Old National Bancorp (ONB) 2011 Q4 法說會逐字稿

Welcome to the Old National Bancorp fourth-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 PM Central today through February 13.

To access the replay, dial 1-855-859-2056 and use conference ID code 4217-3725.

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, Paula, and good morning everyone. Joining me today are Old National Bancorp's -- for joining me today on Old National Bancorp's fourth-quarter 2011 earnings conference call. Joining me on this call are management members Bob Jones, Chris Wolking, Daryl Moore and Joan Kissel.

On slide 3 you will find our 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 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 fourth quarter please turn to slide 5 where as noted specific items we will be discussing today. First, Bob will kick off the discussion of our strong recent financial performance with highlights of both our fourth quarter and full year 2011 earnings performance. He will then provide his thoughts on the current economic environment. Chris will then review our net interest expense performance, non-interest expense performance, capital metrics, and components of our net interest margin and provide our outlook on these metrics. Daryl will then update you on our credit quality and provide his commentary on our outlook in this area. Following these prepared remarks, we will be happy to open the line and take your questions.

With that I will turn the call over to Bob.

Thank you, Lynell, and good morning from Indiana, home of Super Bowl XLVI. We hope everyone is as excited as we are.

We appreciate you joining us today for our fourth-quarter 2011 earnings call. I am going to begin my portion of the presentation on slide 7 by highlighting our fourth-quarter 2011 performance and then I will quickly review our full year 2011 performance on slide 8.

Following my brief overview, I will close my remarks with giving some context around 2012 in an attempt to help you with building your models. Given the complexity of our financials as it relates to both Monroe and Integra's acquisitions, we felt it would be both important and appreciated.

I should also mention that during our Q&A session, we will be very happy to answer any further clarifying questions you have on our recent acquisition of Indiana Bank and Trust. So let's begin on slide 7.

Today we reported net income of $22.2 million or $0.23 per share. These earnings represented a significant increase over the fourth quarter of 2010 and a 27.8% increase in earnings per share as compared to the third quarter of 2011. It is important to note that included in our fourth quarter earnings were approximately $5.2 million of merger and integration costs related to our Integra and Monroe acquisitions.

Chris is going to give you a little more detail, but as you compare our fourth quarter of 2011 to our third quarter of 2011 on a pre-tax, pre-provision basis you may get a better picture of our performance. Our pre-tax, pre-provision income without security gains and without the merger and integration costs increased 20.3% with our revenue up 4.8%.

As you turn to slide 8 I am going to quickly review our full year 2011 performance. We had net income of $72.5 million or $0.76 per share which was an increase of 73% in earnings per share over 2010. We view both the fourth quarter and the full year 2011 as success, in terms of improved performance and we believe we are well positioned to face the potential headwinds of our industry and take advantage of the slowly changing winds of the economic recovery. Our success has clearly been driven by three very critical elements.

One of those is the reduced credit costs. Our full year 2011 loan loss provision was $23.3 million less than in 2010. In addition, we did successfully integrate two acquisitions this past year. And both of these had very positive financial and strategic benefits to our shareholders.

Finally, our continued emphasis on improving our efficiencies has also contributed towards our improved performance. And as you look towards 2012, I believe that these same three drivers will still play a critical role in our financial performance.

While we continue to believe the economic recovery is slow, it does appear that the overall mood seems to be improving. But it is still to be determined what effect this long slow recovery has had on our borrowers and our prospects. While we have clearly benefited from a reduced loan loss provision in 2011, it is really too early to determine what impact this elongated recovery will have on our credit costs in 2012.

The continued improvement of our efficiency ratio is very important to us as a lever to enhance shareholder value. So much so that our Board of Directors has made it a component of our short-term incentive plans.

The power of this is very obvious. It allows us to continue to focus on improving both our revenue while at the same time continuing to improve the efficiency of our operating platform.

As an industry, this slow economic recovery along with the increased challenges our industry faces, we believe, will present more partnership opportunities like the one with Indiana Bank and Trust. My commitment to you is we will remain diligent in our process, adhere to our financial and strategic goals, always with the understanding that our ultimate driver of any partnership must be the value we create for you, our owners, with your capital.

A few observations before I turn the call over to Chris to give you some more detail. In the fourth quarter, we had a number of expenses that will not be in our run rate for the first quarter. They totaled around $9 million.

Some of this is related to the 27 former Integra branches that were consolidated during the quarter with the balance related to former associates of Integra, whose positions were eliminated as of 12/31/2011.

Finally, as you all know, while we were pleased with our reported margin at 4.2%, we do benefit from accretable yield from the balance sheet marks relating to both Monroe and Integra. Chris is going to give you a good review of these components that should help you with building your models for 2012.

Overall we would characterize 2011 as the year where we made major strides towards our strategic imperatives. With our recently announced partnership with Indiana Bank and Trust, we feel we will make even more progress. Let me now turn the call over to Chris.

Thanks, Bob. I will begin on slide 10 with a few more highlights of the fourth quarter.

Fourth-quarter revenue totaled $125.7 million, an increase of $5.8 million compared to third quarter of 2011. Net interest income was $4 million higher than the third quarter, an increase of 5.5%. Fees, service charges and other income not including securities and derivatives-related revenue increased 4.1% and totaled $46.1 million in the fourth quarter. We had a full quarter's impact of Integra Bank in the fourth quarter and this contributed to the increase in both interest and non-interest revenue for the fourth quarter.

Non-interest revenue was also helped somewhat in the quarter by our sale of the four Chicago area Integra branches to First Midwest. We recognized $1.1 million in gain on this sale as well as a $1.3 million gain on an unrelated real estate transaction this quarter.

Last point on slide 10 notes that pre-tax pre-provision income not including securities gains and merger and integration costs improved 20.3% over third quarter.

On slide 11, I have more detail on pre-tax pre-provision income. As I noted previously, securities gains and merger and integration expenses are moved from the calculations; fourth quarter 2011 pre-tax, pre-provision income increased 20.3% over the third quarter to $34.4 million. For the full year 2011, pre-tax, pre-provision income not including securities gains and merger and integration expenses increased to $117.4 million from $61 million in 2010, an increase of 92.3% year over year.

Total revenue in the fourth quarter was up 4.8% compared to third-quarter 2011 and 30.7% compared to fourth-quarter 2010. Non-interest expense for the fourth-quarter 2011, not including merger and integration expense, was $88.5 million compared to $83.3 million in the fourth quarter of 2010, an increase of 6.2%.

When I look at quarterly revenue growth from a year ago of 30.7%, compared to the growth of ongoing expenses of only 6.2%, you can see why we are quite pleased with the impact of Monroe and Integra acquisitions has had on our performance.

It is important to note that we closed on the sale of the Chicago area branches on December 2 and completed our Integra conversion successfully on December 9, 2011. In the fourth quarter, we sold or closed a total of 27 branches, four in October, four on December 2 with the sale and 19 on December 9 at conversion. Without the occupancy and stacking expenses associated with these branches, operating expense should decline by $4 million in the first quarter of 2012 compared to the fourth quarter of 2011, should contribute to improved operating efficiency ratios beginning in the first quarter of 2012.

Finally on slide 11, you will see that provision expense was $1 million in the fourth quarter compared to zero provision in the third quarter and $7.1 million in the fourth quarter of 2010. For the full year 2011, provision expense was $7.5 million much lower than the $30.8 million recorded in 2010. Daryl will discuss our credit risk metrics and more detail during his presentation but the lower provision expense in 2011 reflects lower loan balances and lower risk in the legacy loan portfolio of the Company. Our legacy loan portfolio continued to reflect the growing percentage of relatively low risk residential real estate loans in 2011.

As Daryl will also show in his slides, our total loan portfolio has a large percentage of the purchase loans carried at fair value and loans covered by FDIC loss share. The fair value [mark] and the FDIC loss share both contribute significantly to coverage to the coverage of credit risk on our balance sheet. As the economy improves and commercial loans grow at the legacy bank and as purchase assets season on our balance sheet, it is reasonable to expect that future provision expense could increase from the current low expense we experienced in the second half of 2011.

Slide 12 shows additional detail on our non-interest expense in the third and fourth quarters of 2011. Fourth-quarter total non-interest expense declined $1.5 million to $93.7 million from the third quarter due largely to a decline of $1.6 million in acquisition costs associated with Integra and Monroe, and the $2 million accrual for an anticipated litigation settlement we recorded in the third quarter.

Integra operations expense increased $2.2 million to $8.5 million compared to the third quarter as we executed on the branch conversion of sale. Costs associated with remaining operations of the Company which include the costs of Monroe-related operations declined $300,000 from the third quarter to $78.9 million in the fourth quarter.

As I previously noted, we expect that cost associated with the Integra operations will decline approximately $4 million in the first quarter compared to fourth quarter due to the post-conversion decline in occupancy and personnel costs. Combined with further reductions in merger and integration costs, we expect that operating expenses in the first quarter should decline by approximately $9 million from the fourth quarter of 2011.

We believe that total remaining one-time charges for Integra should be $2 million in 2012 the timing of which will be determined primarily by actions on the remaining branches. A parallel illustration of the progress we have made in reducing non-interest expenses is on slide 13 where I provided an update of the trend in employment at Old National.

Top chart on this slide shows the trend in full-time equivalent employees since early 2009. During the first quarter of 2011 which was the quarter we closed on the Monroe purchase, we added a net of 127 full-time equivalent employees bringing our FTE employment to 2,618 by the end of the second quarter. By the end of the third quarter of 2011, our FTE had declined by 164 employees to 2,454. At the end of the year our FTE had increased by 97 to 2,551 reflecting overtime, the payment of accrued vacation and post-conversion staff additions from Integra.

Total employees increased to 2,679 by the end of the fourth quarter due primarily to Integra associates that were transferred to the ONB payroll from the contract workforce for the newly converted branches and for credit and for other areas of the Company. It is important to note that fourth-quarter staffing numbers do not include 102 contract Integra employees that were working at the Company as of December 31. Depending on staffing requirements in 2012, some of the remaining 102 contract associates may be retained as associates of Old National Bank. Contract associates are not on our payroll, but the cost of these associates are, however, included in our salary and benefits expense line.

On slide 14, I have provided a breakdown of the components of our net interest margin for the fourth quarter. Net interest margin on a fully taxable equivalent basis increased 24 basis points in the fourth quarter to 4.20% from 3.96% in the third quarter. The net interest income generated by the accretion of purchase accounting marks translated to an estimated 69 basis points of margin for the fourth quarter when annualized, 37 basis points from the Monroe balance sheet and 32 basis points from the Integra balance sheet.

Subtracting the contribution from the purchase accounting marks, the core net interest margin increased from 3.28% in the third quarter to 3.51% in the fourth quarter. Primary driver of this improvement was the maturity in October of $150 million of subordinated bank debt which carried a 6.75% coupon.

For 2012 we expect the net interest income contribution from the accretion of the purchase accounting marks of the Monroe balance sheet to decline. The Integra accretion should remain -- should be stable during 2012. We expect the net interest margin of the legacy company to be stable to slightly lower during the year. With a stable margin from the legacy company, stable margin from the Integra balance sheet and lower contribution from the Monroe balance sheet, I expect fully taxable equivalent interest margin to be around 4% for the first 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 during 2012.

On slides 15 and 16, we have provided an analysis of the performance of the loans accounted for under ASC 31030 accounting guidance accounting guidance. These are the loans that were considered impaired in the Monroe and Integra acquisitions and represent the largest component to the credit fair value mark for the two acquisitions.

Slide 15 shows the components of our acquired Monroe loans. The first column represents day one for Monroe. You recall that the non-accretable difference is the difference between contractual cash flows and gross expected cash flows. The accretable difference is the difference between gross expected cash flows and the net present value of these expected cash flows. This is the amount expected to be booked into income over the life of the portfolio. The bars and the graph show the cumulative income we have recognized and the changes to the accretable and non-accretable components as our expectations of the performance of these loans change during 2011.

Through the fourth quarter of 2011, we recognized $14.1 million of loan interest income. Based on our current cash flow expectations, the remaining accretable discount is $15.5 million.

Slide 16 shows the Integra impaired loan performance since the closing date of July 29, 2011. We've booked $20.6 million to loan interest income to date and project that another $97.9 million remains to be booked into income. It is important to recognize that if our cash flow expectations decline as the loans season on our balance sheet the financial impact would result in provision expense. Additionally as our loss expectations change for our Integra assets, we will adjust our indemnification receivable from the FDIC accordingly resulting in additional income or expense.

On slide 17, I graphed our tangible common equity to tangible assets, tangible common equity to risk-weighted asset ratios compared to the average ratios of our peer group. Tangible common equity as a result of -- as a percentage of tangible assets increased from 8.40% at the end of the third quarter to 8.97% at December 31, 2011. Changes in tangible common equity and tangible assets both impacted the tangible common ratios.

GAAP shareholders' equity increased by $5.9 million from September 30 to December 31 due to our strong earnings in the quarter combined with the approximate 30% dividend payout ratio. OCI, other comprehensive income, decreased $9.6 million in the quarter. Goodwill and intangibles declined $15.5 million in the quarter due to the sale of the Chicago area branches in December plus an adjustment to our day one purchase accounting estimate. Tangible assets decreased $307.3 million compared to the end of the third quarter, driven largely by a reduction in investment portfolio assets which were used to find the sale of the Chicago deposits and the maturity of the subordinated debt. Our tangible common to risk-weighted assets ratio increased to 14.46% from 13.42% at September 30. Risk-weighted assets decreased $243 million from September 30.

We announced last week an increase in our quarterly dividend from $0.07 to $0.09 per share and the acquisition of Indiana Community Bancorp. At the closing of the acquisition, our TCE ratio based on our current balance sheet and earnings projections should be approximately 8.27%, which we expect will continue to be at or slightly above our peer group average. While our old national guideline on the graph is 6%, currently we feel that operating with TCE ratio in the range of 7% to 7.5% is consistent with the risk on our balance sheet, our economic outlook and the potential changes in the regulatory environment.

I will now turn the call over to Daryl Moore.

Thank you, Chris, and good morning to everyone. I would like to begin my remarks on slide 19 where you can see that we continue to post acceptable results with respect to both our 30+ day as well as our 90+ day delinquency levels.

As the top chart reflects excluding covered loans 30+ delinquencies was 78 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 but up 16 basis points from last quarter's levels. A 16 basis point increase since last quarter is mainly a result of one large commercial mortgage loan that had matured at year end which added 12 basis points to the delinquency totals. The balance of the growth in delinquencies was mostly associated with the seasonal delinquency increases we typically experience in the fourth quarter in the retail area.

Removing the effect of the large maturity delinquency which since year-end has been remedied, the delinquencies would have been in the 66 basis point range, very similar to results posted at year-end 2010. 90+ day non-covered loan delinquencies, as you can see on the chart at the bottom of the slide, remained constant in the quarter at 3 basis points and continued to be at a level considerably lower than that of our peers.

At year end, the delinquencies in our business banking and consumer loan portfolios marginally exceeded our internal target levels, while the delinquencies in our commercial real estate portfolio posted a more material negative target variance at the period's end. This more significant negative variance was, however, due entirely to the matured loan previously mentioned. All of our other portfolios reflected delinquency below target rates established for 2011.

On slide 20, you see in the chart at the top of the slide non-covered portfolio net charge-offs for the fourth quarter were $8.2 million, up from last quarter's $4.9 million. Net charge-offs for the full year were $21.7 million, a reduction of $6.3 million or 22.5% from 2010's full year levels. Excluding covered assets we had virtually no provision for loan losses in the quarter driven by a number of factors to include lower loss migration rates across some of the portfolio categories, lower levels of [criticized] and classified assets and generally lower outstanding loan balances in our commercial lending portfolio portfolios.

As the chart at the bottom of slide 20 shows the non-covered annualized charge-off rate for the quarter was 79 basis points, up from last quarter's 50 basis points but still slightly better than the trailing peer group average as of September. 2011 full year net charge-offs to average loans in the non-covered portfolio were 53 basis points, a meaningful improvement over the 75 basis points posted in 2010.

With respect to the commercial area, 2011 non-covered losses from the C&I portfolio are generally in line with our expectations while non-covered losses in the commercial real estate portfolio ended up higher than what we had anticipated when we set our target at the beginning of the year. Losses in the consumer portfolio continued to be well-controlled with all major categories performing better than the expectations established at the beginning of the year.

Moving on to slide 21, you can see that within the ONB legacy portfolio only, criticized loans showed a $15.4 million decrease in the quarter with Monroe movements included in non-covered criticized loans were down $18.4 million in the period. Reduction in exposure in this category came primarily from upgrades or payoffs of larger commercial type loans in the quarter.

In addition to the declining criticized loans, slide 22 reflects a decrease in non-covered classified loan exposure. Non-covered classified loans fell $12.8 million in the quarter, $11.3 million of which came from the ONB legacy portfolio with an additional $1.5 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 23 reflects, we showed a $9.5 million decrease in the non-accrual exposure in the quarter. ONB legacy portfolio contributed $5.8 million to the period's decrease with the Monroe portfolio adding an additional $3.7 million. The majority of the changes in this category as is typically the case were a result of either paydowns, charge-offs, or movements of exposure to the OREO category.

Moving to slide 24 we see that excluding covered and Monroe loans, the allowance coverage of nonperforming assets declined 3 basis points in the quarter to 65% notwithstanding a fall in nonperforming assets during the period. While the ONB non-covered consolidated percentages reflect a 46% coverage I would remind you that these numbers do not take into consideration the $30.8 million mark against the Monroe portfolio.

In this regard if we move to slide 25, you can see that we have laid out for you what the combined allowance for loan losses [on loan marks] look like as a percentage of the pre-mark loan portfolio. You can see that combined allowance in marks represent more than 8% of the pre-mark Monroe portfolio and almost 25% of the pre-mark Integra portfolio which I would remind you is subject to our loss share agreement with the FDIC. On a combined basis the allowance for loan losses and loan marks as a percent of the pre-mark loan portfolio is in excess of 6%.

Moving past the credit slides, on slide 26 we wanted again to give you an idea of what our portfolio mix looks like the covered assets -- covered loan assets included. As you can see covered loans from the Integra transaction totaled $626.4 million at the end of the quarter. This number represents Integra originated loans that carry the 80% loss share coverage and is net of a $220.7 million mark. Not included in the covered loans slice of the pie chart showing in yellow are approximately $40.9 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.

Moving to slide 27, we show a breakout of the Integra covered portfolio by commercial and retail asset types and then further break down the asset quality rating distribution covered commercial assets. Commercial criticized classified nonaccrual loans in this covered portfolio in aggregate fell roughly $20 million in the quarter with OREO balances down another $1.5 million. Covered loans 90+ days or more delinquent rose $1.7 million in the quarter.

Moving to slide 28, in summary, I would say that overall it was a fairly good quarter for the bank in terms of the reduction in our risk assets. With respect to what the near-term future holds, we are generally hearing that many of our borrowers are at least a bit more optimistic that a slow recovery may be gaining some momentum.

However, we still have many borrowers in our portfolio who have not yet seen tangible material evidence of any recovery and are not yet totally convinced that a long-term sustainable turnaround has begun.

Because the financial condition of many of our borrowers has suffered over the last several years, we expect to continue to seek downgrades within the portfolio until an extended recovery is in play. This will be especially true in the commercial real estate portfolio where capital and liquidity continue to be an issue for many of our clients.

With respect to the Integra portfolio, progress continues in our efforts to work through the problem loan portfolio that came with that acquisition. To date, we have experienced some success and generally continue to feel good around the mark on that portfolio.

With those comments, operator, I think we are ready to open the line for questions.

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

Good morning. Let's see just, I guess the first question I have is you gave a lot of good commentary overall, but as well on the, Daryl and Bob, you both made comments on the slow recovery and the impact on the credit side of the equation. I wondered, Bob, if you could talk a little bit about overall loan growth expectations on a core basis. I guess you guys have a few different moving parts because you have got pieces of the Integra portfolio running off.

So maybe if you could just talk qualitatively about where you see the loan portfolio going, and then whether we should expect it to start going up or still a little overall bleed as some of the Integra portfolio continues to roll off?

I think from a global basis, Scott, you will still see some reduction, particularly in that Integra portfolio that, net net, I wouldn't anticipate that the balance sheet on the loan side is going to grow very significantly.

Saying that, we are beginning to see pipelines increase on a slight basis. We are hearing a little more optimism from our potential borrowers and borrowers, you know and I'd also say from just an intangible benefit obviously the good year we have had plus the acquisitions our RMs are feeling pretty good about going out and calling on clients.

So I think if you remove Integra from the equation you know I would say you might see some growth in that organic balance sheet, but again I think Integra is going to overshadow some of that.

Okay. Perfect. Thank you and then if I could switch over to the cost side for just a second. Sounded like overall efficiency is going to be a real focus as we look out over the next year. You guys gave some pretty good color on the overall expectation for the cost side.

If we try to X out the noise, can you talk a little bit about core expense growth trends or even additional reductions and then, kind of tangential to that, are all of the Integra cost savings now pretty much baked into the the equation?

No; you have still got some Integra cost that may come out depending on some branch actions that we have that are potential. For the most part they are out, though. I guess the way I would answer that is we still have a strong aspiration to get to that 65% efficiency ratio. I think that is why the Board felt important enough to put it into our short-term incentives. Now, obviously, as we get some growth back in the economy it is a lot easier to get there growing. But I would say that the Board, myself and others still feel that we need to continue to leverage this operating platform and reduce costs as best as possible. Chris, I don't know if there is anything you --.

Does that help, Scott?

Yes. That's perfect. Thank you very much.

(Operator Instructions). Chris McGratty of KBW.

Good morning, guys. I have a question on the security book. You obviously delevered a little bit this quarter. Should we expect a little bit more deleveraging in the investment book in the early parts of 2012?

This is Chris Wolking. I think that's fair, particularly as we would anticipate continued improvement in the next of our balance sheet. I think then as you look forward to after the conversion of the Indiana Community Bank like we did with the other two institutions we try to keep the secure -- or keep the loans and move the securities off the balance sheet. So that is certainly something we will continue. I am not a real big believer in loading up the security portfolio in this environment and that which we do reinvest will continue to be pretty short term.

Okay. In the context of growth, in your comments about the loan portfolio, obviously your credit has been pretty good. Is there a chance we go negative on the provision?

You think I can answer that question and not go to jail? I think Daryl and I and I think everybody have been pretty consistent. While we are starting to see some economic recovery, we still are cautious towards our commercial real estate portfolio we've got. I think -- we still remain cautious.

This is the last one --

You are trying to get me in jail, Chris, aren't you?

Worth a shot. The covered book, the runoff was around $85 million in the quarter. Should we assume similar kind of repays over the course of 2012 on a quarterly basis?

This is Daryl. I would say that the first quarter in that portfolio, we were pretty successful in moving some of the what I would call lower hanging fruit off of those problem loans. I would bake a little bit of reduction into that going into 2012 just because I don't think it is going to be as easy to do that.

Great. And then is my last question on the tax rate, what should we be using for 2012? (multiple speakers)

(multiple speakers), Chris, answer that.

Probably on a GAAP basis, low 20s.

Thanks a lot.

Emlen Harmon of Jefferies.

Good morning everybody. Between Chris and I, Bob, (multiple speakers). Between Chris and I me last week and Chris today, I am going to do to my best not to direct any questions I hear. So maybe a couple for Chris. Chris, just on the liability repricing side, it was great to see the improvement in this quarter and just kind of how it helped out the core margin there. Just give us a sense going forward the next two quarters just in terms of what deposit repricing opportunities are out there and just when you might see that come into the run rate?

Well, as I mentioned in my remarks that legacy bank margin kind of flat to a little bit low and I think a lot of our repricing capacity on the non-acquire deposits have probably run its course. We still have a pretty big book of CDs and we would be looking forward to see that continue to reprice. But given the growth that we have seen in our transaction accounts and -- it's great. But I think as long as we have had that stuff on the books and seen the benefit of the repricing, I think that for the most part in legacy bank that has probably run its course.

Okay so I mean the CD book is still yielding around 145 bps or so. That is a reasonable expectation for --?

That's where we are focused (multiple speakers) want to continue to march down a little bit. But, again, I think as we talk about with the investment portfolio we have got to look forward to those cash flows being invested at lower rates too, particularly as we keep the duration short. So, you know.

I know you didn't want to hear from me, but if you go to the appendix on slide 35 we have got a good breakdown of the CD maturities schedule as well as rates. So that ought to give you a little bit of help with building that into your model.

Okay. Perfect. Thank you. And then, Chris, I guess the other question and it kind of relates to your comments a minute ago, it is about the securities portfolio. Just in terms of liquidity that you guys maintain on the balance sheet is that kind of -- you know, we look at the short-term assets that are on there, you basically in the range where we would expect that to be going forward?

Oh yes. I think, again, the real benefit we get is to redeploy those assets, redeploy those cash flows into loan assets. So we don't anticipate taking a lot of risk and increasing the yields on those assets. So they will stay liquid. They will be there for deployment into quality assets and we will continue to reinvest relatively short duration.

Perfect. Thanks a lot. I appreciate it. Kept you out of trouble, Bob.

Kenneth James of Sterne, Agee.

Good morning. I will see if I can approach the provision in question from a legal way. If I look back at the first quarter or first half of 2011 and I see about 35 basis points of average amount of covered loans to be materially higher than that next year, does the economy have to get worse? Or can your customers exceed that the way they think they are -- the way things are now?

I think that is in the range based on the way we look at the economy.

And are you thinking any differently about the buyback that you just renewed? Or given that you've got a deal closing pending is this one coming just, I guess, a bullet in your holster but one that you may not use next year too heavily?

Yes, I think that's fair. We clearly, as we analyze the use of capital, you know you think about last week our Board really kind of increased the dividend. You make an acquisition, you approve a buyback, I think it kind of speaks to our capital strategy. We would preferred to deploy that where we get the best return for our shareholders. So I think the buybacks there if we start to see things slow down, or if we feel that is the best use of capital. But right now it's probably just the bullet in the holster or in the gun.

Well, thanks a lot.

(Operator Instructions). Chris McGratty of KBW.

Yes. Just a follow-up on the fee income guidance, Chris. Did you say there were roughly 2.5 million of one timers that just showed up in the Other line?

Right. Right. That is about the number.

Thanks.

Mac Hodgson of SunTrust Robinson.

Good morning. Just a couple of questions. One saw good residential real estate growth this quarter, linked quarter and it has been a good product for you guys. I'm assuming that is the Quick Home Refi.

It is and actually in the appendix, we have got a pretty good breakdown of the quality of that portfolio.

is that something you guys think will continue to grow at this clip, but somewhat unusual given -- ?

No, I think -- you know, unfortunately, a lot of our markets you know we have seen a lot of followers. A lot of the banks have come back with the same product, a lot of the credit unions have come out with it so I wouldn't anticipate growth at this level because competition has picked up quite a bit.

Great.

And that is on 39. Gives you a good breakdown of that Quick Home Refi product in the appendix.

Got you. And, Chris, on the net interest margin can you comment at all on what you think the pending acquisition, what sort of effect it might have on the NIM for the back half of this year?

I don't have that kind of analysis at this time. As we move forward I think we will continue to try to communicate like that like we have done in the past. Once the marks get finalized and things of that sort. We have got a ways to go.

And, Bob, I think you answered this question last week on the call, I just wanted to hear it again. Thoughts on additional M&A, you have obviously been very busy these most recent deals very obviously fresh, but what's the Company's appetite to do another transaction or look for another transaction while this one is still pending? Or is this something you are going to integrate first before you look elsewhere?

Our Controller is looking at me with blazing eyes saying, don't do another one. But I think the reality is the environment is clearly you are seeing more and more institutions of quality like Indiana Community that are saying that (technical difficulty) partnership. Jim Ryan remains active in building relationships. You know, we will weigh a lot of factors as we look to enter into any new partnerships which is the best use of capital, our ability to fully integrate it in a timely fashion. I think as I said on the call last week we can do one to two a year, but obviously I have got a lot of people that have to weigh in on that decision, most importantly our shareholders. But we want to make sure that we do the integrations properly and that we don't overstress our platform.

Great. I appreciate it. Thank you.

Dan Oxman of Jacobs Asset Management.

Good morning. My question is related to asset size and what is the impact from the Durbin amendment should you go over $10 billion in assets and how do you weigh that against making enough (multiple speakers).

That's a great question. The gross impact we estimate somewhere north of $2 million a quarter. You know, we also believe that we shouldn't -- that shouldn't be a determinant going above $10 billion. Obviously we are just under $10 billion. We think that we have some levers we can pull and mitigate some of the damage to the $2 million plus and plus as you do a deal you obviously bring in some income as well.

So we are right on the cusp of that. But it is clearly something that we have thought about and we feel we can mitigate it as best as possible. But we also think that creating a bank [ir] relevance in the long-term still adds greater value to our shareholders.

Thanks, and this is a follow-up question on acquisitions that you spoke about on your last conference call and. What from a geographic standpoint what is your preference and specifically how does Michigan fit into that?

You know we still clearly love Indiana. Absent Chicagoland we have zero interest in the Chicago area markets and we still think Kentucky is going to have some opportunities, but we like Southwest Michigan. We think it looks and feels an awful lot like Indiana. I mean, it is a natural extension from our northern franchise. We also think that there is a potential role for a bank like Old National playing a consolidating factor in that southwest portion of the state. But clearly, it is going to have to be the right acquisition and create the nice appendage to our current platform.

And some clarification on the tax rate. Did you say low 20s or high 20s and how does that compare to your tax rate last quarter which was 32%?

I'm thinking about GAAP on a 22% -- 22% to 24% kind of range for 2012. I think obviously as we continue to improve our GAAP income, that that GAAP number rises a little bit.

Okay and what is the difference between GAAP and the actual tax rate? Can you help us translate that?

Yes, Dan, I heard the follow-up. I'm going to -- might perhaps defer here for a moment or two while we dig up some numbers. I want to make sure we are looking at GAAP and not fully taxable equivalents. Yes, I think that that FTE number is probably closer to that 32% to 35% range for the quarter. And we tend to -- our GAAP number of course wouldn't include the gross up from a tax standpoint for our nontaxable assets. I always have to be careful that I clarify FTE rate or GAAP rate.

Okay. Got it. Okay. Thanks a lot.

At this time there are no further questions.

Great, operator. For all of you, thank you so much and obviously as always if you have any further questions please give Lynell a call. We guarantee we will get right back to you. We appreciate everybody's interest.

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 4217-3725. This replay will be available through February 13. If anyone has additional questions please contact Lynell Walton at 812-464-1366.

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