They are traditional C&I companies that are either expanding or building inventory.

We've seen some good activity as well in Louisville and up in our Northeast markets, but no specific projects and fortunately nothing that's got a significant amount of commercial real estate tied to it.

And then, Chris, just a question for you -- I know you -- I recognize you have a big challenge on your hands with that cash flow that you talked about rolling over the next 12 months.

But what do you do?

How do you view it?

Just give us an idea of where you put money to work and just help us get comfortable with your approach.

Yes.

Well, I think in general, I think certainly looking at the duration of our portfolio where it is today at 3.4, we are reasonably happy with that number, given the strong deposit growth we had.

So we'll continue to look for investment opportunities that stabilize the duration of the portfolio.

There aren't a lot of products out there, and that's why I think as we look forward to the impact of the cash flows, rates are certainly going to have an impact on that.

But again, the asset-sensitive nature of our balance sheet and of our net interest income we feel is appropriately set for us now.

I think specifically we might look at some floating-rate Ginny Mae, Ginny Mae ARMs, things of that sort, but there's not a lot of opportunity out there, so it's something we'll watch very closely.

Any possibility you might continue to take down some of your wholesale borrowings and maybe (multiple speakers)

Oh, absolutely.

I think to the extent we have opportunities like we had in the second quarter, where the market gives us some gains, we absolutely will look at the opportunity.

Reducing the leverage on our balance sheet is consistent with everything else that we've talked about, and it really puts us in a good position for strong organic, solid asset growth.

Scott Siefers, Sandler O'Neill.

Bob, maybe I'd start with you.

I was hoping you could expand upon your comments on the M&A environment.

I guess a lot has been made in the last 90 days about the -- call it the changing attractiveness or economics of FDIC deals.

I wonder if you could just comment on what kind of dynamics you are witnessing and how it's changing your thinking if at all.

And then as sort of a follow-up on that, there hasn't been a lot of activity necessarily in your footprint so far, but if you guys might be privy to a little more color than we are on the outside, do you think there will be more in your footprint as you look forward?

And you think I can answer that question?

I had to try; right?

Nine out of 10 investor questions that I get on you guys are that.

So (laughter)

Let me answer the first part of the question.

Fair enough.

The short answer is that what we've seen, the dynamics of the FDIC deals is that in the metropolitan areas, the very competitive markets like Chicago, the dynamics have changed dramatically, and you're almost going to traditional M&A with the backstop of the government, and we are conscious towards those.

I would tell you that we don't look to create a lot of goodwill as we look to do a deal on an FDIC basis.

But if it makes strategic sense, we'd certainly look at it.

So the short answer is, I think we made the right decision avoiding the large markets.

We continue to look within the franchise that we have existing, as I've said before.

We are intrigued with southwest Michigan.

We hope to see some activity pick up in those markets.

The second part of the question, Scott, is it's public.

I don't know any more than what you guys know, and that is that the FDIC seems to have slowed after the Chicago events.

There's not a whole lot going on in the Midwest.

They seem to have gone to the coast on the West Coast, and still a little bit more down in the Southeast.

But we just -- we look at whatever we can.

And again, we continue to use the discipline that we always have.

Perfect.

And then, Daryl, was hoping to get just get some expanded thoughts from you on the credit environment as well.

You made the comment, maybe not unnecessarily a ton of improvement between now and the end of the year.

I guess as you see things, is it -- is the environment generally just kind of a case of kind of steady, still tough out there?

Or are certain segments getting better while other areas just get more stressed the longer the recovery remains tepid?

Yes Scott.

A couple of things.

I think first in the commercial real estate portfolio, I think that banks including ours still have some pain to come through that.

I think that as the leases come off term or as vacancies increase, we're going to see some continued stress in that, and I think we all as we sit around this table know that it's not going to get any better over the next probably two, three, maybe even four quarters in that portfolio.

The C&I is a really interesting portfolio because it's very mixed.

I think anecdotally we've heard some of our customers say that the first quarter was very good and the second quarter was not all that good.

So I think that we remain very guarded about where the C&I portfolio is going.

The consumer, the retail portfolio has held up pretty well.

We have had some layoffs in some of the markets in which we operate that haven't really come through the system.

So there's a little bit of that uncertainty out there.

So I think generally we are hopeful that things are going to get better, but we just don't see the trends today that would allow us to say -- this is the beginning of a certainty of trend.

So we're just a little cautious.

Eileen Rooney, KBW.

Just one question for you guys, on expenses.

If we back out those nonrecurring expenses that you talked about in this quarter's earnings, it looks like you have a little bit of improvement in the expenses, but the efficiency ratio is still pretty high.

I'm just wondering if you could give us a little more guidance on where you see that in the second half of the year and where your -- when you think you can reach your target level?

Well, the reason for the efficiency ratio not improving is really the revenue side.

If you look at the revenues, there's still obviously pressure based on the environment we're operating in.

You know the way we've done it with our Board is to say that our aspiration is to get to 65 by the fourth quarter, and what Chris said is really a salient point, which I would emphasize to everybody.

We want to make sure that when we get there it's sustainable.

There's a lot of ways you can cut costs, and I've done it a lot of different ways over my career, and I use a really bad analogy, but you can either go on a crash diet and lose 50, 60 pounds, and if you don't change behavior you gain it back very quickly.

And I've done that 20 times in my life.

But if you change behavior, you begin exercising, you change what you eat, then it becomes sustainable.

And that's really what we want to do on expenses.

So I'm hesitant to give you any guidance other than we aspire to get to 65 by the fourth quarter of '11, and what we want to do is create a sustainable model that we don't bloom back up to 75% within six months of getting to that target.

And then I guess, how much revenue growth do you have baked into that?

We don't have (multiple speakers) [much of that in] --

I'm not trying to pinpoint a number, but (multiple speakers)

No, no, no, no, it's a fair question.

You can be sure our finance committee of the Board asks those same kind, and it's really relatively innocuous revenue growth.

You can get rose colored glasses on it and say you are going to grow a lot of revenue to get to a certain number, but we choose not to do.

And again, it's an aspiration to get to that 65.

It's going to take a lot of hard choices in terms of how we get sustainable cost reductions.

And I think we've made a lot of good progress on it, and if you look at where we are and obviously if you look at FTE, which is the largest point, we continue to reduce that headcount, and those all provide value in the future.

John Rodis, Howe Barnes.

Hey Bob, quick question again, I guess just to follow-up on Scott's on M&A, and not to beat to beat it to death, but as you look at non-assisted deals and you talk to companies out there, how easy or how hard is it in today's environment to sort of get comfort with their balance sheets and the marks they've got on their balance sheet?

Is it getting easier today?

No.

I would say that's the biggest challenge you have is how -- of the potential targets, how aggressive have they been?

What's the culture within their credit environment?

You've all heard me say that there's only one guy that has a veto as we look to deals, and that's really Daryl, and I think getting a good mark on those credits is very difficult, and it's one that we rely on very heavily as we look at potential partners.

So we not only look at the portfolio, but we also look at the processes as well as the culture.

And it's just tough, John, and you know maybe we do see the world a little differently.

We're a little more negative, but we still think there is pain to be felt in -- over the long term -- or the immediate term in this credit environment, and you've got to get comfortable with that.

Makes sense.

Hey Chris, maybe a couple of just income statement questions for you I guess.

FDIC assessments were down in the quarter.

Is the $1.7 million, is that a good number to go with going forward?

Or --?

Yes, I feel it's pretty good, as the methodology for calculating all of those changed, but we feel pretty good about that number now.

And then I also noticed on the noninterest income side, life insurance was up.

Company owned life insurance was up a little bit.

Was there anything in there?

Or --?

Yes, that's a good catch.

That's a good number for the quarter too, and I think we've probably talked about it in previous calls going back a year or so where we made some changes and we looked hard at our BOLI investments and wanted to insulate -- again, insulate our capital base against any material changes in the value of that product, and it's contributing better to our earnings stream, and I think we can look forward to something consistent to what we saw in the second quarter.

John, it's a good -- I just would add that that's a great example of Chris being proactive.

I think it was 18 months ago we made those changes on the collars within that BOLI product, and we took a little bit of pain there, but I think it's clearly shown it's paying off (multiple speakers)

Paid off, yes.

-- over a long time.

And again, it's -- at the core of everything we do is the ability to manage those risks.

Chris, maybe just one more question on the tax rate.

It's starting to -- well, I guess it's sort of stabilized now.

And --

Yes.

Where do you sort of see that in the second half?

It's about flat from that number in that 14% range.

[Nan Nicholas], Robert W.

Baird.

Actually this is Bryce Rowe.

Hey Bob, a couple of questions for you.

One, on the decision to go no-free checking here, what's kind of the thought process behind that?

Obviously the lost fees from Reg E are a big part.

But what kind of expectations do you have from lost deposit balances, etc., baked in here?

Yes, we've been pretty aggressive at our attrition rates.

I don't want to quote you a number, but as we did the analytics, based it really around the profitability of the product set, as you look at all the changes.

We've built in some pretty aggressive numbers, and we still feel very comfortable that this is clearly the right decision for the shareholder as well as the client.

There are better options if you want free checking with limited balances.

We actually lose money on those accounts, and I don't think any of you want us to continue to do that.

We feel very comfortable that we can retain those profitable -- and I think quite frankly we're going to be able to retain others and cross-sell up, and again, the analysis would show that it's the right decision for us.

Then second question.

You guys made mention of just credit concerns relative to the Illinois municipal bonds.

Anything specific there?

Or is it more just the budget situation in Illinois that caught your eye brows up?

It's the budget situation as what we're seeing from state-owned entities, whether it's the universities, the school systems, anybody dependent upon the revenue from the State of Illinois I think is under stress right now, and again, in line with our proactive risk management, we just didn't feel comfortable with maintaining much exposure if any to the State.

Great.

I appreciate it.

Thanks for all the color.

If you compare that to Indiana or -- that's why we like Indiana so much.

Mac Hodgson, SunTrust.

A couple of follow-up questions on Reg E.

One on the -- I believe you mentioned that you have a 50% opt-in rate.

Is that right?

No, it's actually over 60% on a --

Over 60.

-- on a blended of new and existing clients.

We've had a higher opt-in rate with our existing clients than the new clients.

Have you been through 75 plus percent of the client base?

No.

We obviously have been through the new clients, but I would say on a blended rate we're not nearly the 75%.

As we stated on last quarter's call, we actually started with our higher users of the overdraft courtesy and are working our way through.

So for instance, somebody like Daryl, that's never had an overdraft in his life, we may just be getting to him now and asking him whether he wants to opt in or not.

People that have had experiences, we've obviously been in touch with.

And again, that's one of the lessons we learned from our focus groups as well.

Got you.

And then the elimination of kind of the free checking, do you expect the money earned on that decision to offset negative impact from Reg E?

Time will tell.

Obviously we make the decision because we think there is a benefit to our shareholders.

But experience, both with Reg E and with the elimination, we can give you a better feel at the end of the third quarter.

Okay.

On line utilization, I think you mentioned it's around 32% --

Right.

-- compared to maybe 40%.

Do you want to draw on your line, Mac?

We could use (multiple speakers)

(laughter) 40 plus.

No, I wouldn't get him get approved.

Don't worry.

(laughter)

What sort of gap is that?

If you went from 30% to 40%, would that be $500 million?

Bigger than a breadbox.

Actually, when we file our call report, you'll be able to get pretty close to that number, and until it's filed it's going to be a little tougher to do.

But it's a big number.

We've got close to $1 billion in line commitments.

So you can kind of back into that.

Any more branch closings expected?

Ones.

We've got one for the balance of the year.

And they've been notified.

They will close in August.

And we shouldn't -- it's de minimis in terms of the cost to close that branch.

That's it for me.

Thanks.

(Operator Instructions).

Geoff Davis, Guggenheim Partners.

My questions have been covered.

That's all you wanted to say?

(laughter)

No.

I did star-two (multiple speakers).

All right.

Thank you.

John Rodis, Howe Barnes.

I'll make it one question.

I was just curious, since you brought up on the municipal portfolio, what -- can you just give us by state your biggest exposure?

Well, I don't have those numbers right in front of me, but you can assume that Indiana is going to be our largest exposure.

And then, for the most part, John, that just follows our market.

And Illinois was not a small exposure for us.

So it was a fairly significant decision to reduce the exposure to Illinois.

So would -- just is Illinois less than 5% of the muni portfolio?

Or --?

Before I read you -- I don't have that number in front of me.

That's certainly (multiple speakers)

Yes, we can certainly (multiple speakers)

I can get that to you.

Thanks guys.

At this time there are no further questions.

Presenters, do you have any closing remarks?

Just as always, if you have any further follow-up questions, give Lynell a call.

And we appreciate everybody's time and attention.

Thank you very much.

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 83759272.

This replay will be available through August 9.

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

Thank you for your participation in today's conference.