Old National Bancorp (ONB) 2012 Q2 法說會逐字稿

Welcome to the Old National Bancorp second-quarter 2012 earnings conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. The call, along with corresponding presentation slides, will be archived for 12 months on the Investor Relations page at www.OldNational.com. A replay of the call will also be available beginning at 1 PM Central, today through August 13. To access the replay dial 1-855-859-2056, conference ID code 96399349. Those participating today will be analysts and members of the financial community.

At this time, all participants are in a listen-only mode. Following Management's prepared remarks, we will hold a question and answer session. At this time, the call will be turned over to Lynell Walton, Director of Investor Relations for opening remarks. Ms. Walton?

Thank you, Sarah. Good morning, everyone. Joining me today on Old National Bancorp's second-quarter 2012 earnings conference call are Management members Bob Jones, Chris Wolking, Daryl Moore, and Joan Kissel.

This conference call will contain certain forward-looking statements and on slide 3 you'll find the standard forward-looking statement disclosure. 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 differ materially from historical or projected performance. These risks and uncertainties include, but are not limited to, those which are contained in this disclosure and in Old National's periodic filings with the SEC.

Today's presentation also includes the use of non-GAAP financial measures and you will find a corresponding disclosure on slide 4. Various numbers in this presentation have been adjusted to certain items to provide more comparable data between periods and as an aid to you in establishing more realistic trends going forward. We feel these adjusted metrics to be useful supplemental information in understanding Old National's results and core performance trends. Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentation.

Turning to slide 5 you'll see the specific second-quarter items we will be discussing today. Chris and Daryl will provide you with an in depth look at our second-quarter performance, including our organic loan growth, net interest margin expansion, expense initiatives, and capital positions, as well as our credit quality metrics. Bob will then provide a strategic update, including an overview of the local economy. At the conclusion of our prepared remarks, we will open the line to take your questions.

I'd now like to begin our second-quarter review with slide 6, as I'm pleased to announce Old National reported earnings this morning of $27.2 million, or $0.29 per share. These results represent sizeable increases over both first-quarter 2012 and second-quarter 2011 earnings. Included in the current quarter's results are security gains of just over $6 million, efficiency initiative expenses of $1.7 million, as well as $1.2 million of other expenses as noted. Now to provide more detail on the quarter I'll turn the call over to Chris.

Thank you, Lynell. I'd like to add a couple of comments regarding our earnings highlights for this quarter. The securities gains resulted from transactions to continue to reduce the size and duration of the investment portfolio. The security sales also provided the liquidity needed to retire the $16 million in subordinated debt and trust preferred securities we called on June 30. The efficiency initiatives for which we took charges in the second quarter include the closing of 31 ATMs and other activities related to our simple, easy, fast, productivity and customer service improvement programs. These initiatives are ongoing and we will keep you informed of future actions.

Beginning with slide 8 you'll see that our pre-tax, pre-provision income was slightly higher than first quarter, increasing $700,000 to $33.1 million. Having closed on the acquisition of Monroe in the first quarter of 2011 and Integra in the third quarter of that same year, the impact the acquisitions have had on income is clear. In the second quarter of 2012 alone, accretion associated with the impaired loans we acquired in the transactions contributed $14.1 million in net interest income. We are also starting to see income from core loan growth and benefits from expense control in the timely consolidation of acquisitions.

Average core loans increased $60 million from the first quarter to an average of $3.7782 billion in the second quarter as indicated on slide 9. This is the first material increase we've seen in core commercial and consumer loans in several quarters. While not shown on this slide, if loans covered by FDIC loss share are excluded, period-end loans in the second quarter were $112.2 million higher than at period end in the first quarter. Excluding covered loans, commercial and consumer loans increased $48.8 million, and residential real estate loans increased $62.8 million during the quarter.

Slide 10 shows a 37.5% commercial line utilization in the second quarter. While still under our average 2007, 2008 utilization of 39.9%, we are near the highest line utilization since 2009. The commercial loan pipeline, which includes loans in the discussion, proposed, and accepted phases, increased even as we experienced good loan closings during the quarter. The accepted loan component of the pipeline, which reflects proposals that customers have accepted, was 19%. If these loans close and fund, we should see continued commercial loan growth in the third quarter. We believe that higher line utilization, the strong pipeline, and the higher percentage of accepted loans in the pipeline are a reflection of the strong sales efforts of our officers and heightened interest in borrowing.

As indicated on slide 11, non-interest income was $42.1 million, down $6.3 million from the previous quarter. First-quarter non-interest income included a $4.8 million increase in the FDIC indemnification asset, however, reflecting a higher loss on an Integra asset held as OREO. In the second quarter of 2012, the FDIC indemnification asset declined by $4 million, indicating better anticipated cash flows on certain impaired Integra loans. This is a good example of the quarterly earnings volatility created by purchase accounting and loss share coverage that we will likely continue to see over the next several quarters.

Service charges on deposit accounts in the second quarter are flat compared to the first quarter. Wealth Management fees are up $700,000 compared to first quarter and include higher estate and tax preparation fees. Insurance revenue was down $300,000 to $9.3 million due to seasonally lower profit-sharing revenue. Profit-sharing revenue is generally collected in the first quarter of the year. ATM fees were $5.9 million, down from $6.3 million. Bank owned life insurance income, mortgage banking fees, and investment product fees totaled $5.5 million, with investment product sales revenues up 10% to $3.2 million.

Miscellaneous other income was $6.7 million, up from $4.8 million. The largest driver of the change in miscellaneous income was the gain on the sale of non-covered OREO, which generated approximately $2 million. Not included in this non-interest income is the $6.2 million in securities gains taken in the quarter. As I mentioned earlier, we will continue to take opportunities to reduce the duration and size of the investment portfolio. At June 30, we had approximately $53 million in unrealized gains in our available for sale portfolio. While we don't predict additional securities gains in 2012, it is possible that we will sell securities to create liquidity for other transactions, to sustain loan growth, or to reduce market risk in our investment portfolio.

Core expenses, shown on slide 12, were $79.1 million, compared to $78 million in the previous quarter. Annual merit increases went into effect in the second quarter and accounted for approximately $900,000 in additional core expense. Integra operating expense was $2.7 million, down slightly from the first quarter. Integra OREO expense was significantly lower at $1.3 million. We incurred $400,000 in litigation settlement expense and $1.7 million in expenses related to our efficiency initiatives mentioned at the beginning of this call. We continue to have acquisition-related expenses for Indiana Community Bancorp and anticipate that charges for the acquisition will increase in the second half of 2012. We expect additional one-time charges for the transactions to be $12 million to $14 million pre-tax, most of which will be incurred this year.

Indicated on slide 13, there has been a steady decline in full-time equivalent employees since the second quarter of 2009. After the initial spike in FTE employees in the first quarter with our acquisition of Monroe Bancorp, the downward trend continued until we acquired Integra in the third quarter of 2011. Most Integra employees were contract workers so our contract workforce increased to over 400 employees immediately after the acquisition. At the end of 2011, our FTE employee base had climbed slightly to 2,551 as we increased overtime and staff for the conversion of Integra. Also, note by the end of 2011, the contract workforce had declined significantly because branch consolidations and system conversions were completed by the end of the year. In April of this year, 69 Integra associates joined the Old National team, eliminating the last of the contract workforce positions. These associates are primarily employed in the 16 Integra branches that we did not consolidate or sell in 2011.

A break down of the components of our net interest margin is provided on slide 14. Net interest margin on a fully taxable equivalent basis was 4.26%. The net interest income generated by the accretion of purchase accounting marks translated to an estimated 76 basis points of margin for the second quarter when annualized, 21 basis points from the Monroe balance sheet, and 55 basis points from the Integra balance sheet. The contribution to the net interest margin from the accretion of the purchase accounting discounts was higher than we anticipated and continues to be somewhat volatile. We expect the contribution from both Monroe and Integra accretion to gradually decline.

Core margin was down 2 basis points, driven primarily by lower investment portfolio yield. On June 30, we called $13 million of wholesale funding. The coupon on the subordinated debt, which was issued by Monroe Bancorp prior to our acquisition, was 10%. This, along with continued repricing of our certificates of deposit, should help lower the cost of liabilities going forward. Investment cash flow will be reinvested into securities at lower yields unless we sustain the loan growth we saw during the second quarter. If loan growth continues, we should be able to redeploy a portion of the investment cash flows into better yielding loans, but I expect that asset yields will remain under pressure in 2012. Our forecast indicates that the core net interest margin should be in the range of 3.45% to 3.5% on average for the remainder of the year.

Our capital ratios continue to be among the highest of our peer banks as shown on slide 15. We will also note that our tangible capital ratios are now equal to or higher than they were prior to our acquisition of Integra. TCE as a percentage of tangible assets increased from 9.23% to 9.4%, and our TCE to risk weighted assets ratio increased from 14.88% to 15.5%. GAAP shareholders equity increased by $23.3 million due to our quarterly earnings, our 31% dividend pay out ratio, and $22.3 million of other comprehensive income. Goodwill and intangibles declined $1.4 million, resulting in an increase of $24.7 million in tangible common equity.

In the denominators of the capital ratios, tangible assets increased $109.8 million, and risk weighted assets declined $47.2 million, largely due to adjustments to the risk weighting of our BOLI assets. We are working on new capital models and targets that reflect the Basel III proposals. Our focus on building common tangible equity and retiring various subordinated debt and trust preferred securities has put us in a strong position and gives us many options to deploy capital from this point forward. As we consider the impact of Basel III, close the purchase of Indiana Community Bancorp, evaluate acquisitions, and complete our earnings outlook for 2013, we will have a clearer picture of our long-term capital need. Acquisitions remain a major focus for the Company and we believe the pace of consolidation in the Midwest will accelerate. Therefore, acquisitions will continue to be our primary focus as we evaluate opportunities to utilize capital. I'll now turn the call over to Daryl Moore.

Thank you, Chris, and good morning to everyone. I'd like to begin my remarks this morning on slide 17 where you can see in the chart at the top of the slide that non-covered portfolio net charge-offs for the second quarter were $900,000, down from last quarter's level of $3.4 million. As reflected on the bottom chart of the slide on an annualized basis, non-covered loan net charge-offs for the quarter were 9 basis points, a reduction of 24 basis points from the 33 basis point annualized rate posted in the first quarter 2012, and down 47 basis points from the 56 basis point annualized rate posted in the second quarter of 2011. Annualized loss rates continue to run at levels lower than our peer group on a trailing quarter comparison. Excluding covered assets we recaptured $3.4 million of provision for loan losses in the quarter. Lower non-performing and problem loan levels coupled with lower loss migration rates had a major influence on the provision level in the quarter.

Moving to slide 18, we've laid out net charge-off trends separating the performance in our core portfolio from that of our two most recently purchased portfolios. As you can see, the ONB core portfolio continues to perform very well with zero net charge-offs in the second quarter. As the other portfolios mature, you can see that there is some lumpiness in credit results although the second quarter saw improved performance in both of those portfolios. Net charge-offs in the Integra portfolio were roughly $700,000.

Moving to slide 19, we see that excluding the covered and Monroe loans, the allowance coverage of non-performing assets fell 8 basis points in the quarter to 59%, mainly as the result of the provision recapture in the quarter in the ONB core portfolio. While ONB non-covered consolidated percentages reflect a 45% coverage, I would remind you that these numbers do not take into consideration the $23.6 million mark against the Monroe portfolio.

As we move to slide 20, you can see we've laid out for you what the combined allowance for loan losses and loan marks look like as a percentage of the pre-marked loan portfolio. You can see the combined allowance in marks represent approximately 7% of the pre-marked Monroe portfolio, and slightly more than 26% of the pre-marked 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 percentage of the pre-marked loan portfolio is 5.34%, not much different than last quarter's level of 5.76%.

Moving to slide 21, we show a break out of the Integra covered portfolio by commercial and retail asset types, and then further break out the asset quality rating distribution of the covered commercial assets. Commercial criticized, classified and nonaccrual loans in this covered portfolio in aggregate fell roughly $29 million in the quarter, with OREO balances down another $2.5 million. Covered loans 90-plus days or more delinquent declined $200,000 in the quarter to stand at roughly $600,000 at quarter's end.

On slide 22, you can see that we again had very strong results in the quarter with respect to both our 30-plus and 90-plus day delinquency levels. As the top chart reflects, excluding covered loans, 30-plus delinquencies stood at 47 basis points at quarter's end, an increase of 3 basis points from last quarter's results. As you can see, this continues to compare very favorably to the 139 basis point results posted by the banks within our peer group for the trailing quarter. As you can see in the chart at the bottom of the slide, 90-plus day non-covered loan delinquencies continue at very low levels, with this quarter's results again at 1 basis point. These results continue to be at a level considerably lower than that of our peers, whose average trailing quarter results are in the 63 basis point area.

Moving to slide 23, you can see that within the non-covered portfolio, criticized loans reverse their previous four-quarter downward trend, posting a $26 million increase in the quarter. All of this increase in criticized loans in the quarter came from the ONB core portfolio. Within that ONB core portfolio we saw the addition of 10 loans to our largest 20 criticized list in the quarter, so the increase was significant in both in terms of the number and the size of the credits added. While a good number of these loans do not currently present immediate concerns, we will be watching this trend in the portfolio closely over the coming quarters. As you know, sustained trends in this category can be a leading indicator of future credit performance.

Classifieds loans on the other hand continued their downward trend as shown on slide 24. Non-covered classified loans fell roughly $24 million in the quarter, $20.7 million of which came from the ONB core portfolio, with an additional $3.4 million reduction contributed from the Monroe portfolio.

As slide 25 reflects, non-accrual exposure fell by $13.5 million in the quarter. Non-accruals in the Monroe portfolio were down by $6.5 million, while non-accruals in the ONB core portfolio declined by $7 million. The fall in non-accrual loans in the quarter came from the movement of a number of credits out of the category and not as a result of any single large relationship movement.

On slide 26 we've outlined our agricultural segment exposure to give you some idea of how the extreme drought in our markets might impact our portfolio credit quality. As you can see, our total exposure is just south of $300 million, which represents slightly less than 9% of our total commercial loan exposure, and roughly 26% of capital plus the allowance. Most of that exposure is to borrowers in the crop farming sub-segment. The corn crop in our markets has been seriously damaged and will likely result in significantly lower yields per acre. The soybean crop may be impacted to a lesser degree, although that is yet to be seen. The magnitude of the adverse impact to our agricultural borrowers will be offset at least to a degree by crop insurance, which a good majority of our borrowers carry. Additionally over the last several years, farm operating results have been solid, which should provide some cushion against the expected challenges this year. While we will have to wait until the end of the harvest season to determine the specific impact of the drought on our portfolio, we did augment the allowance for loan losses in the quarter to recognize the potential for higher losses out of this portfolio in the future, and we'll continue to monitor this situation and act accordingly as we get more clarity around final yields.

In summary I'd say it was another very solid quarter for the Bank in terms of the reduction in our risk assets with the exception of the criticized loan category. While this is the first quarter in some time that we have seen an increase in criticized loans, the increase was significant and comes at a time where concerns around economic conditions seem to be increasing. The combination of these two factors will certainly have us watching closely the trends in our early indication metrics over the coming months. With those comments I'll turn the call over to Bob.

Great, thanks, Daryl and welcome, everybody. I'm going to close our prepared remarks beginning on slide 28. First I'd like to follow-up on the 8-K that we filed on July 20 regarding the consent order that we executed with the OCC regarding the deficiencies within our BSA/AML program. As noted in that filing, we have been working towards remediation of those deficiencies since the OCC identified them approximately 16 months ago. Our plan of action includes new systems, operational enhancements, increased staffing, and other actions designed not only to meet the demands of the issues that were noted, but more importantly ensure that we have in place the appropriate controls to be compliant now and in the future. On the date that the consent order was filed by the OCC, we immediately executed a communication plan which included the 8-K to you, our investors and analysts, as well as an internal communications plan that reinforced our commitment to ensure we work as expeditiously as possible to move beyond this action.

Following the filing of the 8-K, we did receive a few follow-up questions that for the benefit of all you and in the spirit of transparency, I'm going to recap this morning. First question was, why did the order take 16 months to be filed? Obviously Old National has no control over when the order was issued, but I can tell you that once the issues were identified we immediately began working to rectify the deficiencies. Second question was, will there be a material impact to Old National's 2012 net income? We do expect that there will be expenses of approximately $2 million over the next few quarters for outside resources to assist us with validating our work to ensure compliance with the consent order. This amount is budgeted and we don't feel it should have a material impact on your models for this year. I should note that there was no cash penalties or fines associated with the order.

Third question was, is there any impact on your capital strategy contained in the order? There were no limitations or restrictions on Old National's capital strategy in the order. Our capital strategy remains the same as Chris discussed earlier. And the final question we received was, was there any impact in the Indiana Community Bank transaction? No, as you're aware their shareholders approved the transaction on July 24, and we still anticipate closing and [verting] this quarter. We still remain very positive towards the partnership, especially as it relates to the markets we will be entering and the retail branches that will serve those markets.

If we've had a disappointment, it's been on the commercial side where we have had more attrition of relationship managers than we would have liked, but to date the client retention has been consistent with our modeling. We have been able to supplement some of our staffing issues, and upon closing remain confident that we will have a good team in place. As Chris noted, we continue to believe that partnerships like this one provide great value to our shareholders and we are still active in looking for potential partners.

Now turning to slide 29, I'll close my remarks with a synopsis of the economy from our clients' perspective. The consumer remains cautious, spending is muted based on the unemployment picture but also from a confidence level because of the uncertainty. This uncertainty affects all levels of consumer spending, including real estate. Most realtors we have spoken with do not feel they can replicate the first half of the year, and remind us that the election years are not historically good for real estate sales, and the uncertainty and lack of clarity from Washington serves to compound the issue.

Business clients we have spoken with share that same uncertainty. The common refrain we receive from our clients is they do not know what rules they will be playing under, given the lack of clarity out of Washington, which makes it difficult to make good, sound, long-term capital investments. In our markets, the European debt crisis has little effect, other than to dampen confidence through the impact it has on the equity markets. And our sense is the economy still remains in a prolonged tepid recovery at least for the near term. With that short overview of the economic conditions, Sarah, would you please open the phone lines for questions?

(Operator Instructions)

Mac Hodgson, SunTrust.

A couple of questions. First maybe you mentioned this Bob a bit, on loan demand, it did seem like utilization rates are up, the pipeline is up, so it does seem like you're gaining positive momentum on the loan side, but you still sound somewhat cautious and guarded. And is the improvement the result of new hires, refocused on originations, how do you reconcile that with the environment?

First is, I think you'd all be disappointed if you weren't just a little tepid on the economy. We at least want to be consistent. I really think, Mac, it's two things. It is an increased sales effort. We have seen just a lot of energy in our RMs, a real testament to Barbara Murphy and our regional CEOs who have gotten people more engaged and more focused. And it was a catharsis in the latter part of the first quarter when it was almost -- looks guys, we can always continue to look backwards, but we've got to look forward and we've seen a lot more positive activity. The second part is, a lot of the acquisitions we've done has given us pretty good market share, and we're starting to take advantage of that market share and getting a lot more at bats than we had in the past and that's helped us quite a bit too.

Okay, great. Daryl a couple questions on the ag exposure. Appreciate you all highlighting that. How much of the crop farming would be corn? And maybe if you could just walk me through a typical loan, loan size, structure, collateral, things like that.

I would tell you that as we look down, we put together a list of all of our lines of credit for crop production of $250,000 or more, and I would say this past season, we had customers or borrowers who were planting probably more corn and soybeans than they have historically planted, so in retrospect that probably wasn't the best thing but who would have known. What we will do is, we'll look at historic yields on farmers and underwrite lines of credit, and make sure that as these lines of credit are paid out once harvest comes; that if they aren't paid out in full, there's sufficient grain in storage with value to liquidate our lines, just to make sure that we don't have any carryover from our farmers. And as I've said earlier today the last several years have been very good to farmers and we haven't had much of that, but what's really going to be in play this year is crop insurance and we went through and looked at all of these and we have very few -- less than six of our borrowers who don't have some type of crop insurance. Now crop insurance ranges all the way from a catastrophic to something greater than that, so it's going to be very hard, Mac, to figure out until the harvest comes what kind of coverage we're going to have. I would say generally, I think this is a safe statement, farmers are not going to make the kind of money with revenue insurance that they would in selling their grain, with good yields, but it probably is going to protect a lot of these farmers from absolute crisis as we move into next year. As I said earlier, the soybeans are still, that's an open question and whether that will help farmers or not.

And are the lines generally due shortly after harvest? Are they on a year roll?

Most of them are on a year roll. Our best customers sometimes we'll put on a three-year roll with covenants, but we're going to have the opportunity to revisit each one of these exposures around harvest season. So late November, early December, you'll see most of these start to mature and they will be back in the bank to talk with us. This is a line of business we've been in for a long time and we know that you're going to have these years. We're not panicking. We're going to as much as we can support our farmers through this. This is just something that happens in this industry.

And was the ag the driver of the increase in special mention?

It was not. There were no ags in that special mention increase.

Could you give any color in what drove the increase?

Yes, about 50% of it was commercial real estate non-owner occupied commercial real estate. We had one large manufacturer that had a soft year, but it was across-the-board, and as we look at it and bankers can always do this, you look at these and one-off and say well this is kind of unusual, and this one is kind of unusual, 10 in a quarter of your top 20, I could probably make an argument for 7 or 8 of those being unusual, but it is concerning for us because of the dollars and the numbers, so we're going to watch it pretty closely.

Okay, thank you.

Scott Siefers, Sandler O'Neill.

Chris, I guess the first question is probably most appropriate for you. I guess on a core basis the margin seems to be holding in probably a little better than I might have thought and I appreciate the outlook on the core margin for the remainder of the year. Was just hoping from your perspective where are things holding in well relative to where you might have expected a few months ago, and where do you see the best opportunity to keep that base of core margin sustained?

Yes, I think problematic obviously is just reinvestment in the investment portfolio. We still get $50 million plus in cash flows on a monthly basis in that portfolio, so reinvestment we watch closely. The very positive for this quarter was the period-over-period loan growth that we saw. That's the first time we've seen that especially in the commercial side in quite a while, so we'll watch that. As I mentioned in my comments the fact that the pipeline's still hanging in there and that a large percentage of those are accepted commitments, we'll look for some, should see some continued increase in loans going forward, so we'll watch that very closely.

The other benefit continues to be our CDs, we're seeing repricing in liabilities. We don't have that much in wholesale funding but we're fortunate to have gotten called that sub-debt, so that will help us too. So I'm reasonably optimistic on the margin given the continued pressure we're seeing on asset yields, the fact that liabilities continue to give us some opportunity to improve that margin is good.

Okay, perfect, thank you.

And Scott, I might add too we're foreseeing growth. We continue to see growth in non-interest bearing DDA, it seems like quarter over quarter it's like just no stopping it, and relatively speaking, there's not much cheaper than 25 basis point wholesale funding but free DDA is still pretty good, so we'll take it.

Okay, perfect. And then Bob, was just hoping you could maybe touch on the M&A environment just the things you're seeing at a top level. Obviously you guys have been active and still remain very interested, but there just hasn't been a lot of activity industry wide at least that we've been able to see from the outside. So just curious how conversations are going these days and things like pricing, overall interest in selling, et cetera.

Scott, I think the last two weeks with the TARP issues we've seen a little more activity increase as people either got their letters or have started to put together their plans. We continue to have very positive conversations with potential sellers; I think the reality is there's still a slight disconnect between seller expectations and our expectations, but I think that gap is beginning to narrow as people look out. The other real impetus I've seen Scott is Basal III, I think it's created a real just almost terror look in some folks as they think about Basal III and all the changes to that in terms of their capital constraints. So I know we've all been predicting it consolidated for a while, but my sense is that the activity's picking up and I think realism is beginning to hit in for all of us.

Perfect. Appreciate the color.

(Operator Instructions)

Stephen Geyen, Stifel Nicolaus.

Maybe a couple of questions for Daryl. In the gross recoveries it's been pretty steady over the last several quarters. Anything in particular that might be driving that, is that success going to continue?

Stephen, that's very interesting. I think we have been relatively, I wouldn't say aggressive, but we charge things down pretty appropriately, and as we have come through this cycle, I think we're seeing $200,000 to $300,000 in this past quarter, we had a $400,000 recovery. I think it's just garden variety stuff that we charged off, things are getting a little better. People may want to sell properties, can't do it without releasing our mortgage. So it's just probably what you would expect to see as you come out of the cycle with respect to those recoveries. It is very difficult to determine at what levels these things are going to be at going forward. It's just so hard, I wouldn't want to take a stab at it.

Sure, I understand. And the compensation, Chris, is that kind of a good core number working with? And maybe any additional thoughts on Indiana and what that impact might look like? I don't know if there's been any update or any thoughts?

Yes, I think that's a good core number. When we go into the second quarter we always want to talk a little bit about the increase in salaries and such that come along with our normal calendar year adjustments. Pretty good number. We do spell out the Integra operating costs and I think you want to be cognizant of those two together. Really, from Indiana Bancorp, I would say nothing's really changed from our outlook when we initially announced the deal and I think we're in pretty good shape.

Steve, you might remember that our full-year belief was we would get $0.06 to $0.08 in accretable earnings after one-time -- before one-time, excuse me, and then 35% cost saves and there's nothing that we've seen that would precipitate anything different.

Okay, good. And last question, the line utilization that's great to see it's up. Some of the banks that I've been talking with say part of the reason they're seeing some increase in line utilization is that over the last two years, the actual lines available to credits have been cut to some extent. Can you kind of, how much -- do you think there's any of that involved in the increase? And how much growth, or what are your customers saying as far as the potential going forward?

Stephen, I've got Jim Sandgren here who runs our largest region within the bank. Barbara Murphy's on vacation. I might just let him answer the question because he sees the clients far more than we do.

Yes, Stephen we have actually seen our clients' revenues bounce back maybe not to historical levels pre-2008 but they are bouncing back and receivable bases are up. They're building inventory, so we're seeing the reason for the line utilization going up as just positive from our customer base, so we would like to continue to see that going forward, but we didn't do too much as far as reducing lines of credit exposure. I'm looking at Daryl and he's nodding, so it's really been from a core increase in revenues and corresponding increases to receivables in inventories.

Great. Thanks for your time.

Mac Hodgson, SunTrust.

Just a couple of quick follow-ups. Chris, on the merger charges, $800,000 and then the $1.7 million of efficiency initiative expenses, were those in other expenses or where were they housed I guess in the expense line items?

Yes, I think primarily other, Mac.

Okay. And you gave a little bit of color I think in your comments on the efficiency initiatives and I didn't quite catch it all. Could you elaborate a little bit on what you're targeting there?

Mac, this is Bob. We did close 31 ATMs in the quarter and we've got as we always do, we've got a variety of different initiatives all with that aspirational target of 65% that as we get closer to some public announcement of those we'll let you know.

Okay. I appreciate it, thanks.

At this time, there are no further questions. Presenters, do you have any closing remarks?

Just as always we appreciate your interest and call Lynell if you have any follow-up questions, and again thank you so much.

This concludes Old National's call. Once again a replay along with the presentation slides will be available for 12 months on the Investor Relations page of Old National's website www.OldNational.com. A replay of this call will also be available by dialing 1-855-859-2056, conference ID code 96399349. This replay will be available through August 13. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call.