Old National Bancorp (ONB) 2011 Q1 法說會逐字稿

Welcome to the Old National Bancorp first-quarter 2011 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 OldNational.com. A replay of the call will also be available beginning at noon Central today, through May 16. To access the replay, dial 1-800-642-1687, conference ID code 57914516.

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, Sarah, and good morning, everyone. Joining me today on Old National Bancorp's first-quarter 2011 earnings conference call are management members Bob Jones, Chris Wolking, Barbara Murphy, Daryl Moore, and Joan Kissel.

On slide 3, you will find the standard forward-looking language. Our discussion today will contain forward-looking statements. Such statements are based on information and assumptions that are available at this time and 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 4 contains non-GAAP financial measures language. 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. We feel these adjusted metrics to be helpful in understanding Old National's results of operations and core performance trends. Reconciliations for such non-GAAP data are included within the presentation.

As we begin our financial and strategic review of the first quarter, please turn to slide 5, where I've noted specific items we will be discussing today. First, Bob will review our strategic -- our strategy and provide an update as it relates to six key focus areas and how their consistent execution has led to our strong first-quarter performance. He will also discuss our recent acquisition announcement of Integra's trust and wealth management division. We will then provide more detailed financial data, as Chris will highlight the progress we have made in continuing to reduce our non-interest expense base, the increase of our net interest margin, and maintaining our strong capital position; while Daryl will discuss our current credit quality trends and our outlook in this area.

And with the transaction officially closed on January 1, Barbara will discuss the integration and quickly approaching systems conversion of Monroe Bancorp. Following our prepared remarks, we will be happy to take your questions.

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

Good morning, everyone. Let me join Lynell in welcoming you to Old National's first-quarter 2011 conference call.

Given that this is the first call of 2011, as well as our first call post-closing of the Monroe partnership, we thought it would be helpful to begin with a reaffirmation of the key executional elements that we've discussed with you in the past. I'm going to begin that review on slide number 7.

One of our primary focuses has always been -- and will continue to be -- prudent credit, driven by the application of conservative yet consistent underwriting. For us conservative means lending within our footprints to clients who desire a relationship. That approach has allowed us to have better than peer credit metrics through this last cycle, and while that is good, be assured that consistency is the key to all cycles.

As we look to the broader credit market, we have seen improvement in the metrics, but we are still cautious towards the overall economic environment and still remain guarded on the economy's impact on our clients, particularly those with housing-related businesses.

Control of non-interest expense is obviously a key driver for future growth and earnings for Old National. And while we are pleased with our progress to date, we realize that we still have work to be done to achieve our aspirational target of a 65% efficiency ratio. The work we have done in the first quarter with an additional 50 FTE reductions in what was the legacy Old National Bank, along with the additional 50% cost saves that will come from Monroe in the second quarter will provide additional momentum towards our cost efficiencies.

Yet we also realize that it is about more than cost reductions, and that the winners in this next cycle will be those banks that can grow their top line. Our view is that it cannot only be about loan and deposit generation, albeit they are the key drivers. We are very focused on all areas of revenue generation -- fee income through our insurance and wealth businesses; and fee generation from our deposit accounts, and other ancillary fees; as well as a very strong focus on cross-selling.

Our focus on growth is balanced between organic growth and mergers and acquisitions. We continue to see a very active discussion-focused M&A environment and continue to target partners that are much like Monroe -- midsized markets within our footprint or very near our markets where we can grow market share and drive efficiencies, while maintaining our Community Bank mission. We feel very good about where we are with Monroe today, both financially and culturally, and would love to replicate this type of partnership.

Our strong capital position is what allows us to be active in looking at the M&A market, and it is still our desire to use our capital to grow Old National. While our board has approved a stock repurchase, we feel the immediate best use of our capital is growth. And we will continue to monitor this and will prudently use the approved stock buyback when the opportunities arise.

I hope that this overview was helpful. It does also provide good context for our first-quarter performance, which I will review, beginning on slide 8.

This morning we announced net income of $16.4 million or $0.17 per share. These earnings represent a 188% improvement over net income for the fourth quarter of 2010 and a 63% net -- increase in net income as compared to the first quarter of 2010.

As you reflect on what is our best net income performance since the third quarter of 2008, the review of our executional elements is very appropriate, as the linkage is very strong. The quarter was driven by a reduction in credit costs, highlighted by a -- net charge offs of 27 basis points and a loan loss provision that was still in excess of those charge-offs.

This strong credit performance was supported by continued improvement in noninterest expense and growth in net interest income, driven by our margin improvement and growth in demand and transaction accounts, and a slight growth in loans. We also saw good growth in fee income, both in wealth and insurance.

Our Monroe partnership was also a good contributor to the quarter, and as I mentioned a moment ago, we are very pleased with where we are, both financially and culturally. Chris and Barbara will give you further details later on in the call.

Slide 9 provides a good overview of our balance sheet's positive changes for the quarter. Loan growth was driven by our quick home refinance program. The qualities of these loans are still well within our underwriting guidelines. Pipelines within the C&I portfolio and small business remained soft, but with slight improvement over last quarter. Commercial line utilization at the end of the quarter is 32.6%, up slightly from last quarter's utilization of 28.9% and similar to the first quarter of 2010's line utilization of 32.9%.

The general economic environment within our markets remains in a slow recovery. Unemployment has improved slightly, but most companies we speak with are hesitant to hire with a concern towards inflation, particularly in businesses that deal in markets affected by high commodity prices. Capital expenditures have been slow to return, but we are hearing more demand and hope that this may be a positive sign for the future.

Finally, I will close my presentation on slide number 10 with a brief overview of our recently announced agreement to purchase Integra's trust group.

As you are aware, the six individuals assigned to manage the Integra trust relationships left en masse approximately two weeks ago. Given that, we have been operating the Integra trust area under our service agreement. We have been contacting their customers and we are managing their accounts. We are actively soliciting commitments to retain the business, and we have been very pleased with the early results.

We anticipate closing this transaction no later than June 30, and we still feel comfortable that our accretion should be consistent with our early announced accretion of just under $0.01 on this transaction.

Let me turn the call over to Chris, and I look forward to answering your questions at the end of the call.

Thank you, Bob. At the beginning of his presentation, Bob summarized the elements of Old National's financial performance that we have discussed with you over several quarters. These are the areas upon which the management team is focused, and I am pleased with our progress so far.

I will talk further about Bob's points regarding revenue growth; operating expense reductions; net interest margin, and our capital management; while Daryl will talk about credit costs for this quarter.

I will begin on slide 12.

First-quarter revenue totaled $104.2 million. Total revenue in the quarter was $8 million higher than total revenue in the fourth quarter of 2010.

Looking at the components, net interest income was $61.4 million in the first quarter compared to $54 million in the fourth quarter of 2010. Fees, service charges and other revenue -- which does not include securities gains -- was up $2.9 million to $41.3 million in the first quarter from $38.4 million in the fourth quarter. Our Monroe Bancorp acquisition closed on January 1 of this year and gave us a nice lift in revenue for the quarter. The impact of the purchase accounting marks related to the Monroe balance sheet contributed approximately $3.7 million in net interest income. Additionally, Monroe businesses contributed $2.3 million in fee and service charge revenue for the quarter.

Noninterest expenses were $3.4 million lower in the first quarter of 2011 compared to the fourth quarter of 2010. We incurred expenses in both the fourth and first quarters related to staff reductions and the Monroe conversion.

In later slides, I've broken down our operating expenses into finer detail to show the progress we've made in our work to reduce operating expenses, particularly salary and benefits expense. But before we move to the operating expense detail slides, I would like to call your attention to our improved pretax, pre-provision income on slide 13.

Pretax, pre-provision income in the first quarter of 2011 was $24.3 million, an 88% increase over the fourth quarter of 2010 and a 15.7% increase over the first quarter of 2010. If I subtract securities gains from these quarters, first-quarter 2011 pretax, pre-provision income increased 151% from the fourth quarter of 2010, and 28% from the first quarter of 2010.

Please turn to slide 14, where I've graphed our progress in improving our productivity.

Since the second quarter of 2009, our population of associates has declined by 434 FTEs, or 15.1%, not including the Monroe associates we added this year. Including the 177 new Monroe associates as of 3-31-2011, our FTE climbed to 2,618 in the first quarter. In the second quarter, we expect an additional reduction of 61 FTE once we complete the Monroe conversion.

On slide 15, I have provided quarterly operating expenses since the fourth quarter of 2009. I adjusted reported operating expenses for those items that were unique to their respective quarters to give you what we believe is an appropriate view of the consistent improvement in our operating expense.

Adjusted expenses, excluding the new costs of operating Monroe, declined from $85.8 million in the fourth quarter of 2009 to $72.7 million in the fourth quarter of 2010 and further to $71.4 million in the first quarter of 2011. Recall that in the fourth quarter of 2010, we paid a discretionary bonus to non-executive personnel of $3.3 million, and we incurred $3.8 million in charges related to the extinguishment of debt.

In the first quarter of 2011, we incurred one-time charges of $3.5 million related to the integration of Monroe, and $4.4 million in operating expenses associated with Monroe. We expect an additional $4 million to $5 million in conversion expenses from Monroe, most of which should occur in the second quarter.

As I noted earlier, Monroe operating expenses should decrease in the second quarter as we realize additional staff reductions after the conversion is completed in May. We should meet the equivalent of 50% of Monroe operating cost savings when the company is fully converted and integrated.

On slide 16, I provided information regarding our net interest margin for the first quarter. The net interest margin increased to 3.62% in the first quarter compared to 3.46% in the fourth quarter of 2010. As I noted, accretion associated with the purchase accounting marks accounted for $3.7 million in net interest income for the quarter. This translates to 21 basis points of margin when annualized. We expect that the contribution from purchase accounting accretion will decline gradually during 2011. By the fourth quarter of 2011, we estimate that net interest income attributable to purchase accounting of the Monroe balance sheet will have declined approximately $1.3 million, to $2.4 million for the quarter, or 13 basis points of net interest margin when annualized.

Of the mark to fair value impacts associated with the acquisition of Monroe, the mark on loans will have the most impact on net interest income and margin, quarter to quarter. The earnings impact for the purchase accounting marks may be adjusted during the year, as expectations associated with the loans change, particularly as we work out the impaired loans.

Transaction account balances continued to increase during the first quarter. Total average checking balances increased $388.5 million during the quarter, $334.1 million of which came from Monroe, and $54.4 million from the remainder of the franchise. Since first quarter of 2010, average checking account balances have increased $438.3 million or over 18%.

Total average loan balances were up approximately $470 million on average compared to the fourth quarter of 2010. Monroe accounted for $432.1 million of this growth, and the remainder of the franchise accounted for $38.1 million in average loan growth. Average commercial and consumer loans, not including Monroe, were lower than the fourth quarter, but average residential mortgages increased $147 million, largely due to the success of our QHR initiative.

On slide 17, I prepared a more detailed analysis of first-quarter improvement in net interest margin. I'd like to focus on three of the drivers of the improved margin -- the change in asset yields; the change in volume and mix of assets; and I will make one point regarding wholesale funding.

The fact that the change in asset yields contributed a relatively small, 1-basis-point increase -- to the increased margin for the quarter, understates the yield changes of our earning assets. The yield on the investment portfolio declined by 21 basis points during the quarter, due to the reinvestment of cash flows at lower interest rates. Much of our cash flows are being reinvested in short-duration fixed-rate and variable-rate investments.

The yield on our loan portfolio increased 18 basis points, in large part due to the accretion of the discounts on the marked loan portfolio we acquired from Monroe. As I noted, we expect the contribution from the loan market to decline during the year, assuming loans perform as expected. This will likely be reflected in lower loan yields during 2011.

The change in mix and volume of assets gave us the biggest lift in the margin for the quarter. The loan portfolio increased by approximately $470 million compared to the fourth quarter, and this was due largely to the loans contributed by Monroe and in the increase in residential mortgage loans. The investment portfolio, including money market investments and cash at the Federal Reserve, increased only $50 million on average for the quarter, with cash in the Fed account increasing by $76.8 million over the fourth quarter.

Based on average balances for the first quarter, loans increased to 59% of earning assets compared to 57% of earning assets in the fourth quarter.

The one point related to wholesale funding I want to make is to remind you that in October of 2011, we expect to retire $150 million of 6.75% coupon subordinated debt. This should reduce significantly the cost and size of our wholesale funding portfolio. Considering likely lower earning asset yields during the year, the improved earning asset mix and lower fourth-quarter liability costs, we expect that the margin will decline during the second and third quarters but increase during the fourth quarter. During the fourth quarter, we expect the margin to be equal to or slightly higher than the 3.62% margin of the first quarter. This assumes an unchanged rate environment and no significant additional changes to earning asset or liability mix.

On slide 18, I graphed our tangible common equity to tangible assets and tangible common equity to risk-weighted asset ratios, compared to the average ratios of our peer group.

At the end of the fourth quarter 2010, the latest quarter for which peer data is available, our tangible common to tangible assets ratio was 178 basis points higher than the average ratio of our peer group. The purchase of Monroe for stock at a price of $90.1 million minus the goodwill and intangibles associated with the transaction, plus our earnings and a 40% dividend payout ratio for the quarter, were the primary drivers of a $28.3 million increase in tangible common equity for the quarter.

Tangible assets increased $774.1 million during the quarter due to the acquisition. Combined, these account for the 56 basis point decline in our tangible common ratio from the fourth quarter.

Our tangible common to risk-weighted assets ratio was 316 basis points higher than our peers in the fourth quarter, up from 306 basis points higher in the third quarter. Again, the Monroe acquisition drove the slight decline in our ratio for the first quarter of 2011.

Our capital ratios reflect capacity to either grow organically or through acquisition, or to return capital in the form of stock repurchases. We have not yet repurchased shares under our buyback authorization. We would prefer to utilize this capital for an acquisition, and don't believe it is prudent to buy back shares until it is clear that an acquisition will not be available to us in the near term.

Moving to slide 19, I show that our wholesale funding in the investment portfolio both increased somewhat during the quarter. I included in the graph what the portfolios would have looked like without Monroe, and you can see that the average balances in the investment portfolio and the wholesale funding portfolio would both have declined without the addition of the Monroe balances. As I mentioned earlier, money market investments including the cash balance in our Fed account, increased during the quarter as we continued to reduce the duration of our portfolio.

Average wholesale funding, not including the acquired funding from Monroe, declined to $744 million during the quarter. Recall that we called $100 million in trust preferred debt late in the fourth quarter, which lowered our average wholesale funding balances for the first quarter. We expect to continue to use cash flows from the investment portfolio to reduce our wholesale funding in 2011, and while we would like to shrink our investment portfolio further, our continued strong deposit growth may cause the investment portfolio to increase without accelerated loan growth.

My final slide, slide 20, shows the duration of book value of our investment portfolio at March 31. The total book value and duration calculations include the impact of the money market investments and deposits to the Fed. You will note that duration of the portfolio of assets declined to 3.85 from 4.02 at December 31. Our modeling indicates cash flows from the investment portfolio due to calls on maturities -- not including the cash investments -- are likely to be quite high at approximately $720 million for the next 12 months, if rates are unchanged.

We are still targeting a duration for the total investment portfolio of 3.5 to 3.6, including the impact of money market investments and deposits at the Fed.

In the first quarter, we took other than temporary impairment charge of $299,000 against two securities in our non-agency mortgage security portfolio. We sold approximately $10 million in book value of nonagency mortgage-backed securities in February, as we continued to look for opportunities to reduce the risk in this component of our portfolio. The appendix of this presentation includes slides with data on our OTTI charges over the last two years, and the changes in the classified assets portfolio due to the sale of the nonagency mortgage securities.

I will now turn the call over to Daryl.

Thank you, Chris, and good morning to everyone. I'd like to begin my presentation on slide 22, with a few comments on the Monroe acquisition and the increased marks on the loan-related assets that came over as a part of the transaction.

As we outlined in our recent 8-K as well as touching on it briefly in our last call last quarter, the marks on both the loan portfolio as well as the OREO book turned out to be greater than we had originally estimated when we first conducted our due diligence. At closing, we ended with a mark of $64.4 million on a $518 million loan book, an $8.1 million mark on the $17 million OREO portfolio.

Initial estimates had been $46.6 million mark on the loan book and $1.1 million mark against the OREO portfolio.

As we were able to obtain more current and more detailed financial information on our borrowers, we determined that based upon the application of the Old National credit administration standards, the marks needed to be a little greater than we had initially indicated.

With respect to credit quality trends, let's move to the top chart on slide 23, where you can see that we posted a decline again in our 30-plus delinquency levels, continuing the trend of already solid results in this measurement category. Delinquencies fell to 58 basis points at quarter's end, a level that continues to be considerably lower than the average results posted by banks within our peer group.

The same type of comment holds true with respect to our 90-plus delinquency levels, as shown in the chart at the bottom of the slide. 90-plus delinquencies were only two basis points of total loans at quarter end.

On slide 24, you can see in the quarter we again covered our net charge-offs with provision for loan losses of $3.3 million, slightly exceeding net losses of $2.9 million in the period.

Annualized charge-off rates were low in the quarter at 27 basis points, down considerably from last quarter's loss rates and may very well continue a trend of net charge-off result significantly lower than the average of our peer group for the period.

Moving on to slide 25, you can see that criticized loans showed an increase in the quarter, due mainly to the addition of loans from the Monroe portfolio, but also from some changes in the legacy Old National portfolio. Exclusive of Monroe additions, criticized loans rose $10.6 million in the quarter. While there was a fair amount of movement of credits in this category in the period, the two largest movements were the upgrade of an $8.8 million relationship from a substandard classification into this category, as well as an $8 million relationship moving into the category from a past classification.

Slide 26 reflects an improvement in substandard loan exposures, showing a $20.4 million drop in exposure in this high-risk category before the addition of any loans associated with the Monroe transaction. Additionally, as you can see, even with the Monroe portfolio additions, outstandings in this category fell slightly in the quarter.

On its face, the magnitude of the improvements in this category could be a little misleading, as part of the movement was attributed to the downgrade out of this classification and into nonaccrual, of three relationships totaling approximately $11.8 million. However, even absent the movement of these credits, we would still have posted a meaningful decline in this category when considering the Old National legacy portfolio only.

Nonaccrual loans as shown on slide 27 showed a meaningful increase in the quarter, rising $50.5 million. Of that $50 million plus increase, approximately $11.5 million was associated with the legacy Old National portfolio, with the balance of the increase representing the marked impaired loans associated with the acquisition.

With respect to the increase in the Old National legacy portfolio, as I mentioned a minute ago, the growth was centered in three relationships totaling roughly $11.8 million. Each of these relationships had previously been identified as troubled, and although the loans are currently performing, their movement to nonaccrual was precipitated by our continuing concern with their ability to cover debt service requirements prospectively. Since the end of the quarter, $2.1 million of these loans have been paid.

Allowance coverage of nonperforming assets fell in the quarter, as shown on slide 28. While an element of this decline was due to the increase in non-accruals in the Old National legacy portfolio just mentioned, a significant contributing factor was the addition of nonperforming loans from the Monroe Bancorp loan portfolio, which were recorded at fair value, with no allowance brought forward as prescribed by accounting conventions.

Finally, on slide 29, we thought we would give you some indication of what we are observing in the market today. Generally, our clients are slightly more upbeat in their assessment of their financial prospects, although there still remain borrowers in certain industry segments, including borrowers involved directly or indirectly in the residential and commercial real estate industry segments, that have not yet seen any sign of improvement with respect to top-line revenues.

Because the cycle has been both deep as well as extended, it has had a significant negative impact on the capital positions of many borrowers. These eroded capital positions will serve to keep some of these borrowers in criticized rated categories until meaningful, sustained, improved performance is evident. So it could take some time before you see any improvement in our borrowers' financial results work its way through our reported credit metrics.

Add to this, higher energy prices which, on the business cycle, will affect margins and on the consumer side will lower disposable income, as well as potentially higher interest rates on borrowed funds, and you can see that there remain a number of variables that continue to be in play with respect to where credit quality may move.

With those comments, I will turn the call over to Barbara.

Thank you, Daryl.

In less than two weeks, we expect to complete our bank systems conversion for Monroe Bank. We have had two practice conversions events that have been executed well, and all the known issues that can be remedied before the conversion are already cured.

The group involved in this work consisted of 19 teams, and a third of the team leaders were new team leaders. These new team leaders have done a splendid job and give us even more capacity and capability to complete these kinds of projects in the future.

Our associates have been trained; all the letters to clients notifying them of product and pricing changes have been mailed; the offices are being rewired for new security and data processing connections; new signs are being set in place; and this week, we begin just-in-time training for clients on our cash management Internet products.

In addition to converting systems on May 14, we will start to consolidate our facility. We will consolidate four of the ONB locations into the Monroe facilities in Bloomington, and will change the signs on four locations in the Indi market. And we will close two of the nearby charter locations into these nearby Monroe locations in Indi. This will leave us with eight locations in Bloomington and 48 locations in Indi after consolidation.

As we consolidate the operations center and these banking center locations, we expect to reduce headcount by 61 associates from mid-May through the end of June. The combination of fewer locations and the reduction in headcount will put us on track for the 50% cost saves we originally estimated. These will be realized during the second half of the year.

Our next steps beyond conversion will be to fully integrate the selling and servicing standards we use at Old National, and start to build increased sales results and revenues from the Bloomington market. We will continue to report our progress over the next several quarters, and this will conclude our update for today.

Sarah, we can open the line for questions now.

(Operator Instructions). Scott Siefers with Sandler O'Neill.

Let's see, Bob, first question maybe for you -- you talked about M&A interest in your opening remarks. I recall when you guys did your investor day last fall, you gave a very detailed series of thoughts on FDIC deals in particular. I guess maybe if you could just sort of update or refresh those thoughts, based on some of the things you've seen so far this year in kind of the FDIC world at large, so to speak?

Yes, that's a great question, Scott.

Clearly, the FDIC is moving at a little slower pace than they had in 2010, and I think as you look at Texas ratios, absent the Chicago market, which we've been pretty up front about in having no interest, there doesn't seem to be a lot of opportunities; there's clearly -- the elephant in the room that we all are aware of, but we continue to think that an FDIC deal makes sense for us; it would make sense really for a cost-efficiency basis.

We think that the opportunity to reduce our overhead costs and use our platform to be able to execute an FDIC deal is appropriate. We've done all our research; we know how to do them. It's just a matter of when an opportunity might present itself.

And much like any other deal, though, we're going to be diligent about the credit side and we're going to be diligent about the strategic. We are not going to do an FDIC deal just to do a deal.

Okay, perfect. That's helpful.

And then, Daryl, had a couple questions for you. Chris had given some pretty good thoughts on the direction of the margin for the remain of the year, inclusive of the purchase accounting-related items.

I know basically disposition of target companies' loans can have an impact on at least when that accretion works through. So I wondered if you could just give us a sense for your thoughts on the disposition strategy for Monroe's loans, i.e., do you intend to kind of work through the purchase credit-impaired loans, sell them, et cetera?

Yes, Scott, sure. I think that our approach of the Monroe portfolio is going to be just slightly different than maybe how we've approached our own portfolio, recognizing that there may be some opportunity for income. We will continue to work through these loans. We won't have a dramatic kind of draconian approach to taking these off the balance sheet, unless we think that the credits will be deteriorating. And at that point in time, we will make those decisions.

But we are going to look at each one of these individual credits, assess where we are on deterioration of where the credits are going, and make the right decision from an income perspective and a risk perspective for the company.

Scott, I think the bottom line on that is, we are going to do what's right for the shareholders as we look at these individual credits. And I think that is a little bit of why you saw some of the changes in the mark as well, is that we've taken a little longer view of how we are going to work out of these credits.

Okay. And then the last question I had for you, just on charge-offs; you know, you made the comment in your prepared remarks that they will be -- likely stay lower than peers, but they already were. And then I guess at least from my perspective, this quarter's results were much better than I would have thought. So I guess any thoughts you might be able to offer on helping to sort of narrow the range of potential charge-off expectations looking forward?

Yes, Scott, that's a really difficult question. You know, generally we think things are getting better, but we do have loans in the portfolio that could -- depending upon where those individual credits go -- could produce losses or could get better. So it would just be really a guess at this point in time, to give you any solid indication of where we think charge-offs are going to be for the rest of the year. Not -- sorry I can't do better than that.

Okay, no problem. All right, I think that's it; thank you very much, guys.

Jon Arfstrom with RBC Capital Markets.

Daryl, as long as you are front and center, a couple more questions for you.

I missed the number you said of the $11.8 million that had been repaid or renewed.

Yes, could you repeat that, Jon? We had a little bit hard time hearing you.

Just the dollar amount that you stated of the $11.8 million in new nonperformers that had been reduced after quarter end; what was that number; I missed that number?

$2.1 million.

$2.1 million, okay.

All right. And then the three relationships of $11.8 million, is this something that you would consider isolated? It seems like the commentary on credit is maybe mixed to a little bit better. And if in fact you would say it's isolated, is there anything larger that's sitting in the pipeline that has you concerned at all?

You know, there are always credits that are sitting in that substandard category that are of some size, and we could see some deterioration. As I said, though, each one of these three credits -- I don't know that they would be isolated, per se, but they are part of this bigger group that has kind of struggled through this recession. Capital has eroded, as I said. The top-line revenue has not come back, and so at a certain point in time when you look prospectively and what the debt service coverage is, you just begin to get more and more concerned.

So these are a group of those loans that we've not yet seen material improvement. We've got some of those in the portfolio. We also have some in the portfolio that are in that substandard category, that we clearly see are getting better. So, these were not surprises, but they are in that kind of group of just marginal credits.

Okay. And then, a question -- I don't know who will take this one, but just a question on the profile of what you are adding in residential mortgage and maybe a little bit more detail on the quick home refinance program, so we can understand that a little better.

Yes, this is Barbara Murphy.

The quick home refi program is a program we introduced in September. This is a very good set of mortgages that we've added to the books. The credit scores on it are very solid. We've yet to have one delinquency. We've booked these since September 15. The duration of these is really 10 to 15 years.

The product is limited at $250,000. We have decided to -- because of the credit quality being so, in my words, spectacular -- not Daryl's words -- we have decided to raise the limit from $250,000 to $400,000 to capture more opportunity in our major metropolitan areas of Louisville and Indianapolis and South Bend. So, it is a product that we feel very good about. And it has added significantly while the commercial volume is down.

And Jon, this is Daryl; I might just add something. I don't use the word spectacular in my vocabulary at all (laughter).

On anything.

I would tell you that this product was built around some pretty stringent credit standards. We are sticking to those standards with respect to credit score, LTVs, debt-to-income ratios. And this product really becomes an advantage to us in our marketplace, just simply by how quickly we can make our decisions and close the loan. So this was not a product that was built around any kind of change in the way we view strong credit being put on the books.

Okay. And then just final topic here -- the C&I category looks like it's -- at least on a period-end basis, relatively flat. I'm curious what your overall attitude is and how you're feeling about new C&I loan balances. And then also talk a little bit about the pricing environment on C&I.

The C&I environment has been slow. There's no doubt that we've seen a little bit of growth but not what we are used to in previous years.

We are -- even having loans go through the pipeline, they get approved, and customers are reticent to close. So it is not a function of their aren't customers out there who don't have capacity; they are being approved but they are just slow to sign on.

Yes, Jon, I would just add -- I think it reflects while working with the clients and their cautious view of the economy, I think they are making the initial decision to borrow, and then they are hesitant to leverage their company. So pipeline is up slightly, but there's nothing significant in the C&I environment in all our markets, and that would cut across the whole state of Indiana as well as other markets of Illinois and Kentucky.

And then just any comments on pricing?

Pricing has gotten probably a little bit more aggressive in the first quarter, as competition has increased for credits. We are seeing that pressure, but again, people are not really closing a lot of loans, so we're seeing a little bit of competition on pricing and a little bit on structure, but we are staying with where we are.

Thanks for the help.

Chris McGratty with KBW. That question has been withdrawn. And your next question comes from Emlen Harmon with Jefferies.

As long as we're talking about just commercial loan growth, could you maybe give me a little bit of color about what demand looked like over the course of the quarter, and whether you saw -- you know, we've heard from some banks; they saw a bit of a slowdown as the quarter wore on. Just kind of curious as to what you guys were seeing there.

It really just was a slow quarter. And again I think the phenomenon that puzzles me more than anything is that customers did come in, they did apply, they did get approved but they didn't close. And that just seems to be a little bit of a trend that we are seeing is they are just hesitant.

Okay, got you. Sounds like it was pretty steady, then.

And then if we could -- you guys have given us some pretty good color on expense saves and where you are; I was hoping we could just kind of recap in terms of what the run rate was. You guys have said you are 50% through the saves as of 1Q, so I'm assuming that we can -- just assume that's in the run rate for the second quarter. And then it sounds like the other 50% won't be fully run rated until the end of the third quarter; am I thinking about that the right way?

Yes, that's a good way -- the 50 is a reduction of 50 FTE that came through in the first quarter, which you should be able to get into the run rate in the second quarter. The 50% out of Monroe for modeling purposes, I would build in towards the latter part of the second quarter, because some of that comes out in May when we do the conversion, and the balance of it comes out towards the end of June. So it really will be a good -- a better run rate in the third quarter.

Okay, got you, thanks. And one just I guess final clean-up item -- on the tax rate, it looked like it may have been a little higher than I guess I would have expected. Kind of around 31%, is that what we should be thinking about in terms of a tax rate going forward? Was there anything unique going on there?

You know, Emlen, this is Chris. You know, we are tending to look at that 20% to 25% range, and I think it's just as you can tell, taxable income has increased relative to tax-exempt income -- which is what we've been working on for so many quarters. So along with that is just going to come a little higher tax rate going forward.

Okay, thanks.

In this case, we're glad to pay a little higher taxes.

We will pay it.

Fair enough. All right, thanks for taking my questions, guys.

David Long with Raymond James.

You had mentioned the utilization rate was up a few percentage points from the end of the fourth quarter. Was that just the small business and commercial portfolio?

Yes; that's in our line utilization, so any of our commitments on commercial lines, that's the line utilization rate.

Okay. And for the total lines available, how did that move from the end of the quarter -- from the end of the year to the end of the first quarter?

Fairly stagnant.

Okay. And then lastly on that, any geographies or industries that really stood out that would have drove the increase in the utilization?

No, not really. You know, we're still not seeing a large demand from our contractor base. We don't have a significant exposure. These wouldn't be home contractors; these would be larger industrial contractors. But it's pretty much, David, across the board, and it's just so small that it's hard to pinpoint exactly any -- either geography or industry.

All right, great. Thanks.

Mac Hodgson with SunTrust.

On the quick home refi program and the standards, you mentioned being very stringent on that on the investor day. I believe you mentioned it was FICOs over 740; loan-to-values less than 80%. Is that still the case? Just kind of curious where the spectacular credit quality kind of numbers are coming through.

(laughter)

We are going to -- we're going to recant Barbara's spectacular, realizing it's not a credit term. But the FICO scores continue to be in the range we talked about at investor day; above that range. And again, as Daryl said and Barbara said, we are very comfortable with the quality of the credit. And again, feel very good about the loan standards we've put in place.

Okay. And on the outside of this program in just the normal commercial loan book, remind us again what in-house loan limits are, target loan size, things like that?

Yes. Our loan limits are obviously [degragated] by grade. But our maximum loan is $20 million, and that's got to be a grade zero or 1 credit. Average loan size is still around that $250,000 to $300,000 target range. And our target credit really is something less than $5 million.

Our focus is really at the lower end of the C&I portfolio in small business, with the good work we've done with our CBU and other areas.

Okay, great. And on the Monroe acquisition and the adjustments to the original expectations on the fair value mark, any changes you all plan to make on just assumptions going forward in future deals, or the due diligence process in order to be more conservative in the future?

Yes, well, we like conservative, as you know.

I think the lesson that we've learned -- one, I think our due diligence process is very, very good. Where we probably need to be a little tighter is the connectivity between our accounting group and our credit group. So we get a little better comfort on the marks earlier on from an accounting perspective. So I think the lesson for future due diligence is to get Joan Kissel, our Controller and her team, involved probably more up front than we had with Monroe.

Maybe just one last one for Daryl -- on the reserve, you all have consistently added to the reserve, I guess in excess of charge-offs just slightly. What should we look for as a reason to bring -- for that trend to reverse? Is it special mention, the best category? Is it potential problem? How should we think about when we might see the reserve balance start to come down?

That is a great question. And I think generally you could probably look at just the reversal of nonperforming -- you know, our delinquencies are low now; if you begin to see the trends in each of those three special mentioned -- classified, nonperforming -- begin to have sustained improvement, then I think at that point in time, the committee would be more likely to move in that direction.

Now, having said that, you may see that those trends don't change, but we've got different factors within our analysis that do. And it might be that we begin to have provisions less than charge-offs. It just is a number of different factors that I couldn't isolate one or two to give you any great guidance.

I think the overarching word there, Mac, is sustained. We will need to see some sustained recovery and sustained quality in our portfolio -- again, back to my opening comments; we are conservative. We think building loan loss provisions is not a bad thing.

Okay, great. Thanks for the help.

Kenneth James with Sterne, Agee.

Good morning. I had a question, kind of circling back to the cost-cutting focus; it kind of really came through this quarter. If I look back over the last four quarters, it seems like you are putting together a pretty consistent trend of shaving about $1.5 million a quarter off that kind of adjusted expense number on slide 15. Should I have any reservations about continuing that trend going forward in my model?

You know, our desire is still to get to that 65% aspiration. To do that, we've got to continue to reduce costs.

Now, hopefully at some stage, the revenue line comes back, but you've got 50 FTE reduction this quarter; you've got Monroe coming in. So we are clearly focused on reducing cost.

Okay. And then in terms of the kind of adjusted marks you've put on Monroe, I mean by my math, it took up to a 15% kind of implied cumulative loss, which seems really high kind of for a small-town Indiana community bank type of kind of I guess acquisition marks we've seen in other larger deals.

Not everybody has Daryl! (laughter)

Other, larger deals with even possibly dicier credit. So I was wondering if you could comment on what you saw between announcement and close, and kind of just -- I don't know -- what you think you have prospects to do better, better than that, and you just had to mark them there now because that's where your most recent comp was, but you don't think maybe it will really be that bad?

Yes, we would have to shoot you if we gave you an idea of what the marks might look like in 90 days.

But I think Daryl made the appropriate comment, Kenneth. When we got in there, we got updated financials and applied our credit metrics. Clearly, that's what the mark ended up at. And I purposely started the conversation with talking about our conservative nature. Yes, we are conservative, but we are proud of it and we think that's the prudent thing to do for all shareholders.

Okay. And if I heard you correctly, don't expect any buybacks in the near term; you are going to fully explore any M&A opportunities?

Well, you know, we're going to have to be comfortable that the M&A opportunities aren't there, and we still think there is a lot of discussions and a lot of opportunities that might be there. And like Monroe, we think that's the best use of our capital in terms of the value it gives to our shareholders.

Thanks a lot.

John Barber with KBW.

Good morning, it's Christopher McGratty. I had some trouble with the phone this morning.

Yes, you haven't passed orientation yet!

You know, the speaker phone is still new to me! (laughter)

On the Monroe -- one more question on Monroe. Bob, can you talk about maybe any attrition -- maybe I missed it. But any attrition since the deal was announced?

You know, it's a little early on to talk about it. I would tell you, we are -- from a personnel standpoint we lost three or four of our mortgage originators, and we lost a cash-management person, the mortgage side. Probably less concerning to us because that market has kind of gotten pretty soft. So from an HR standpoint we are very good with the retention.

It's a little earlier with clients because fee changes in that will be notified in the next 30 days, and that's when the real rubber meets the road. But I was up there last week, spent two days in the market. I talked to a lot of clients, and there's a very positive feeling towards the partnership.

The leadership that Mark Bradford, Dan Doan and Chris Kroll have given us have been very strong. So we feel pretty good about it; we feel very good about it. I won't use the word spectacular, but we feel good about it.

Okay. And then just a housekeeping question on the Integra acquisition in the quarter. You mentioned servicing; is that exactly what this agreement is? Is there any management of assets, or is it just more servicing of the trust (multiple speakers)?

No, we are actually managing the assets as well. We're left -- Integra is only left with four support and operational personnel, so we've actually got our folks in there under a servicing agreement, which works out better, because quite frankly, we are getting in front of the clients now. We are able to make -- talk to them about what we can do. And fortunately our reputation is such that, as I've said, we've been very pleased with what we've heard from clients so far.

Okay, and you said there were six heads in that group?

Six that left and four that stayed. The four that stayed were all operational support personnel; the six that left were all the relationship managers, but we've been able to fulfill those relationships with our folks.

And as you may remember, we've got a number of folks that work for Old National that used to work for Integra, so they know those clients very well. I think the clients were glad to see familiar faces, and again, Carrie and her group have a great reputation.

Okay; thanks for the help.

Presenters, do you have any closing remarks?

No, we don't. Thank you so much. As always, if you have any further questions, contact Lynell, and we appreciate everybody's interest. Have a great day.

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, OldNational.com. A replay of the call will also be available by dialing 1-800-642-1687, conference ID code 57914516. This replay will be available through May 16.

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

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