Old National Bancorp (ONB) 2013 Q1 法說會逐字稿

Welcome to the Old National Bancorp first-quarter 2013 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 1.00 p.m. Central Time today through May 13. To access the replay, dial 1-855-859-2056, conference ID code 34133918.

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, Jodi, and good morning, everyone. Joining me today on Old National Bancorp's first-quarter 2013 earnings conference call are Bob Jones, Chris Wolking, Daryl Moore, Joan Kissel and Jim Sandgren.

I would like to remind you that our comments today may contain forward-looking statements that are subject to certain risks and uncertainties that could cause the Company's actual future results to materially differ from those discussed. Please refer to the forward-looking statement disclosure contained on slide 3, as well as our SEC filings for a full discussion of the company's risk factors.

Additionally, as you review slide 4, certain non-GAAP financial measures will be discussed on this conference call. References to non-GAAP measures are only provided to assist you in understanding Old National's results and performance trends and should not be relied upon as a financial measure of actual results. Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentation. At the conclusion of our prepared remarks today, we will be happy to open the line and take your questions.

I'd like to begin our quarterly performance review with slide 5 as I am pleased to announce Old National reported first-quarter earnings this morning of $23.9 million or $0.24 per share. This net income represents a 10% increase over first-quarter 2012 net income of $21.7 million and is a 4% increase over fourth-quarter 2012 earnings. Please note that while our net income has improved, earnings per share was also impacted by the additional shares issued for the Indiana Community acquisition in the third quarter of 2012.

There were several positive highlights of the quarter. The first being the 8.3% increase in average core loan balances from the first quarter of 2012. The credit quality of our loan portfolio showed continued improvement with declines in nonaccrual and classified loans, as well as continued low delinquency and charge-off levels. Our core noninterest expenses were well-controlled as we remain vigilant in achieving our efficiency ratio target.

We also completed the sale of nine branches during the quarter as we continually review our branch network and continue to transform our franchise from slow growth, low marketshare markets to those with higher growth demographics.

And lastly on this slide is an issue that has garnered increased attention over the last month. As the acquirer of a financial institution from the FDIC, we wanted to make you aware that Old National's method for amortizing the indemnification asset related to the acquisition is consistent with ASU No. 2012-06 and has been since the date of that acquisition.

Turning to slide 6, and as an aid to you in building your models, you will see a list of other items that were included in our first-quarter results that impacted the quarter in either a positive or negative way. The items on the left impacted our total revenue as we recorded a gain on the branch sale of $2.4 million and our insurance division received seasonal contingency income of $1.9 million, which is historically just a first-quarter event.

The listing on the right side of the slide relates to various noninterest expense items. The two largest items being the $2.3 million expense recorded as a negative on our noninterest income section related to the change in the indemnification asset and the $1.7 million in professional fees related to the work being done in our BSA/AML area. Chris will discuss most of these items when he reviews our trends and noninterest expenses. Now to provide you with more detail, I will turn the call over to Chris.

Thanks, Lynell. Lynell noted the FASB guidance, ASU 2012-06, related to amortization of the FDIC indemnification asset on our balance sheet. This receivable is the present value of the FDIC's share of the future losses inherent in the Integra loan portfolio, which we purchased in July 2011. This guidance requires that we amortize this coverage over the shorter of the expected life of individual assets or the life of the loss share. We adopted this accounting method at the time of purchase as we've seen in our quarterly net income amortizing the indemnification asset in this fashion can cause some variability in quarterly earnings, but should result in the receivable being fully amortized as assets are resolved and recovered. As of March 31, 2013, our FDIC indemnification asset was valued at $109.9 million, down from $168.5 million at September 30, 2011, the first quarter-end that included Integra assets.

I will begin on slide 8 with our pretax pre-provision income. Without securities gains and merger and integration expenses, pretax, pre-provision income increased slightly from the fourth quarter and is up $1.9 million compared to the first quarter of 2012. Income related to the accretion of discounts on purchased loans decreased $4.1 million compared to the fourth quarter.

As Lynell noted in her earlier slide, we saw several items in the quarter that we would not expect to see at the same level in future quarters, including the gain on our branch sale of $2.4 million and expenses related to 2012 incentives, our BSA/AML project consulting and early extinguishment of an FHLB advance. Adjusting for these items, our pretax pre-provision income was $35.1 million for the quarter.

Included in noninterest income this quarter was a negative $2.3 million in other income, which reflects the expense associated with the indemnification receivable. In the fourth quarter, we booked $700,000 in income related to the receivable. Of the $14.9 million in accretion income recorded in the quarter, $1.9 million resulted from the Monroe assets, $7.9 million from the Integra transaction and $5.1 million from the Indiana Community transaction. We expect that accretion income from our Monroe and Integra transactions will continue to decline. We continue to stay focused on reducing operating expenses and increasing organic revenue to offset the impact of declining accretion income and our pretax pre-provision income.

On slide 9, I have again illustrated our progress with the impaired assets acquired in the Monroe, Integra and ICB transactions. This is a graphical depiction of the performance of only the impaired assets and does not reflect the acquired performing loans. In the first quarter, loan interest income related to Monroe impaired assets was $2 million, higher than the $1.1 million we accrued in the fourth quarter. The nonaccretable component of the impaired Monroe assets has remained relatively stable in a range of $12.3 million to $14.9 million since the second quarter of 2012 compared to our original expectation of $39.8 million of nonaccretable loan mark.

Loan interest income from the amortization of the discount associated with Integra impaired assets was $10.7 million during the first quarter, down from the $14.7 million we recognized in the fourth quarter of 2012. Our expectation of nonaccretable discount declined from $156.8 million in the fourth quarter to $148.9 million in the first quarter as we continue to see the positive results of our workout efforts.

Income from accretion related to Indiana Community Bancorp impaired assets was $1.6 million in the first quarter compared to $2.1 million in the fourth quarter. Our estimate of the nonaccretable discount of the Indiana Community Bancorp loans may change in the future as our special assets managers evaluate opportunities for the remediation of these assets.

In the next several slides, I provided information on our loan portfolio and loan pipeline. On slide 10, average loans, excluding loans purchased in our acquisitions or what we call, core lot loans in the slide, increased $58 million, about 1.5% from the average balance in the fourth quarter of 2012. Core ONB average loans were up $308.4 million in the quarter or 8.3% from the first quarter of 2012. Total average loans decreased $81.3 million in the first quarter from the fourth quarter of 2012 due largely to the decline in our portfolio of purchased loans.

Average purchased loans declined $139.3 million in total compared to the fourth quarter. Average Indiana Community Bancorp loans declined $61.7 million, Integra purchased loans declined $76.5 million and Monroe loans declined $1.1 million. Of the $139.3 million decline in average purchased loans during the quarter, the majority were impaired assets managed by our special assets team. So much of this decline was intentional as we worked out of problem assets.

Slide 11 shows graphs of two commercial loan production statistics. Commercial line utilization declined slightly in the first quarter to 35.6% from 36.9% in the fourth quarter of 2012. Line utilization has been in the range of 35% to 37% for several quarters, but is still under our historical average of 39.9%.

Moving to the second graph on the slide, you see the commercial loan production trend over the last several quarters. On the left side of this graph, I compared first-quarter 2013 production to first quarter's 2010 through 2012. Our production was significantly higher at $166.5 million for the quarter compared to the first-quarter production of the previous years. While we had our highest total loan closings in several quarters in the fourth quarter of 2012 at $240.7 million, we were pleased to see that we sustained this momentum for the first quarter with good closings during Q1 as well. This continues the trend that began in the second quarter of 2012.

Moving to slide 12, our pipeline of new commercial loans increased to $453 million in the first quarter from $396 million in the fourth quarter. Given the high volume of loan closings we experienced in the fourth quarter of 2012 and the first quarter of 2013, we were pleased to see the pipeline increase through Q1. The pipeline is broken down into loans in the discussion phase, loan proposals and loans that have been accepted. Most of the increase in the loan pipeline from Q4 to Q1 is in the discussion phase. Loans under discussion increased $76 million from the fourth quarter. This is the highest level of loans under discussion since early 2012. Early indications for the second quarter show that the commercial loan pipeline is continuing to build to a level equal to or higher than the level we saw in early 2012.

On slide 13, I have included a chart that provides a picture of our residential loan production over the last several quarters. Two takeaways from this chart. Of course, production increased significantly in the second half of 2012 due primarily to the very low interest rates we saw beginning in April of 2012. As interest rates rose, the application pipeline declined in the fourth quarter of 2012. This resulted in lower mortgage production in Q1 of 2013. Application volume is increasing today due both to the season and lower interest rates we saw beginning in mid-March.

Percentage of our mortgage production for new home sales increased from 30% in the first quarter of 2012 to 36% of application volume in Q1 of 2013, but new purchase mortgage applications account for nearly 50% of our pipeline today. We believe this is a sign of better home values and a healthier economy in our footprint and it should help sustain future mortgage production.

All of the loan data I've shown you in the slides indicate positive trends in loan production at the Company for the first quarter. Production was strong in the core bank in the first quarter and the pipelines indicate a good outlook for continued growth in our core loans for the next two to three quarters.

On slide 14, I have provided a graph of the trends in noninterest income. Noninterest income, excluding gains on the sale of securities, was $45.3 million in the first quarter, down $1.6 million from the fourth quarter and down $3.1 million from the first quarter of 2012. The $7.6 million of other income includes the nonrecurring gain on sale of $2.4 million from the sale in the quarter of the nine Kentucky and Illinois branches.

Wealth management, brokerage and insurance contributed $20.2 million in the quarter, higher than in the fourth and first quarters of last year. Most of our insurance agencies' contingency income is collected in the first quarter of the year and was over $700,000 higher in the first quarter of 2012. Brokerage fees were $300,000 higher than fourth quarter 2012 and $700,000 higher than in first quarter. And wealth management fees were $300,000 higher than Q4 and $600,000 higher than Q1.

Service charges on deposits, which includes overdraft fees, declined $1.8 million from the fourth quarter, our largest decline that we've experienced on a quarterly basis. Approximately $300,000 of the service charge decline from the fourth quarter was due to our branch sales in January and February. A new deposit fee schedule went into effect on April 22, 2013, so we expect to see some recovery in future deposit service charges. However, as overdraft presentments continue to decline at the bank, deposit service charge revenue is likely to remain under pressure.

Also, in the quarter, we incurred $2.3 billion in indemnification asset expense compared to the $700,000 in income from the IA adjustment in the fourth quarter. We would expect to see quarterly amortization expense, not income, as the IA continues to shrink. In the fourth quarter of 2012, however, we took a charge of $5.2 million to reduce the carrying value of Integra-related other real estate owned.

Without the increase in the IA due to the OREO writedown in the fourth quarter, IA expense would have been about $3.3 million in that quarter. Our current estimates indicate a range of $1.5 million to $2.5 million in indemnification asset expense per quarter for the remainder of 2013, but this will likely continue to be variable from quarter-to-quarter.

Totaled noninterest expenses shown on slide 15 were $90.2 million compared to $99.4 million in the fourth quarter and $91.3 million in the first quarter of 2012. Other expenses included $1.7 million of BSA/AML professional services, $500,000 provision for unfunded commitments and $700,000 for the early extinguishment of a FHLB advance.

ONB core expenses totaled $85.1 million for the quarter compared to $85.7 million in the fourth quarter. Our nine branch sales closed in January and February, so we had a partial quarter of these expenses in our core expenses. We should see the full benefit of our 2012 branch optimization beginning in the second quarter; although much of the expense savings was realized in Q1. We estimate further quarterly savings of approximately $300,000 beginning in Q2 related to the branch optimization.

On slide 16, I layered our full-time equivalent employees trend line over the period and total assets to provide some perspective on the success of the integration of our acquisitions and the impact of our productivity improvement projects.

In the fourth quarter of 2009, we employed 2812 full-time equivalent employees with just over $8 billion in total assets. By the end of the first quarter of 2013, our FTE employees had declined by 8% to 2589 and our total assets had increased 21% to $9.7 billion. There are two important takeaways from this chart. Since the fourth quarter of 2010, just before we closed on the Monroe Bank and Trust transaction, through the first quarter of 2013, we've maintained a relatively stable FTE employee count while our total assets increased by over $2 billion. I believe this demonstrates strong integration of our acquisitions and an ongoing commitment to meet our staffing targets.

Secondly, we have managed to retain much of the deposit and asset base after each of our acquisition since our Monroe transaction in 2011. I would also note that FTE employees declined by 95 FTE in the first quarter of 2013 due to the integration of Indiana Community, the sale of the branches we completed in the quarter and retirements and other departures due to successful productivity improvements.

Moving to slide 17, I provided a breakdown of our net interest margin in the first quarter and the trends we've experienced over the last 18 months. Net interest margin on a fully taxable equivalent basis was 4.04% in Q1, down from 4.34% in the fourth quarter of 2012. Core interest margin declined more than we anticipated in first quarter. Core margin declined in the first quarter to 3.31% from 3.40% in the fourth quarter. Much of the higher-than-anticipated decline in the core margin was due to higher investment portfolio balances. We intentionally added to the portfolio beginning mid-quarter in anticipation of the closing of our acquisition of the BofA deposits later this year.

We may grow the investment portfolio further if we have the opportunity during the second quarter in anticipation of absorbing the cash from the acquired deposits. The investment portfolio increased by $337.3 million compared to year-end 2012 and was about $203 million higher on average than the fourth quarter. The yield on the total investment portfolio was about 6 basis points lower than fourth quarter.

Investment portfolio yields will likely remain under pressure in the second quarter if we increase the size of the portfolio further and reinvest cash flows at lower yields. I would also note that the duration of the investment portfolio moved out to 3.97 in the first quarter from 3.57 at the end of 2012. A large percentage of the BofA-related purchases in the first quarter were long maturity municipal bonds. As we do further bond purchases related to the deposit acquisition, I don't expect to purchase a high percentage of long duration municipals. In the appendix of the slide deck, slides 35 through 39 show more detail at our investment portfolio activity, including a full breakdown of our purchases in the quarter.

Core loan yields were approximately 12 basis points lower than the fourth quarter, reflecting a change in the mix of the loans driven in part by good loan production in the quarter, continued loan pricing pressure in our markets and fewer days in the quarter compared to fourth quarter. The net interest income generated by the accretion of purchase accounting discounts translated to an estimated 73 basis points of margin for the fourth quarter when annualized. Accretion of Indiana Community discount accounted for 25 basis points of margin, accretion of discount from Integra accounted for 39 basis points and accretion from Monroe accounted for 9 basis points of margin.

ICB accretion of $5.1 million for the quarter was slightly higher than expected while Integra accretion income was back in line with our expectations after the large contribution in the fourth quarter. Although interest income from purchased assets will likely continue to be somewhat variable in 2013, we do expect that the Monroe and Integra accretion income will continue to decline during the year 2013.

On slide 18, I noted that the decision to add investments in the first quarter in anticipation of our branch acquisition reduced our margin by an estimated 3 basis points for the quarter when annualized. As I said earlier, core loan yield declined as well and also was a significant contributor to the decline in margin for the quarter.

I listed two transactions that we executed in the first quarter and opportunities we see for the remainder of the year that may help offset some of the continued pressure on core margin. In the first quarter, we terminated and restructured higher cost wholesale funding, but we have only limited opportunity for these transactions in the future. We also expect significant retail certificate of deposit repricing in the second, third and fourth quarters of this year.

We continue to expect downward pressure on our core margin in the second quarter. The core margin will likely be impacted by our loan growth and loan pricing in the quarter and further decisions to increase the size of the investment portfolio. Additionally, our investment portfolio continues to generate $30 million to $60 million in cash monthly, which will likely be reinvested at lower rates. However, some of this pressure should be offset by continued opportunities to reduce our cost of funding.

Slide 19 shows our trend in tangible book value per share. Our intangible book value per share ended the quarter at $8.23, up from $8.17 per share at the end of the fourth quarter. The decline in third-quarter tangible book value per share was driven largely by the 6.6 million shares issued for the purchase of ICB.

We continue to see our priorities for using capital as organic balance sheet growth, attractive acquisitions and the return of capital to shareholders in the form of dividends or stock buybacks. As you saw with our announcements in January, we continue to try to balance these priorities to take advantage of opportunities as they become available. Remember that in January, we announced the acquisition of the 24 branches from Bank of America, the 11.1% increase in our quarterly dividend to $0.10 per share and reestablished our authorization to buy up to 2 million common shares during 2013. I will now turn the call over to Daryl.

Thank you, Chris. Slide 21 is where I will begin my remarks this morning. On this slide, we show a trailing eight-quarter summary of net charge-offs for our core portfolio, as well as for our three most recently purchased portfolios. Overall, we experienced roughly $2.1 million in net charge-offs in the quarter, representing an annualized net charge-off rate for the period of 17 basis points, which is right in line with our 2012 full-year charge-off rate.

As you can see from the chart, the Old National core portfolio continues to perform very well with roughly $600,000 in net losses, representing 6 basis points of net charge-offs in the quarter. With respect to the acquired portfolios as a whole, we posted net losses of approximately $1.5 million, which was slightly higher than the $1.2 million we reported last quarter. While losses in the Monroe portfolio improved to a net recovery position in the first quarter, loss rates in both the Integra, as well as the Indiana Community Bank portfolio were higher in the first quarter as compared to the fourth quarter.

Slide 22 shows our trends in the allowance for loan loss coverage of non-covered underperforming assets. On a consolidated basis, we maintained our 29% coverage in the quarter. While this level would typically be of concern, I would remind you that this coverage number does not include the $15.8 million currently outstanding mark on the Monroe portfolio or the $55.8 million mark on the Indiana Community Bank portfolio. Excluding the acquired Monroe and Indiana Community Bank portfolios, we did improve our coverage in the quarter up to 54%, up 4 basis points from last quarter's levels mainly as a result of lower underperforming levels in this segment.

As we move to slide 23, you can see that we have laid out for you what the combined allowance for loan losses and loan marks look like as a percentage of the pre-mark loan portfolio for each of our differently tracked portfolios. As has been the case in the past quarters, the combined ALLL and mark to pre-mark loan balance percentages appear to appropriately rank and reserve for the risk levels of each of the portfolios with the Integra portfolio remaining the most troubled portfolio, followed by the most recently acquired Indiana Community Bank portfolio.

You can see that combined allowance and marks represent roughly 5.5% of the pre-mark Monroe portfolio, roughly 13% of the Indiana Community Bank portfolio and slightly more than 27% of the Integra portfolio. Keep in mind that the majority of the Integra portfolio is also 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 now 4.77% as compared to the 5.13% at the end of the last quarter.

On slide 24, we have displayed for you trends and first-quarter results with respect to our portfolio delinquency levels. At 49 basis points, 30 day or greater noncovered delinquencies showed solid improvement from last quarter level of 66 basis points and continue to compare very favorably with peer results. 90 plus noncovered loan delinquencies did increase in the current quarter, moving from roughly 1.1 million or 2 basis points of period-end loans at December 31 to 2 million or 4 basis points at the end of the first quarter. Virtually all of the increase is attributed to our residential mortgage portfolio and an issue we had with our servicer. We believe the issue has been addressed and we would anticipate that the 90 plus day delinquencies in this portfolio should fall back to more normal levels over time. Even with this problem in the current quarter, Old National's results continue to be at a level considerably lower than that of our peers whose average trailing quarter results stood at 57 basis points.

Moving to slide 25, you can see that within the noncovered portfolio, last quarter's downward movement in criticized loans was reversed with a material increase in this category in the first quarter. Non-covered criticized loans rose $14 million in the quarter due mainly to the addition of one larger relationship. As you can see from the trend line, which excludes Indiana Community Bank, the net increase in this category came in the ONB legacy portfolio. At this point in time, the relationship added in the quarter seems to be stable while the borrowers progress will be continued to be watched closely.

Moving to slide 26, we can see that, on a consolidated basis, noncovered classified loans fell by $6.7 million in the quarter to a level of $76.4 million. This decline in consolidated noncovered classified loans continued the improving trend, which began last quarter. Over the two most recent quarters, we have reduced noncovered classified loans by $22.1 million or 22%.

As slide 27 reflects, noncovered nonaccrual exposure fell again this quarter, declining $5.1 million on a consolidated basis and $4.4 million when excluding the Indiana Community Bank portfolio. Without the additions associated with the Indiana Community Bank merger in the third quarter of last year, you can see that the trend in this category reflects a sustained modest quarterly decline over a good number of quarters.

As I wrap up my remarks, I would summarize the first quarter of 2013 as a quarter of continued solid credit performance. While we continue to view the recovery as moving forward, the increase in our special mention loans, even in light of our falling classified nonaccrual loans, reminds us that our clients do continue to experience challenges in the current environment.

We continue to focus on two key areas. First, we repeatedly emphasize the absolute importance of proper identification and timely recognition of our risk in our loan portfolios. The ability to do this consistently well is key especially in times when the economy continues to be somewhat flux.

Second, we are working hard at establishing the right balance between credit risk and credit structure management against the need to be competitive in order to increase loans as the economy continues to improve. We have experienced bankers who have been through cycles in the past that know how to do this. But it takes continued focus to make sure we manage this process properly. With those comments, I will turn the call over to Bob for concluding remarks.

Great. Thank you, Daryl. Before I review the slides on pages 30 and 31, I would like to offer my observations on our first quarter. We continue to be encouraged by the loan production we are seeing, particularly in light of the competitive environment. A 69% increase in commercial loan production and over one year ago is a testament to our relationship strategy and our strategic shift to higher growth markets.

Of note is the very strong quarter that we had in our Bloomington market, the former headquarter city of our Monroe acquisition, with first-quarter commercial real estate production of approximately $22 million versus production last year at this time of only $608,000. I was also pleased with the mix of our mortgage production between purchase and refinance.

Credit remains a strength for us as we remain diligent in balancing our need for originations and credit quality. Daryl and Barbara have put in place a number of procedures that are ensuring strong communication and cooperation.

Noninterest income was a mixed bag. We were very pleased with our insurance revenue. While it would be natural to look at the strong quarter and contingency revenue, I was more encouraged by what appears to be a hardening of the market for renewals and new sales opportunities.

The other side of that noninterest income equation is service charges. As Chris noted, we continued to see a softening in this area driven by both customer behavior and regulatory changes. But as challenging as this area is for us, as we compare ourselves to peers, our numbers appear to be in line. We will be watching the customer behavior over the next few months to gauge the impact on revenue from our increased fees.

While our core net interest margin decreased, a portion of that is related to the specific actions we took to absorb our BofA acquisition. Though we remain challenged to see any change in the compression of net interest margin in today's rate environment. Overall, we were very pleased with the quarter and remain positive as we look at our loan pipeline now compared to January.

In addition, we remain diligent on our work to improve our efficiencies and it feels as though we have made good progress, especially in light of the noise Lynell referenced in her comments earlier. Plus, we also have a number of items we continue to work on to give us reason to be optimistic we should achieve our efficiency target for the year. Just as a reminder, the 65% target is an important part of management's incentives.

I do apologize for being somewhat redundant and repetitive to my teammates presentations, but I thought it was important that you hear my thoughts on the quarter and why we feel we continue to be well-positioned. Our increase in optimism is also shared by our clients. We have seen a positive shift in our clients and prospects' view of the world during the quarter. Clients seemed to have moved passed the negativity that has been driven by Washington and are more focused on business at hand. Across most sectors, we have seen a decent pickup in business that has resulted in our increased loan pipeline. While the economy is picking up slightly in our market, it is not growing with a vibrancy that will allow it to withstand potential downward pressure from outside forces like regulatory or policy changes or other negative economic forces.

Of particular note during the quarter was the unemployment data. Our clients are telling us that the challenge they face is the lack of available qualified workers. Many of our clients are faced with job openings that remain unfilled because workers do not have the necessary skills to fill open positions. Job training and technical skills have begun to develop and implement job training programs, but their impact may be further down the road. Thus, unemployment numbers may linger at higher levels for some time and this may have a slight impact on consumer spending.

While there seems to have been much media attention paid to the sequestration, our view is that the impact of sequestration will be minimal when compared to the impact of the increase in payroll tax. Our clients who serve the middle class reported a noticeable reduction in business immediately after the decrease. These consumer-related businesses have just begun to experience a pickup in their sales volumes.

On a more micro basis, I noted earlier that the competitive environment for loans is strong. This is particularly true in our larger markets where we are seeing competition is both on price and in some cases structure. As the old saying goes, bankers do have short memories and we have already begun to see some structures that are slightly reminiscent to precrisis times. The use is not nearly as broad as it was prior to the crisis, but we will continue to watch this trend and make decisions that are in the best interest of our shareholders for the long term.

Turning to my final slide, number 31, I will get off of my soapbox and discuss topics more germane to Old National. To begin with, we have completed all of the remediation steps required on our BSA/AML consent order and feel we have made significant progress towards complying with that order. We look forward to the OCC reviewing our program and feel comfortable that we have a program in place that protects our clients and our institution. At this time, we still believe we should be able to close on our BofA transaction in the third quarter as we originally announced.

Our pre-closing efforts continue with BofA and our optimism grows with every interaction we have had with our soon-to-be new associates. They have a terrific focus on their clients and the communities that they serve. They have also demonstrated strong change leadership skills, which should make the client transition positive. We continue to also be impressed with the markets both from an economic standpoint and as it pertains to our ability to compete with our community banking model. We already have in place an indirect lending function to serve those markets and we have plans in place to higher commercial bankers, wealth management RMs, mortgage originators and investment reps. We envision these hires being made between now and closing so that when we finally finalize the transaction, we can hit the ground running.

We are now two quarters into our IBT transaction and remain very pleased with both the client and associate reaction. While we have lost some clients and some accounts, the attrition remains within our modeling and more importantly, our new business efforts are ahead of where we thought we would be at this time. The attitude of our associates is excellent and we believe the market presents us with strong opportunities going forward much like we have in Bloomington.

Two final points. The M&A market is much the same as last quarter, lots of conversations, lots of books, but crossing the finish line still remains a challenge. I would note that there appears to be a lot more discussions at the highest levels and we remain committed to finding key partners like we did in Bloomington and Columbus.

And finally, it is with great pride that I announce that ONB was once again honored as one of the world's most ethical companies by Ethisphere and again, we were the only US bank to be so honored. This is a testament to our Board's commitment to strong governance, transparency and great values. With that short commercial, Julia, we will be glad to take questions.

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

Chris, I guess first question is for you, just on the margin. You gave a lot of color on sort of the put and takes on the core margin. But just as I looked through things the last several quarters, it looks like the pressure on the core margin has been increasing. What is your sense for order of magnitude of compression here as we look out over the next few quarters?

I think last quarter we talked 3 to 5 basis points. We continue to see it, driven obviously partly by intentional activities. But as I mentioned, loan pricing and reinvestment opportunities and rates are still low. So I think it continues at the same kind of overall pace that we've seen. Just a lot of things can happen to move that around, Scott.

Okay, all right, that makes sense. And then just on the reported number, I think previously you had been suggesting that overall purchase accounting benefits for 2013 should be similar to 2012. Is that something you still feel or will there be a little more -- I guess a little more pressure on the reported margin than we might have thought? How are you thinking about that dynamic?

I think generally we feel the same. I think in fourth quarter we had a nice lift from some late quarter items from Integra. But generally, we still expect that the opportunities from ICB are there and the other two are going to continue to decline in a gradual way.

Okay. Perfect. And then actually just one ticky-tack question for you. The FTE tax rate has been kind of bouncing around a little and I guess the last two quarters has been a little higher than I might have anticipated. What do you think a good number is as we look forward?

Yes, I think our number this quarter was in that 30 -- kind of that GAAP rate was in the 30% range. We still feel like we are moving to that 28%, but just given the amount of taxable income and our nontaxable kind of component of that, we are just working to get that back into that 28% range. But, yes, first quarter was a little high.

Okay, perfect, thanks. And then, Bob, you gave a lot of good color on how you are feeling about overall loan dynamics. And then I guess the big headwind is just the continued declines in the purchased credit impaired piece. Do you think as we look forward in the aggregate from here you will be able to grow the total loan portfolio? In other words, the core stuff out -- or overwhelms, I should say, continued declines in the purchased credit impaired piece?

Scott, that is a tough one to answer. It all depends on Daryl's workout ability and one of the things we have asked Daryl to do is to really look at workouts and best of -- what the best value is for the shareholders. What I would say is we remain for us optimistic about core loan growth and a lot of that depends on how quickly we work out of those impaired assets again and what is best for the shareholders. So I'm not so sure the first quarter isn't somewhat symbolic of the rest of the year, but again the pipeline has increased at a fairly nice clip.

Okay. All right, that is perfect. Thanks a lot, guys.

Chris McGratty, KBW.

Chris, on the securities book, I think your comments said you were going to continue to grow it in anticipation of the BofA transaction. Should we assume kind of a similar size increase? I think it was a little over $325 million in the quarter.

I don't think so, Chris. Rates were up a little in the first quarter, so we kind of got ahead. We thought we had some good opportunities. I wouldn't expect it to happen, but it could. We are still talking about $700 million in new deposits and not much in the way of loans in that acquisition. So I would like to keep my hand kind of free to do that when it happens. And as you can see kind of from the balance sheet, we have to fund that with borrowed funding, so it does have an impact on the margin as we anticipate those deposits coming in. So more of a timing kind of issue. I wouldn't plan on it.

One for Daryl on the criticized increase. Maybe I missed it, but can you remind us exactly what happened here? And then was there a provision against it? Was any of it in the -- it doesn't seem like the shared national credit book. But any resolution outlook for that would be great.

Yes, it was, as I said, an ONB legacy credit. It moved from the pass grade to the special mention. Really this client had anticipated some increased revenue quicker than it came, so they ramped up their expenses. Revenue seems to be coming now, so this is one that we think will get turned back around. It is not a shared national credit.

Chris, I would just add, this is a long-term Old National credit, been with us for a long time, as I said. And I think it is just reflective of, as Daryl said in his closing remarks, our diligence at looking at financial statements and making the right decision because, again, this is -- it's a strong, good balance sheet, but they just ramped up their expenses a little quicker than their revenue and we made the appropriate decision to downgrade the credit.

Okay. Last one for you, Bob. I believe, in the proxy, you gave your targets. I think 70% is net income, but there is also that efficiency piece you guys talk about. I didn't see an actual efficiency ratio. I think in the past it has been 65%. Can you give us an update? Is that still the bogey and then when you guys think you could hit it on a full-year basis?

That absolutely is the bogey and actually a nuance. We used to say it was an aspiration; we now will tell you it is a target. We have moved past thinking about it to, come hell or high water, we are going to get there. And I think that's more coming from the Board, as well as management. Our incentives have it in the fourth quarter. Depending on a lot of things -- Chris has a lot of good things going on that we are very encouraged that we are going to get there at least by the fourth quarter.

All right, thanks.

Emlen Harmon, Jefferies.

Bob, your comments just about the lending environment and structural competition getting more intense, are you at the point where you are walking away from more loans, more loans this quarter and just how much of a headwind do you see that to just overall loan growth?

Yes, it has the potential, Emlen. I would tell you we have heard about more than we have actually seen in pure competitive basis because they tend to be in the larger credits. But as you all know, that's going to kind of transform down into our target market on the structural side.

Where we have lost a few credits is on pricing. We have seen some of the super regionals be very aggressive. We lost a 10-year -- or a deal up in Lafayette where it was priced at 10 years at 3.75%. Hard for Chris and I to look at that and figure out how to make money. So the one-offs on pricing, but we are hearing enough noise in the structure that we just want to watch it. Safe to say that as people get more aggressive, we just have to be more careful and as Daryl said, we've got experienced RMs and credit folks that know when to say when.

Got you. Thank you. Could you talk a little bit about the decision tree on stock repurchases. I know you did a good chunk last quarter. Just how are you thinking of when to take that opportunity and when to use the capital in that manner?

Yes, I think there is a couple factors. I think one is the M&A pipeline in the books and our belief on are some of these deals going to move through the pipeline and obviously that is our first and foremost after balance sheet growth. We are pleased with that.

Secondly, the reason we bought some -- it was really actually in the fourth quarter, not the first quarter, was, post our third-quarter call, our stock got a lot of downward pressure and we just thought it was a good time to come back in, both as a company and many of us as inside shareholders. So I think, Emlen, you balance the need for M&A with whatever pressure we get in that stock price and hopefully we don't have that problem after this call. We're counting on you, Emlen.

All right, thanks for that. Thanks for taking the questions, appreciate it.

Jon Arfstrom, RBC Capital Markets.

You touched on the Bloomington loan production a bit, Bob, but maybe can you give us a little more broad view of just geography or type or theme of what you are seeing in the pipeline because it does seem like it continues to get stronger and stronger each quarter? I'm just wondering if there is anything else that is worth commenting on?

Really it is geographically well-dispersed. What we call our Central region, which is Terre Haute and Bloomington, Columbus and Muncie had probably the best quarter of the group in the first quarter and quite frankly, if you think of those markets, they wouldn't be the ones you would particularly talk as our growth year markets. But I think it is really a couple things that we are seeing this broad. It's one, our folks are out calling a lot more because they are not inwardly-focused. Secondly, the level of cooperation between our credit folks and our origination is the best I have seen it and doesn't mean that Daryl has changed. We worked really hard to get him to make semi-positive comments on his closing remarks. And we are seeing it really, Jon, across broad industry. We are seeing inventory builds, we are starting to see some equipment purchase, a little bit of expansion of real estate. It is healthy I guess is the best way I would describe it.

Okay. You are getting pretty bullish too, Bob.

Well, you guys blasted me so much last year. I mean, heck, Lynell plays Don't Worry Be Happy songs before we do our calls because --. I would like to just add to that, Jon, and not to be -- but, you know, I have also been spending a lot more time out with clients and a lot more times on calls and you can read the Wall Street or watch CNBC and come away with one view of the world. But when you are actually talking to clients and listening to them, you get a pretty good perspective. And I am getting out much more, which makes everybody here happier, but I think you get a pretty good perspective on -- people are just -- they are tired of waiting. I think you are going to see a little more -- maybe even what people are predicting.

Okay. I mean as long as you just mentioned that, this maybe isn't the right forum for asking the question, but I will anyway. How prevalent is that lack of qualified workers comment? Is that just a couple of comments or is that pretty broad?

Pretty broad, I will be honest with you. When I am with a client and I will say what is the biggest challenge you face, almost universally they will say I can't find enough people to hire that are qualified. So whether it's Berry Plastics down here or -- I was in Lafayette and I was in Columbus, I've been in Bloomington. Anybody who has a semi-technical job and that may seem -- but if you are on a production line today, you are really using robotics versus the old day that -- when I worked at a Ford plant, I was manual labor. A lot of it is robotics and they just can't find the trained workers to get there. It is throughout our footprint.

Interesting comment. And then, Chris, just one question for you, a smaller issue. But on the CD book repricing, what is possible there and what are the retention goals for kind of the three different quarters that you laid out?

Yes, I think our highest posted rate is 30 basis points or under. So when you look at that relative to the cost of that money as it gets repriced, it is pretty good. We have been largely successful retaining deposits in the form of -- they will move into savings accounts or some things of that sort. But, generally speaking, when you look at our total deposit portfolio, I've been very, very pleased, even when we are faced with some of these large repricing opportunities.

Hey, Jon, I've got Jim Sandgren here who is the market president for our largest markets and it might be good to get his perspectives on that because his branches are the ones that are seeing it.

Yes, I think to Chris's point, we have been able to retain more of these CDs than maybe we had anticipated. I think customers right now are just wanting to make sure that their money is safe and secure and they know that with Old National Bank. And other money maybe has moved into savings accounts. We have done a nice job too moving some of those dollars to our financial advisors and that's -- as Chris pointed out earlier, we have seen some really nice increases in our brokerage book. So it has been a nice combination.

Jon, I would just add on, the only thing I would caution everybody that we believe strongly that a lot of this is parked money until rates go up. And our modeling really says that when rates start to rise, I think any bank that tells you they are going to retain this amount of core deposits isn't accurate. I think you have got to build in your models the ability to get some of this out of there. So right now, there is just not a lot of opportunities.

All right. Thanks for the help.

Mac Hodgson, SunTrust.

Just a couple questions. Chris, on the Bank of America deposits that are coming on in the third quarter and with the bonds you kind of pre-bought, just help me think through how the balance sheet will look. So will you take some of that cash and pay off the debt you used to purchase the bonds in the third quarter when the deal closes?

Absolutely. That is our anticipation. We are still working very hard here internally to do what we can to stay below that $10 billion number and it is a big deal here. So we are very focused on that, Mac.

Got you. And what was the rate on the munis that you purchased?

I think if you go back to that -- I think it is 35 or --.

35.

35 in the deck, you will see a full breakdown. I think in aggregate our average was about 2%.

3.94% on the munis.

3.94% on the munis.

That was probably tax equivalent.

Yes, that is a tax equivalent (inaudible).

And then on the efficiency ratio and the target, 65%, I know you give the footnote in the press release on the calculation being expenses excluding intangible amortization over FTE, spread income and the income ex-bond gains. What is the intangible amortization? I couldn't find it; I probably didn't look in the right spot. But what does that generally run on a quarterly basis?

Yes, for us, obviously, it is primarily core deposit intangible and Joan Kissel is here and if we can put our fingers on that number, I'm not sure that we can this very second, Mac, but we will get back to you on that number.

Okay, yes, no problem. Just one last kind of big-picture, Bob, question on M&A. You mentioned lots of conversations and books. Just curious from your discussions what the main hurdle is? Is it still price? Is it more kind of the soft cultural issues? Just curious to get your perspective on that.

Yes, that's a great question, Mac. It is less about price and I think what we are seeing a shift, if you had gone back three or four years ago, it was CEOs that were ready to say, you know what, this is just extremely difficult, hard for me to get my head around (inaudible). Board's are saying, hey, I think we can get back. Now we are seeing Board's are starting to look at compliance costs, we are looking at growth opportunities. Even if you believe a GDP at 3 or 3.5, it is hard to get too excited about a growth year economy.

So the shift has gone more to the Board's being more intrigued and that is what we are hearing from our bankers. And CEOs are kind of sitting back and saying, you know, it's not a bad gig, I've got a nice salary, I've got a car and a country club and maybe I don't. So it has been a little bit of a shift. But I think we are starting to see a confluence of everybody realizing that, in this rate environment, a slower growth economy with the impact of compliance costs, I think that is why we are seeing more and more books because I think everybody is starting to realize this is a tough business.

Okay, appreciate the color, thanks.

At this time, there are no further questions. I will now turn the conference over to Mr. Bob Jones for closing remarks.

Great, thank you very much. And as always, we appreciate everybody's interest on the call. Follow-up questions to Lynell or by e-mail and we will get right back to you. Appreciate everybody's support. Thank you.

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 34133918. This replay will be available through May 13. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call.