Old National Bancorp (ONB) 2011 Q3 法說會逐字稿

Welcome to the Old National Bancorp third-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 1 p.m. Central today through November 14. To access the replay, dial 1-855-859-2056, conference ID code 18112540.

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, David, and good morning, everyone. Joining me today on Old National Bancorp's third-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 that 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 third quarter, please turn to slide 5 where I have noted specific items we will be discussing today.

First, Bob will kick off the discussion of our strong third-quarter financial performance driven by the completion of our first-ever FDIC assistant acquisition of Integra Bank. Bob will also provide you with Old National's thoughts on the state of banking today and how OMB is positively positioning itself given the challenging operating environment.

Chris and Daryl will then provide more detailed financial data relating to the third quarter as Chris will discuss our growth in revenues and net interest margin, major items impacting our non-interest expense base along with our strong third-quarter capital metrics. Daryl will discuss our current credit quality trends and our thoughts and outlook in this area as well as the enhancements we have in place for managing the Integra credit portfolio.

Barbara will then complete our prepared remarks with an update on our consolidation and integration efforts of the former Integra Bank operations. Following these prepared remarks, we will be happy to take your questions.

In line with our commitment to transparency, throughout the presentation and specifically in Chris and Daryl's sections, we have made every effort to delineate what we term legacy bank performance versus that attributable to our recent acquisitions. As we continually look to improve upon our disclosures, I would welcome your comments and suggestions following our call today.

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

Thanks, Lynell, and good morning to everyone and Happy Halloween as well. For those of you that are on the call that are affected by the snowstorm over the weekend, we hope that everyone is safe and that most importantly, you have power.

I am going to begin my presentation on slide number 7 with an overview of our third-quarter results as we announce them this morning.

The quarter was highlighted by good performance in what we have called our legacy bank driven by stabilizing credit trends that led to no loan loss provision and our continued focus on expenses. This improvement in the legacy bank was enhanced by the excellent integration of both Monroe and Integra, which improved net interest income, provided new revenue growth, and cost reductions. In the short-term, these transactions also provide the ancillary benefits of accretion associated with the purchase accounting marks on the acquired assets and liabilities assumed.

As Lynell said in her introductory remarks, we are going to work very hard to provide you with the information to differentiate between what is core and what are just temporary benefits associated with purchase accounting.

For the quarter, earnings per share were $0.18 or a 38% increase over the same quarter for last year and equal to the second quarter of 2011. Net income for the quarter is much the same story with earnings of $16.8 million as compared to $11.9 million for the second quarter of last year or a 41% increase. The $16.8 million for the quarter was $200,000 less than Old National's net income for the prior quarter of 2011.

During the quarter, though, we did absorb approximately $8.8 million of expenses, $6.8 million related to merger and integration expense and $2 million in an expense related to a tentative settlement of litigation of a 10-year-old lawsuit against our Trust Company, which has been discussed in our public filings since February of 2009 with our 2008 8-K.

As Chris will detail in his presentation, our original estimate of merger and integration expense associated with Integra was $22 million to $24 million. After further refinement, we now estimate these costs to be in the range of $13 million to $15 million.

Let's turn to slide number 8. We last spoke to you about Integra on the Monday after we acquired the bank and receivership from the FDIC. We did provide additional detail on our October 14 8-Ka where we gave information related to the fair value of the assets acquired and the liabilities assumed and described the anticipated effects of the acquisition on our financial condition and operating results.

Slides 8 and 9 will provide a recap of some of the more salient points and Chris, Daryl, and Barbara will give further detail.

But before I begin that review, I would tell you that we are very positive at this point towards the transaction. The integration has gone exceedingly well and the client reaction for the most part has been positive, which is a testament to the quality of the staff at both Integra and Old National locations.

What I would also tell you is that these transactions require a great deal of work and while we are very focused on cost reductions, I feel we have remained appropriately staffed in the areas that require the resources to fully realize the value we have committed to our shareholders.

As we mentioned in the 8-Ka, the Integra transaction did create goodwill in the amount of $29.7 million. This goodwill is the amount paid in excess of the fair value of the assets acquired and liabilities assumed, which we believe is an appropriate amount considering the cost savings we can achieve. In addition, there is a core deposit intangible associated with the transaction of $4.3 million, which represents the value of the relationships that Integra had with their deposit customers.

This intangible is based on the discounted cash flow methodology that gave appropriate consideration to type of deposits, deposit retention, cost of deposit base, and the net maintenance costs attributable to customer deposits.

Turning to slide 9, which is what I have termed here is what we said and here is where we are. When we announced the transaction on July 29, we had estimated that the transaction would create shareholder value through accretable earnings estimated at $0.18 to $0.19 after acquisition costs. We are still very comfortable that the transaction will be positive and anticipate a slightly higher level of accretion in part driven by our continued belief that we should be able to reduce the expense base of the legacy Integra by at least 75%. Our intent is to accomplish a great deal of those cost saves by the conversion date of December 9 of this year with some residual cost reductions carrying over to the first quarter of 2012.

As Chris will note, our capital levels remain strong and we do not anticipate any need to raise additional capital.

In closing my portion of the presentation, I would be remiss if I didn't opine on the environment that all banks are operating in today. A simple description would be difficult. As you think of the magnitude of regulatory changes all banks are dealing with at this time, the continued slow recovery of our economy, and the challenges that this presents to our borrowers, the pressures on revenue growth from tepid loan demand and net interest margin pressures along with the negative public perception that all banks are facing, it is indeed not an easy time to be a banker. These times require continued focus on execution and commitment to creating shareholder value.

As an organization, Old National remains committed to its three strategic imperatives which have been in place for the seven years we have been together as a management team. During these challenging times, our focus will continue to be on reducing expenses. Fortunately we have been at this for some time and have a number of plans in place to reduce costs. While we should get close to our aspirational efficiency ratio of 65% with the Integra transaction, we realize that the best way to continue to increase shareholder value is through continued focus on reducing complexity and the costs associated with it as well as other costs.

We also feel that our legacy Bank will continue to see opportunities to grow revenue through market share opportunities and the expansion of our client relationships. But we will not sacrifice credit quality as we look to grow revenue. As can be the case in times when loan growth is weak, banks can [strengthen] their credit standards, but this is not an area we will compromise on in our quest for growth.

Cross-selling opportunities still exist between our bankers and our wealth, insurance, and investment areas and the level of cooperation is excellent and we believe this provides us with an additional competitive distinction.

Finally, given the difficult environment, we still believe that M&A will be active and we plan on continuing to look for the right opportunities to grow Old National through partnerships like we have with Monroe and Integra. At the heart of those activities is our desire to create shareholder value and stay true to our committed community bank strategy.

Let me now turn the call over to Chris.

Thank you, Bob. I will begin on slide 11 with more highlights of our third-quarter earnings. Third-quarter revenue totaled $119.9 million, an increase of $14 million or 13.2% over the second quarter of this year. Net interest income was $10.3 million higher than the second quarter and of course, our acquisitions of Monroe Bancorp and Integra Bank lifted net interest income for the quarter.

The contribution to net interest income from the accretion of balance sheet purchase accounting marks was $5.5 million from Monroe Bancorp and $7.5 million from Integra Bank. Most of this income was due to the accretion of the purchase accounting discount of the loan portfolios.

The Monroe contribution was approximately $1.1 million less than in the second quarter. The acquisition of Integra closed on July 29 so the $7.5 million contribution represents about two months of purchase accounting related earnings for Integra.

Noninterest income not including securities gains increased 3.3% or $1.4 million over the second quarter of 2011. Deposit service charges were up $1.5 million and debit card related fees were up $700,000 compared to second quarter and both were largely driven by activity on the new deposit accounts acquired with the Integra acquisition.

My last bullet point on slide 11 notes that pre-tax pre-provision income not including merger and integration costs or securities gains was up 2.9% over the second quarter. As you will see when you turn to slide 12, pre-tax pre-provision income without securities gains or acquisition-related costs has increased now for the third consecutive quarter.

Total revenue in the third quarter was up 13.2% compared to the second quarter and 24.8% compared to third quarter 2010. It is important to note that operating expenses were essentially flat from the first quarter to the second quarter of 2011 while revenue increased $1.7 million during this period. Revenue increased another $14 million in the third quarter from the second quarter while operating expenses increased $15.4 million to $95.2 million.

As I will show in the next slide, much of the increase in expenses for the third quarter was related to the integration of Integra and we expect that these expenses will decline significantly in future quarters.

Revenue increasing at a faster rate than expenses quarter-over-quarter is an important trend for Old National and moves us closer to our strategic imperative of consistent quality earnings.

Our Integra conversion is slated for December 9, 2011, so first quarter 2012 should see a significant reduction in Integra expenses. Current Integra associates working on the conversion and in the branches slated to be consolidated will leave the Company in late December unless they are filling existing open positions in other areas of Old National.

Before I leave slide 12, you will see that provision expense was approximately zero in the third quarter compared to $3.2 million in the second quarter and $3.3 million in the first quarter of 2011. Daryl will discuss our credit risk in more detail during his presentation but the lower provision expense throughout 2011 reflects lower loan balances and lower risk in our legacy loan portfolio. Relatively low risk residential real estate loans, loans purchased and marked to fair value, and FDIC covered assets comprise an increasingly larger percentage of our loan portfolio.

Slide 13 provides additional detail on our noninterest expense in the second and third quarters of 2011. Because our noninterest expense increased in the third quarter, I believe it is important to identify those items that contributed to this increase.

In the second quarter of 2011, we incurred approximately $2.2 million of merger and integration costs related to the Monroe Bancorp integration. We completed the Monroe conversion in May of this year. $77.6 million of noninterest expenses in the second quarter were expenses incurred through our normal quarterly operations including the new expense related to Monroe facilities and retained personnel.

For the two months of the third quarter which we owned and operated Integra, we incurred $6.8 million of acquisition and integration costs and $6.3 million of operating costs. In addition to these Integra-related expenses, we accrued $3.2 million of incentive expense, $2 million in anticipation of the settlement of a long-standing lawsuit, and $900,000 of non-Integra related severance expense.

The $3.2 million of incentive expense accrued during the quarter is anticipation of a reinstated short-term incentive program for Old National Associates. As you may remember, our traditional short-term incentive program has been suspended for two years although we did accrue a modest incentive expense in the fourth quarter of 2010. We expect to accrue an additional $3.2 million for incentives in the fourth quarter.

When we compare noninterest expenses for the third quarter to expenses incurred during the second quarter, if we exclude those third-quarter costs I just listed, expenses related to our legacy operations declined approximately $1.6 million from the second quarter of this year.

A parallel illustration of the progress we have made in reducing noninterest expenses is on slide 14, were I have provided an update of the trend in employment at Old National. The top chart on this slide shows the trend in full-time equivalent employees since early 2009 with and without the employees we retained from Monroe. During the first quarter of 2011, which is when we closed on the Monroe acquisition, we added 127 full-time equivalent employees, bringing our FTE employment to 2618 by the end of the second quarter. By the end of the third quarter this year, our FTE had declined by 164 employees to 2454.So we finished the third quarter of 2011 with 37 fewer FTE than we had in the fourth quarter of 2010.

The second graph tells the same story as total employees declined from 2629 associates in the fourth quarter of 2010 to 2602 associates by the end of the third quarter of 2011. I believe these charts are the best demonstration of our progress toward improving productivity at Old National especially during a very busy third quarter at the Company in which many associates were involved in the integration activities associated with Integra.

It is important to recognize that third-quarter FTE numbers do not include the 406 Integra employees that were working at the company as of September 30. These associates are employed by an employment agency and are not included in our employee population. The cost of these associates is however reflected in our salary and benefits expense line.

Slide 15 provides a breakdown of the $6.8 million merger and integration charges of the third quarter and our current estimate of the timing of the remaining integration expenses. $3.9 million of our expenses in the third quarter were professional fees, primarily the fee to our investment banker. We also incurred charges for the professional partners who helped us with accounting and creating the infrastructure necessary to support the administration of the FDIC loss share. We accrued $2.2 million in retention costs mostly for the Integra associates who are critical to the conversion work.

At this time we expect $2.5 million to $3.5 million in additional merger and integration charges in the fourth quarter of this year and $3.5 million to $4.5 million in 2012. Most of these expected charges are related to system conversions, technology infrastructure, and branch divestitures. Integration costs could change as our decisions related to the remaining Integra branches evolve.

On slide 16, I have provided a breakdown of the components of our net interest margin for the third quarter. I started my presentation by noting the net interest income in the quarter from the accretion of purchase accounting marks from Monroe of $5.5 million and Integra of $7.5 million. The net interest income generated by the accretion of purchase accounting marks translated to an estimated 68 basis points of margin for the third quarter when annualized -- 29 basis points from the Monroe balance sheet and 39 basis points from the Integra balance sheet.

In the second quarter, accretion of the Monroe purchase accounting marks accounted for 38 basis points of net interest margin. Subtracting the contribution from the purchase accounting marks, we estimate the net interest margin on the legacy bank declined to 3.28% from 3.29% in the second quarter. The yield on the investment portfolio declined from 3.28% in the second quarter to 3.16% in the third quarter if cash balances at the Federal Reserve Bank are included in the portfolio.

The decline in the yield of the investment portfolio was mitigated somewhat by a decline in our cost of interest-bearing deposits and an increase in non-interest-bearing transaction accounts. Margin at the legacy bank should increase in the fourth quarter because of the October maturity of the 6.75% coupon, $150 million bank subordinated debt. We retired this debt using available cash at the bank.

For the fourth quarter of 2011, we expect the net interest income contribution from the accretion of the purchase accounting mark on the Monroe balance sheet to decline somewhat. Integra accretion should be consistent in the fourth quarter except of course we will have a full three months impact in the fourth quarter. So with a slightly higher margin from the core bank, somewhat lower contribution from the Monroe balance sheet and an additional month's income from Integra, I expect fully taxable equivalent net interest margin to be in excess of 4% for the fourth quarter.

As we have seen with the acquired Monroe balance sheet however, performance from the Integra loans could contribute to some volatility in the margin for the fourth quarter.

On slide 17, I have shown the impact of the accretion of purchase accounting discounts on loan yields over the last several quarters. In the first quarter of 2010, loan discount accretion contributed approximately $2.4 million or 6 basis points in the additional loan yield. I should say in the first quarter of 2011.

In the second quarter, the loan discount accretion from Monroe was $5.6 million or 13 basis points of additional loan yield. By the third quarter, Monroe-related loan appreciation totaled $4.7 million or 10 basis points of loan yield. Third quarter also included $7.2 million in loan-related accretion from the purchase accounting marks of the Integra loans. This created an additional 16 basis points of loan yield.

The loans acquired in both the Integra and Monroe transactions have been accounted for under the acquisition method of accounting and recorded at their estimated fair values as of the acquisition date. Monroe impaired loans are accounted for under ASC 31030 guidelines and Monroe performing loans are accounted for under FAS 91 rules.

In the case of Integra, we are counting for both impaired and a subset of our performing loans under ASC 31030 guidelines. ASC 31030 was formally known as SOP 33.

On slide 18, I provided a fairly simple analysis of the Monroe purchase accounting mark for the loans considered impaired on day one of the Monroe Bancorp acquisition. These are the loans accounted for under ASC 31030 accounting guidance.

On day one, impaired Monroe loans were marked to fair value with the discount totaling $46.8 million. This discount has two components -- the accretable discount, which is the yield generated from the expected future cash flows, and the non-accretable discount, which is the present value of the anticipated loss on the portfolio of loans.

The bars in the graph shows the cumulative income we have applied to the loans and changes to the accretable and non-accretable discounts as our expectations of the performance of these loans changed during 2011. Through September 30, we have recognized $9.5 million in income and applied this to the loan portfolio as interest income. As of September 30, the projected remaining accretable discount is $16.2 million of the original $46.8 million purchase accounting mark of the impaired loans.

As you can tell by this chart, our credit personnel have been successful in collecting many of these impaired loans more quickly or with better expected cash flows than originally believed or in bringing loans back to performing status. We will prepare a similar chart for our Integra assets in the future, although it will likely be more complex.

The FDIC receivable plus the fact that we are accounting for both performing and impaired loans from Integra under ASC 31030 guidelines will complicate the presentation somewhat.

On slide 19, I graphed our tangible common equity to tangible assets and tangible common equity to risk weighted assets ratio compared to the average ratios of our peer group. Tangible common equity as a percentage of tangible assets declined to 8.40% from 9.52% at the end of the second quarter due primarily to the acquisition of Integra. GAAP shareholders equity increased by $19.4 million from June 30 due to our strong earnings quarter, our 39% dividend payout ratio, and an $8.2 million increase in other comprehensive income.

Tangible assets increased $882 million compared to June 30 and the Integra purchase added goodwill and intangibles totaling $33.7 million as of September 30.

Our tangible common to risk weighted assets ratio declined to 13.42% from 14.82% at June 30. Risk weighted assets increased only $428.1 million from June 30 compared to the $882 million increase in tangible assets. We were pleased at our ability to close a deal the size of the Integra acquisition and still maintain equity ratios that rank among the highest in our peer group of banks.

While not noted on the slide, our leverage ratio at Old National Bank was approximately 7.10% at September 30, a decline of 10 basis points from our June 30 leverage ratio of 7.20%. To bolster bank cap and in anticipation of the impact of the Integra acquisition, the Company downstreamed approximately $25 million of cash to the bank in the quarter.

Our relatively strong capital ratios after absorbing the acquisitions this year of Monroe and Integra put us in a good position for further acquisitions, to absorb the impact of future economic downturns if required, or for other capital strategies.

Included in the appendix of the slide deck today are slides providing more detail on the investment portfolio including market value and duration. We took no OTTI in the third quarter but continue to monitor our trust preferred and non-agency CMO portfolios closely.

I will now turn the call over to Daryl.

Thank you, Chris, and good morning to everyone. I would like to begin my remarks with the top chart on slide 21, where you can see that we continue to post very acceptable results with respect to both our 30- and 90-day delinquency levels.

Excluding covered loans, 30 plus delinquencies were at 62 basis points at quarter's end, a level that continues to be considerably lower than the average results posted by the banks within our peer group although up slightly from last quarter's levels. 90-day noncovered loan delinquencies increased 2 basis points from last quarter's levels and now stand at 3 basis points.

The majority of the increase in delinquencies in the quarter came from the commercial and commercial real estate portfolios with a significant portion of those delinquencies related to maturity delinquencies as opposed to payment delinquencies.

On slide 22, you can see in the chart top at the top of the slide that charge-offs for the third quarter were $4.9 million, down slightly from last quarter's $5.8 million. 2011 year-to-date net charge-offs to average loans stand at 44 basis points compared to 76 basis points for the same period last year. As you know, we had no provision for the quarter driven by a number of factors to include lower lost migration rates across many categories as well as generally lower outstanding loan balances.

As the chart at the top of the slide shows, the annualized charge-off rate for the quarter was 50 basis points, down from last quarter's 56 basis points and considerably better than the trailing peer group average of 109 basis points.

With respect to the commercial area, year-to-date losses from the commercial and industrial portfolio are generally in line with our expectations while losses in the commercial real estate portfolio are actually slightly better than what we had anticipated when we set our targets at the beginning of the year.

That having been said, a majority of the larger relationships that migrated to nonaccrual in the current quarter were out of the commercial real estate portfolio. So it is possible that we may see increased losses out of this portfolio segment in the future.

Losses in the consumer portfolios continue to be well-controlled with all major categories performing better than expectations established at the beginning of the year.

Moving on to slide 23, you can see that within the OMB legacy portfolio only, criticized loans showed an $8.2 million decrease in the quarter. With Monroe movements included criticized loans were down $7.1 million in the period. Reduction in exposure in this category came primarily from the upgrade of a larger commercial real estate project during the quarter.

In addition to the decline in criticized loans, slide 24 reflects a decrease in substandard loan exposure. Substandard loans fell $9.3 million in the quarter, $8.1 million when they dollars of which came from the ONB legacy portfolio with an additional $1.2 million reduction contributed from the Monroe portfolio. Reductions in this category came from various avenues including payoffs and upgrades as well as some downgrades.

As slide 25 reflects, we showed a $6.4 million increase in the nonaccrual category in the quarter with a great majority of the larger credits moving into this category being commercial real estate loans. The OMB legacy portfolio contributed $4.5 million to the period increase with the Monroe portfolio adding an additional $1.9 million.

I will have additional remarks around what we are seeing out of the commercial real estate portfolio later in my presentation.

While with no provision in the quarter and slightly higher non-accruals, slide 26 shows that excluding noncovered and Monroe loans, the allowance coverage of nonperforming assets declined to 71% in the quarter. While the OMB noncovered consolidated percentages reflect a 49% coverage, I would remind you that these numbers do not take into consideration the $38 million mark against the Monroe portfolio.

Moving past the credit quality sides on slide 27, we thought we would give you an idea of what our portfolio mix looks like with the Integra loan assets included. As you can see, covered loans from the Integra transaction totaled $711.3 million at the end of the quarter. This number represents Integra originated loans that carry the 80% lost share coverage and is net of the markets determined by Old National. Outside of the covered loans slice the pie chart shown in yellow, are approximately $58 million in Integra loans that are not covered by the loss share agreement. This set of loans consists mainly of non-real estate secured consumer loans but also includes a relatively small amount of loans fully secured by deposits.

Slide 28 gives you additional granularity with respect to the covered assets. As you can see in our current assessment of the portfolio, we have identified that just slightly less than half of the commercial portfolio is classified as criticized or worse.

Having said that, however, we have not identified any issues out of the portfolio to date that would give us concern that our due diligence work was not on target.

To give you some flavor on how we are approaching the Integra covered portfolio, we have outlined some key points on slide 29. To assure proper handling of the FDIC covered assets, we felt it was important that we establish a separate division in the bank to handle the loss share assets. Within this division we have underwriting and special assets areas that work exclusively on the Integra covered asset portfolio. Individuals in these areas have been trained around the requirements of the purchase and assumption agreement with the FDIC and understand what must be done to preserve loss share on the covered assets.

Additionally, we engaged a third-party firm to work with us through the first several months of the Integra portfolio integration. The firm has been retained to help us make sure we are following the requirements of the loss share arrangements as well as to understand how to properly document our compliance with those requirements. Assistance around proper and timely FDIC reporting has also been an area of concentration by the third-party firm.

As slide 30 shows, building this segregated loss share division has allowed us to have a dedicated experienced team focused solely on working through the credits within the loss share requirements. Additionally and maybe as importantly, it has permitted us to manage our legacy portfolio in the same manner and with the same dedication as we did prior to the Integra purchase with little diversion of legacy credit resources to the loss share portfolio.

I do also want to mention that we understand the importance of the accounting and reporting plays in any FDIC assisted transaction. In this regard, we have placed the bank's former controller, Brendon Falconer, as the president of our loss share division.

With respect to general credit comments, as we look out over our different lending areas, we generally feel good about the state of our retail portfolio, although we acknowledge that we continue to suffer from the residential mortgage market overhang, which we expect to be with us for some time.

As we speak with both our credit managers as well as field relationship personnel, we feel that there has been some stabilization in the commercial and industrial segment of our portfolio with topline revenues appearing to have firmed across many industries. At this point in time however, the commercial real estate segment of our portfolio continues to be under stress. Both declining lease rates as well as increasing overall vacancy rates continued to be an issue in many projects, which leads to the continued concern around both increasing probability of default as well as loss given default in that portfolio.

I believe the consistent message we are hearing from our client base is that the uncertainty that exists in the economy today continues to lead them to a conservative approach to risk taking. We are concerned that until we see general confidence rise, we may not experience any meaningful growth in loan demand.

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

Thank you, Daryl. Our integration of the Integra organization is progressing as planned. 18 teams from functional groups in both organizations have been participating together for the past 90 days. Our process continues to work well. Systems conversion and tasks for mapping products and data was simplified since both organizations have been using the [FIZER 4] systems for years.

We had our first successful mock conversion two weeks ago and have another planned for this upcoming November 4 weekend. Based on our progress so far and during next weekend, we will evaluate if the third mock conversion is necessary. If we do decide to execute a third one, it will occur over the weekend of November 18 and the actual conversion will occur over the weekend of December 9.

The more arduous task associated with this integration event is the plan to consolidate the branches. We submitted a plan to consolidate 33 of the 52 existing locations and the FDIC approved it within 48 hours of submission. This plan allows us to do an early close of 14 locations. These early closures are closing existing Integra branches into other nearby Integra locations. We have completed 13 of these with the 14th one to be done on December 2.

This will leave us with 19 to consolidate at conversion, all of which will be folded into ONB facilities except one where we will fold our site into Bedford, Indiana into the location there because it has a drive-through facility and ours did not.

Our early closure plan was created to serve three purposes. First, we wanted to create a pool of employees who could start to back fill positions as Integra employees found other jobs. Second, we wanted to reduce operating costs as soon as possible. Third, we wanted to ease into the number of consolidations we have to do at conversion. The plan turned out to be very successful because fortunately within 60 days of the transaction occurring, 19 of the Integra managers had found new jobs so the pool concept was very much needed.

Two other major deliverables before our December 9 conversion will be the divestiture of the four branches in Chicago which will occur in the first week of December. The other will be the conversion of residential mortgages from Integra to our servicing vendor, Everhome, on November 30. After conversion, 15 branches will remain -- six in Indiana, five in Western Kentucky, and four in Southern Illinois. The conversion and consolidation activities will allow us to follow through with our expense reductions which are one of our primary drivers for the success of this event.

In addition, these reductions will facilitate closing the gap towards an improved efficiency ratio.

This concludes our formal remarks. Operator, we are ready to receive questions. Thank you.

(Operator Instructions). Chris McGratty, KBW.

Good morning, guys. On the expense question, maybe it's just a technical one and it seems like you took up the accretion for Integra up a little bit next year. Was any of this related to the lower one-time costs or was that all just the higher cost save assumptions baked in your model?

I think it's the higher cost save assumptions in the model plus we are seeing better retention on some of the assets that we brought over. We are seeing much better work from our folks with the clients.

Okay, so it wasn't the lower one timers. On the Chicago piece, we saw the deposit decision a few weeks back. Can you maybe talk about on the decision to keep the Chicago loans? It seems like I thought I saw that in the press release you are going to keep the loans associated with that. Maybe just comment on how big that is and kind of the decision you did together there?

The reason we kept those, Chris, is because of the loss share agreement. We can't sell those credits and I will let Daryl answer to the size of those. I think he is looking up the number for us now, Chris. But those are all covered under our loss share. We do feel they are appropriately marked. Those are difficult loans but we do think we have them marked right. Daryl, do you have an amount?

Yes, it's roughly $52 million with most of that being the commercial real estate.

Okay, and then just one --

I'd love to be able to sell that to my buddies at First Midwest with no loss share but I don't think they'd buy it, so --

Sure, just a final question on kind of how I should be thinking about the size of the balance sheet? I appreciate the comments on the loan growth challenges for the industry, the size of the investment portfolio kind of from here. You [haven't] had too much of integration from Integra, but how should we think about the absolute size of the portfolio going forward?

I think for planning purposes, I would say relatively flat. We are not seeing any significant growth opportunities or growth opportunities and we are going to continue to try to shrink those investment portfolios as best we can to reinvest that into loans. Barbara and her team have done a very good job with our Quick Home refi product and we're just not seeing a lot of loan growth and quite frankly, we're not going to go out and create loan growth. We'd rather work with our clients and do it right.

Okay, great. Thanks. Chris, on the tax rate, what should we be penciling in for the next few quarters?

Yes, thanks, Chris. Good question. As our taxable income has increased with the acquisition, we are looking at that rate in the low 30% going forward up from a significantly lower effective tax rate that we've had over the last several quarters.

Great. Thanks a lot.

Jon Arfstrom, RBC Capital Markets.

Good morning. Question maybe for you, Chris. The loan yield chart, slide 17, you covered a lot of ground on that but I'm just curious if there's anything you can attribute the stronger core yield to in your core portfolio?

Well, clearly on the acquired assets, discounts are an element. I think that the core -- if you look at the core, Jon, it's really the pricing mechanics that Barbara has put in place and some of the discounts that come with that.

I guess what I'm getting at is that relationship between price and volume because obviously those trends are much better than peers. When I see the core loan yields on the other hand you do have the organic change and the organic runoff. I'm just curious what the message is internally in terms of balancing that loan versus volume (multiple speakers)?

That's a great question, Chris, and I would tell you that we are very cognizant of it but Barbara has also done a very good job over the last few years of looking at returns on loans and we have gotten rid of some of our syndicated credits and worked those through and I think that has helped us quite a bit, is that too.

John, the other point that I make is that the incremental yield that we have on that chart is just from the accretion. So the actual loan yields from the acquired Monroe and Integra assets are reflected in that higher number. So it is the spread and the pricing, as Bob mentioned, related to Barbara, but it's also that extra yield associated with the loans that we have acquired. So it has driven up the portfolio -- or the yield on the whole portfolio.

Okay, that makes sense. Then just a couple more. The market share versus organic growth outlook, Bob, do you feel like even though there's organic challenges, do you feel like you are still getting your fair share of at bats and you're not giving up market share; you're maintaining or gaining market share?

Oh, absolutely. I feel very good with what we are seeing. Loan pipelines, while not significantly growing, we are seeing good, steady loan pipelines and we are getting every opportunity and our folks are aggressively out working to try to get new credits and we're managing it appropriately. And I think, quite frankly, with the gain in market share in a lot of our markets, our name recognition, while it was great, we are still -- we've got a lot of new opportunities with the new Integra clients and we are seeing --.

Then just one last question, a little more detail oriented. But the incentive accrual, I certainly don't have a problem with that, and I think we maybe discussed it two or three quarters ago. But what kind of triggers drive that incentive accrual?

Jon, it's primarily the outlook for EPS and some very basic assumptions around net charge-offs and some very basic things. I think that all of these look -- on a relative basis look pretty good. When you think in terms of provision expense that we've had and are charge-off experience, as well as the net income contributed from the acquisitions and largely better than anticipated performance in several fronts on the acquisition side.

So more quantitative than qualitative?

Absolutely.

Very much quantitative. Our Board wouldn't do a qualitative incentive, so clearly we have got specific goals and targets and that's how we allocate it.

Okay, thank you.

Mac Hodgson, SunTrust Robinson.

Good morning. Chris, on the margin, I know you mentioned a NIM above 4% in the fourth quarter. I know there's a lot of moving parts but how should we think about how the margin should trend in 2012 as the accretion continues to flow through spread income?

You know, with Monroe, as we have said several times, we would anticipate that the contribution from the accretion will fall off a little bit. That's a trend that we would expect to see in the 2012 as well as the fourth quarter. I think it's a little early on Integra. We will try to keep you guys posted on that but until I get a couple more months of actual performance, I am a little reluctant to attribute any margin, any significant change to the margin in that.

I think it's also important to point out you know, our investment portfolio is still a fairly large component of our balance sheet and that yield has come down and the way we are managing it, we would anticipate that that could still be a drag on margin going forward. But again as you know, we've got some repricing of our interest-bearing deposits still ahead of it. So like I said, the yield on the investment portfolio should come down a little bit through 2012.

Okay. And how much cash is left at the holding company?

I'm going to guesstimate this one at about $35 million to $40 million, Mac. Still plenty of liquidity to take care of our obligations. We were certainly prepared to invest more at the bank if it was necessary to maintain those high capital ratios that we intended to keep at the bank.

Great, just a follow-on to that, Bob, maybe elaborate on the M&A environment. You've still got some dry powder. Have you seen potential sellers' conversations picked up over the last few months given the economic weakness? What's generally your outlook for opportunity there?

I think there are opportunities, Mac. I think if you take my comments, I think every banker you are talking to, it's a difficult time. You are seeing revenue challenged, while you are improved credit, it's still a challenge in the work out area and you've regulatory environment. So we are seeing a lot more receptivity to conversations. We are actively talking to a lot of people and we continue to look for those right partnerships.

So I think the banks right now that are trading with not a lot of liquidity and maybe not trading at book or better, they're looking for where they can move to maybe get a little better return for their shareholders.

Okay, great. Thank you.

Kenneth James, Sterne, Agee.

Good morning. Chris, talking about the accretable yield number for Integra this quarter, $7.5 million in two months. I am assuming that $7.5 million was all kind of normal level yield accretable discount into income and there was no accelerated kind of discount accretion?

No, it's really just too early. We are still operating under the basic assumptions there and as I pointed out, we have got performing assets in that ASC 31030 pool also. So we would anticipate that that will be a little less volatile than what we perhaps have seen with Monroe. But it's awfully early to get a good read on that and probably won't be through the first couple of months here the fourth quarter.

Okay and should you have -- which I imagine you will -- accelerated discount accretion in quarters going forward? Is that all going to run through the margin or any of it going to show up in noninterest income, etc.?

Most of it goes through the margin.

I've seen it accounted for a couple different ways, so that's why I was --

Most of ours is set up to go through the margin and that's why we have seen -- as I pointed out, such a large percentage of that accretion that we have actually had has shown up in the margin. So we will continue to point that out. And to the extent that it diverges at all, we will make sure to point that out, too.

Okay, and then the other income statement impact and the noninterest income, the change in the FDIC asses, I would assume the -- that's -- only thing that's going to change that would be if you revalue the portfolio and have the cash flows go for you or against you?

Yes, as you know, the timing of that is driven by our assumptions around how those assets perform, so much like any of the changes to the margin, that would be the only thing that would drive a difference in the way we have accreted the benefit from the receivable.

Okay, do you guys mind quantifying the cost savings from the core systems conversion in Integra?

I had it at my fingertips.

We will get that for you, Kenneth. We'll get out to everybody.

Thanks a lot, guys.

(Operator Instructions). Steven Geyen, Stifel Nicolaus.

Good morning, guys. A handful of questions here. Just you mentioned the conversions that you are going to be going through I believe early December. Have you converted all the cost structure on the deposits on the various accounts to ONB?

Yes, we have. (multiple speakers) and we have actually -- as you know with the process you break CD rates immediately as well and those letters are out and our CDs are now appropriately priced.

Okay, a question for Daryl. The provisions, (inaudible) number to see, just curious about where you saw it. Was it in the specific -- well, maybe some -- a bit more information, do we see some declines in specific versus general reserves or which?

The way our model works obviously is that we will take our losses back through our model and the more accurate we are on grading our loans, the less impact a loss would necessarily have on the non-impaired pools. And so as we took those losses back through this quarter, we had some -- it really worked well for us.

In addition to that, Steven, a lot of that or some of that came from reduced loan outstandings, so you had not only lower loss rate but you also had reduced loan outstandings and we had as you know a fairly good month with respect to charge-offs. Most of that came out of those loans already impaired, so all three of those came kind of merged together to just tell us that a zero provision for the quarter was appropriate.

Okay, that's helpful. Maybe just one question on the fee income line, just wondering if there was any adjustments to the MSR during the quarter?

We don't have mortgage servicing rights, Steven. We don't capitalize those.

Most of our loans are either kept in whole loan form or we sell it servicing released.

Got it, got it. You're right. Okay, thank you.

Chris McGratty, KBW.

What kind of an average life assumption are you making on the Integra portfolio? I am just trying to back into what kind of a normal runoff would be kind on a quarterly basis? There's like a four- to five-year average life on this portfolio.

Chris, this is Chris and I'm looking at Daryl and I'm not sure that either of us have that number. I would -- it was probably just a little bit shorter than that particularly on the impaired loans. But if -- we can put together more detail of that and we will provide it to the group, too. That might be useful to look at the amortization and the accretion.

Okay, and then just one on the expenses. Once you kind of get the one timers out of the way over the next couple of quarters, can you maybe talk about what you see as a decent starting point from kind of an all-in -- now you have three -- two acquisitions in your legacy portfolio? What kind of a starting run rate should we see by maybe midyear for the Company?

Just in terms of EPS guidance?

No, I'm sorry, operating expenses.

Operating expenses, I'm sorry.

I would say as he look at midyear you know, as we look to next year, obviously have our merit increases, it will come into play but I would say absent that, you should see a slight decline in that core base. Then you add to that your merit increases and that right now is going to be somewhere in that 2.5% to 3% range. We don't envision adding a lot of core costs onto the franchise and in fact, you will get some slight decline absent since those merits.

Your starting point to kind of get to that would be this quarter or --? I'm just trying to put a dollar --.

I think you're going to get through another quarter of Integra to let us work out those costs. It's really -- we are going to be able to give you a better idea of that -- our first-quarter call, our fourth-quarter call that is held in January.

Okay, that's fine. Thanks.

Jeff Davis, Guggenheim Securities.

Good morning. A couple questions for you, Bob and just 30,000 foot is all I'm asking about. Is -- let me do them as a series. As it relates to M&A, are you seeing regulators more directly pushing banks to sell? And then along those, why? If yes, any difference between a let's say an OCC or a federal -- were there primary regulators or federal entity versus state-chartered?

And then as it relates to marks on the loans at these institutions, do you get a sense that the would-be sellers are getting more real in where they have the loans marked? And then the Daryl's point -- sorry, four-part question -- to Daryl's point about commercial real estate looking iffy, is there an implication that for some of these banks there may be another leg down in the marks that they prospectively may need to take?

In terms of regulators looking at pushing banks, we have not seen that at all, Jeff. It's really more boards are tired. Banks are tired. They look out at all these regulatory changes. They look at the interest rate environment. They look at the economy and it's just people are -- but we have not seen the regulators come at it.

In terms of the marks, it still continues to be a challenge as we have conversations. Obviously everybody thinks their stuff is prettier than we think it is and the first thing that Jim and I will tell the CEO of a bank that we're having conversations is that we are a royal pain in the ass when it comes to due diligence and we are going to work very hard on the credit side.

So I think any seller always believes that their portfolio is better than what a buyer would do, so you do see that gap between the marks that exists.

Has the gap narrowed any, Bob, from, say, a year ago, whether they have written it down or they're just -- they're getting more realistic?

What we're starting to see is more realism coming to the marks after they finish the next round of regulatory exams and I think they are getting a little closer. So what used to be the Grand Canyon may not be quite so large any more in terms of expectations. So I think that's all part of this whole cycle we are going through.

Relative to CRE, I do think that -- I have used a term premature euphoria. I think we got a little ahead of ourselves in terms of people getting confident around commercial real estate. We've been fairly consistent in our negativity towards it. So I do think there are still a lot of strings out there that are going to create some challenges that in certain markets with banks having an exposure to real estate.

Daryl, I don't know if you --

I would say that. You know, it's interesting. The commercial real estate markets or borrowers that we have, we have some projects that are performing very well. One of the difficulties with the commercial real estate borrower is they have multiple projects. So while our project may be performing well, they may have two or three other projects that are not and it just -- it creates such a strain on cash flow that all the projects then suffer. We are seeing a fair amount of that kind of dynamic going on in the market today.

Okay, but you are not of the mind at least yet for some of the smaller banks, Daryl, that there's another leg coming down and where they need to mark their commercial real estate loans?

It just depends on the bank. I would say most have become much more realistic.

I think the regulators have gotten in there too, Jeff.

Thanks much.

There are no further questions. Do you have any closing remarks?

No, but as always, please call Lynell. In all frankness, if there's other things that you would like to see us attach to the slides, we do our danged-est to disclose as much as we can. So we heard a few things we can look at trying to do but as always, we appreciate your support and if there's things we can do better, let us know. Thanks.

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 1-855-859-2056, conference ID code 18112540. This replay will be available through November 14. If anyone has additional questions, please contact Lynell Walton at 812-464-1366.

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