Old National Bancorp (ONB) 2014 Q1 法說會逐字稿

Welcome to the Old National Bancorp first-quarter 2014 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 made available beginning at 8 AM Central Time on April 29 through May 13. To access the replay dial 1-855-859-2056; conference ID code 29183728.

Those participating today will be analysts and members of the financial community. (Operator Instructions) At this time the call will be turned over to Lynell Walton for opening remarks. Ms. Walton?

Thank you, Selena, and good morning, everyone. Joining me today on Old National Bancorp's first-quarter 2014 earnings conference call are Bob Jones, Chris Wolking, Daryl Moore, Jim Sandgren, Jim Ryan, and Joan Kissel.

Some 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 4, as well as our SEC filings, for a full discussion of the Company's risk factors.

Additionally, as you review slide 5 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.

Legal disclosures aside, those of you who have followed us for any amount of time know that we pride ourselves on our transparency and adaptation of our slide content to meet the needs and requests of you, the investment community. We've attempted to do this once again and are pleased to present you with what we believe is an improved slide deck. One that focuses on the salient topics that you are most interested in hearing about.

We remain fully committed to being completely transparent, so if you find we don't cover a particular slide in our prepared remarks you will most likely find it in the appendix. As always, we will take your questions following our prepared remarks.

We will start this discussion on slide 6 where you will find the significant highlights of our year-over-year performance. I will begin by covering the high points and following my overview our team and I will provide greater detail.

Year-over-year non-covered loans, or all loans excluding those acquired by our FDIC acquisition of Integra Bank, grew $84.1 million. Our core net interest margin, which excludes accretion income, expanded 5 basis points and we experienced growth in our insurance, wealth management, and investment businesses.

The cultural discipline we have instilled is reflected in year-over-year decline in our noninterest expenses. Importantly, this decline occurred despite the addition of the Bank of America branch purchase in the third quarter of last year, which added $2.8 million to total noninterest expenses in the first quarter. Our credit quality in capital levels remains strong and, finally, we are very pleased that our partnership with Tower is officially closed as of last Friday.

Moving to slide 7, you will see various measures of Old National's first-quarter performance. Our reported net income of $26.5 million is a 10.7% increase over first quarter of last year and our pre-tax pre-provision income improved 9.6% from a year ago. We also saw an improvement in our non-covered loans, core deposits, as well as double-digit increases in our return on average assets and our return on average equity.

Laid out on slide 8 is the year-over-year quarterly revenue growth in our fee-based businesses. Wealth management increased just slightly year over year and is obviously somewhat dependent on the market. Their sales for the first quarter were good, having some large additions to existing relationships and ending the first quarter with a strong pipeline.

Insurance had a great first quarter which surpassed last year's by over 10%. A strong performance from property and casualty commission revenue attributed greatly to this increase, with new business up 27% over 2013. In addition, contingency revenue, which is typically a first-quarter event, increased $500,000 from last year.

Insurance is also seeing positive momentum build from their acquisition of the Wells Fargo Evansville office and the addition of producers in the Louisville region. Coming off a very strong performance in 2013, our investments area is also ahead of last year with the largest dollar increases coming in our southern Illinois region, our Bloomington and Columbus markets, and in our Jasper market.

While we are very pleased with these strong results we are reporting today, we are equally excited about the future and what it holds for Old National. With that I will turn the call over to Jim Sandgren.

Thanks, Lynell, and good morning, everyone. I've had the pleasure of meeting many of you over the last five-plus years on investor trips and at conferences. For those of who I have not had the opportunity to meet, I thought I would take just a second to share my background at Old National.

I have been fortunate to serve Old National and our clients for the past 22 years. I have worked in various markets throughout the Company: one small market, Greencastle, Indiana, where I started my ONB career; a midsize market, Terre Haute, Indiana; and a large market here in our headquarter city of Evansville, where I've spent the past 16 years.

I have held various roles in commercial lending, served as the Southern Region Chief Credit Officer as we were working through some serious credit issues 10 years ago, and most recently I served as a Southern Region CEO with responsibility for day-to-day operations for the largest region in the Company. I'm truly excited about my new role and look forward to working with our incredible team of associates to continue our path to high performance.

At this time I will move into my presentation, which begins on slide 10 with an illustration of areas of loan growth throughout our footprint.

The three graphs on the top row represent markets were Old National has had an established presence for some time. While it may not be surprising to see growth in Louisville and Indianapolis, it is worth noting that our third-best market in the first quarter was Muncie, Indiana. While growth in the Louisville and Indy was mostly commercial, Muncie also experienced nice growth in our consumer segment.

The bottom row of the slide to depicts some of our newer markets and recent acquisitions. While our Columbus market did see a slight decrease in outstandings during the quarter, their results are still impacted by the marked loans we are still working through. It is important to note that our pipeline in the market is building and we feel very good about our future prospects.

From a base of almost zero when we acquired the Bank of America branches in Michigan and Northern Indiana, I am excited to share that we are experiencing good growth, $20.6 million during the quarter, across all loan categories: commercial, mortgage, and consumer. This includes the largest QHR pipeline in the Company.

While our growth in these newer markets is largely attributable to new clients, our growth in other regions can be attributed to a solid mix of both new and existing clients across a broad spectrum of industries: manufacturing, municipalities, and physician groups to name a few.

Moving to slide 11, you can see a vast improvement in our commercial loan pipeline from both the first and fourth quarters in 2013. I truly believe this is a case of pent-up demand as our commercial customers have more confidence in the economy and are now willing to invest in that new piece of equipment or looking to expand their facility.

I am pleased to note that we have actually seen the pipeline continue to increase through the month of April as it now stands at nearly $550 million. We now need to work to try and move these loan opportunities through pipeline to closing.

Commercial line utilization remains muted, basically flat with the end of the year. Many of our clients are still flush with cash on their balance sheets and have not tapped into their lines recently. While we may not return to pre-crisis line utilization levels anytime soon, I do believe that we have room for improvement as each percentage increase in line utilization represents nearly $12 million in additional outstandings.

I'd like to now turn to slide 12 and update you on recent and pending partnerships. As we announced our first-quarter earnings today, we also announced the closing and conversion of Tower Financial Corporation which occurred over the weekend. All reports indicate that the weekend conversion activities went very smoothly, which is a testament to the hard work and experience of our merger and integrations team led by our Chief Administrative Officer, Julie Williams.

As of this morning, the seven previous Tower banking centers located in Fort Wayne and Warsaw, Indiana, officially opened their doors as Old National locations and we are extremely excited to have them join the Old National family. Wendell Bontrager, our new Fort Wayne Region President, has provided incredible leadership throughout the past couple of months and especially this past weekend.

Wendell is nearly finished assembling his commercial and mortgage lending teams. With just one RM position left to fill and only one additional mortgage loan originator to hire, he anticipates having both teams filled in the near future.

I'm pleased to report that Tower had a good first quarter with net income of $2.2 million, which was higher than our modeling. Loans were down from year-end, but almost all the decline was due to the great job that the Tower team did in moving distressed credits out of the Bank prior to closing. To date, our team has only lost one credit that we wish we had not lost.

I am happy to note that we did just close on a $10 million loan last Thursday to an existing client in the healthcare industry. Our current commercial pipeline remains strong and we continue to be optimistic about opportunities in the market.

We are also excited and actively planning the closing and integration process with our pending United partnership in Ann Arbor, Michigan. Just last Friday, United reported a strong first quarter as well, with net income of $2 million. If you exclude one-time, merger-related charges, earnings were $2.6 million. United also reported growth in both loans and deposits.

The team there is fully engaged and completely intact and ready to hit the ground running. We anticipate the closing to be in the third quarter of 2014.

At this time I will now turn the call over to Chris.

Thank you, Jim. Moving to slide 14, total revenue less securities gains in the first quarter of 2014 was $123.5 million, which included accretion income of $17.9 million and a relatively high indemnification asset amortization expense of $7.3 million.

Revenue not including securities gains, indemnification asset costs, or accretion income was $112.9 million in the first quarter of 2014, up from $111.8 million in the first quarter of 2013 and up from $111.9 million in the fourth quarter of 2013.

On slide 15, fully taxable equivalent net interest margin was 4.22% in the first quarter, up from 4.04% in the first quarter of 2013 and up from 4.11% last quarter. I have shown on the slide the impact accretion income has had in our reported margin. Our core margin has been fairly stable over the last several quarters, but benefited this quarter from loans that moved from non-accruing to accruing status.

Accretion income will continue to be volatile in the following quarters and we expect that core fully taxable equivalent margin will be in the range of 3.30% to 3.32% in the second quarter. Core margin may be positively impacted by loan growth over the next several quarters.

Slide 16 breaks down noninterest income. Total noninterest income was $39.9 million in the first quarter of 2014, down from $45.3 million in the first quarter of 2013 and $44.1 million in the fourth quarter of 2013. Major contributor to the decline in noninterest income was the increase in amortization of our FDIC indemnification asset.

IA amortization expense was $7.3 million for the quarter, $5 million higher than the first quarter of 2013 and $3.9 million higher than last quarter. The increase in the indemnification asset expense was due primarily to better performance of FDIC covered loans. The increase in accretion income from Integra assets reflected in the net interest margin is the offset to the additional IA expense for the quarter.

Total FDIC indemnification asset on our balance sheet declined to $65.7 million from $88.5 million at the end of the fourth quarter. As of March 31, we expect that $38.2 million of the remaining IA will be amortized into expense by the time our loss share coverage terminates. This should be offset by cash flows from covered assets and should be largely amortized by the time our commercial loan loss share coverage ends in the third quarter of 2016.

Both our experience in the first quarter and our outlook for income from covered assets indicates continuing better expected performance of the covered assets than we originally anticipated. Additionally, we expect that quarter to quarter the IA expense and accretion income will fluctuate.

Debit-card-related income was $5.7 million in the first quarter and was down slightly from the first quarter of 2013 and down $1.3 million compared to fourth quarter. The fourth quarter is generally our strongest quarter for interchange income, so we expected a decline in interchange income in the first quarter.

January and February interchange income was lower than expected, but we believe some of the decline was attributable to the severe winter weather we experienced in our footprint. Interchange revenue was more in line with our expectations in March and is tracking with our expectations so far in the second quarter.

Lynell spoke earlier about the good performance of our fee-based businesses. Insurance contingency income was approximately $500,000 higher in the first quarter of 2014 than the first quarter of last year. Property and casualty commission revenue was also approximately $500,000 higher than first quarter 2013.

Insurance had a strong year in 2013, experiencing increases in commission revenue in several of its lines and began 2014 well due in part to new insurance producers added in our Evansville and Louisville markets. Mortgage revenue was down $700,000 compared to the first quarter of 2013 and was flat to last quarter. Mortgage activity was slow in the first quarter, but the pipeline has increased in April with 75% of the current mortgage pipeline comprised of loans to purchase homes.

Other income of $8.1 million for the quarter was up slightly from the fourth quarter, due to an increase in the gain on sale of other real estate owned. Service charges on deposits were $11.1 million in the quarter, the same as first quarter of 2013 and $1.7 million lower than last quarter. This decline was slightly higher than we anticipated in the quarter and we expect continued pressure on deposit service charges.

Slide 17 breaks down our noninterest expenses. We continue to stay sharply focused on managing operating expenses, particularly as we work through the consolidations and conversions of our new partnerships. As you saw from earlier slides, we are seeing balance sheet growth in our markets and continuing focus on expenses obviously increases the benefit we derive from the balance sheet growth.

Total noninterest expenses for the first quarter were $88.3 million, down from first quarter a year ago and flat to fourth quarter of 2013. We incurred approximately $2.5 million in acquisition costs in the first quarter, which was approximately the same as fourth quarter.

Operational expenses were $1.8 million higher than the first quarter of 2013, but this quarter included the full operational expense impact of the 24 Bank of America branches we purchased in July of 2013. Our operational expenses were also $1.8 million higher than the fourth quarter and included higher FICA and unemployment taxes and higher facilities management expense due to severe winter weather.

We expect to incur $6 million to $8 million in acquisition costs for the Tower and UBMI transactions in the second quarter.

Slide 18 shows our progress towards attaining an operating efficiency ratio of 64.5%. As we've talked about in many of our previous calls, becoming a more efficient company is a major initiative for us. As Bob noted last quarter, a component of our incentive plan for 2014 is an efficiency ratio at 64.5% for the fourth quarter. Subtracting acquisition and integration costs, our efficiency ratio for the first quarter was 65.81%, up from the fourth quarter but still significantly better than first quarter of last year.

It is important to emphasize that the Company continues to invest to stay current with new regulatory and compliance requirements and to improve our technology platform. For example, our new mobile banking product is seeing good acceptance from our customers since introduction early this year. This product both enhances our customers' experience and should provide productivity improvement opportunities in our branches.

Slide 19 depicts the output of our interest rate sensitivity models. The graphs show output from our net interest income at-risk models for two of the several scenarios we run on a monthly basis. The light blue line is the percentage change we expect to two years' net interest income if future interest rates are as implied by the interest rate swap yield curves for each of the dates on the horizontal axis. The forward yield curves used for this model at March 31, 2014, are included in the appendix.

As of March 31, 2014, this model expects an increase in net interest income of 2.24% if interest rates change as the yield curve predicts. We consider this our most likely two-year rate scenario. The dark blue line depicts the trend of possible impacts on two years' net interest income if rates are shocked immediately upward 200 basis points along the entire yield curve from actual interest rates as of the dates listed.

In this scenario our model indicates that, based on the balance sheet as of March 31, total net interest income would increase 3.41%. A slide with rates used in the scenario is also included in the appendix.

Predicted net interest income in this scenario has changed since 12/31/2013. As we have discussed in previous calls, the most material assumptions driving our rate risk models are related to the assumed repricing of our non-maturity deposits and the expected prepayment of our mortgage whole loans and mortgage investments. We believe that historically we have been conservative in the expectations of the repricing and degradation of non-maturity deposits on our balance sheet.

In the fourth quarter of last year we engaged a consulting firm to help reevaluate our non-maturity deposit assumptions. For the first quarter, after many discussions with the consultants, senior management, and our Board committee responsible for market risk oversight, we adopted detailed new assumptions related to our deposit repricing. Our March 31 rate risk positions shown on the slide reflects these deposit assumptions and the output indicates that we are more asset sensitive than previous models had shown.

Overall, we are comfortable with our current exposure to interest rates but we continue to pay close attention to the output of our rate risk models. The fact that we are more asset sensitive than our models indicated previously does not change our current thoughts regarding market risk. We expect to continue to reinvest much of our investment portfolio cash flows in short maturity or floating-rate securities and sell most residential mortgage production with a maturity of 15 years or longer.

Slide 20 shows our key capital ratios as of 3/31/ 2014 and compares them to recent quarters and our peer group. Overall, consolidated capital ratios are strong and continue to be higher than the average ratios of our peer group.

Earnings of $26.5 million for the quarter with a dividend payout ratio of approximately 41% at $0.11 per share were the primary contributors to the higher tangible common equity. Additionally, tangible assets declined by approximately $35 million during the quarter. Our strong capital base gives us the ability to add assets through organic growth, acquire additional banks or businesses using cash, or continue to return capital to shareholders.

Both the Tower and United transactions including mix of cash and stock in the purchase consideration. We are currently working through the closing numbers on Tower and I don't yet have an estimate for second-quarter tangible common equity, but we do expect that the asset mark on the Tower balance sheet will be less than the 14% we estimated when we announced the transaction.

One final comment regarding our quarterly effective tax rate. Our effective tax rate for the first quarter was 25.9% compared to 30.3% in the first quarter of 2013. We expect that rate to increase somewhat next quarter, but we expect the overall rate for the year to be in the range of 26% to 28%.

I will now turn the call over to Daryl Moore.

Thank you, Chris. On slide 22 we have laid out for you net charge-off results for the most recently ended quarter, along with comparative data for both the same period in 2013 as well as the fourth quarter of 2013.

As you can see, we are fortunate to be able to report that on a consolidated basis we were in a net recovery position for the quarter. While the dollar level of loan recoveries in the quarter was similar to those in the first and fourth quarters of 2013, we benefited from levels of gross charge-offs in the current quarter that were roughly half the levels of those in comparative periods.

These charge-off results obviously allowed us to benefit with respect to provision expense in the quarter. Within the segment of our loan portfolio not covered under an FDIC loss share agreement, we showed a slight net recovery from the allowance, while on a consolidated basis we booked a negligible provision expense in the period.

The nominal provision in the quarter compares favorably to the $800,000 provision expense in the first quarter of 2013 and the $2.3 million provision expense recorded in the fourth quarter of 2013. Allowance for loan loss percentages as measured against the standard benchmarks were all confirmed to be within acceptable ranges at the end of the quarter, especially considering the marks on our acquired loan portfolios.

On slide 23 we show trends in our special mention, substandard accruing, and substandard non-accrual plus doubtful loan categories excluding any FDIC covered loans. Special mention levels fell by roughly $23.1 million in the quarter, while substandard accruing loans showed a somewhat similar $22.5 million increase. While there were numerous movements within these categories in the quarter, the transfer from the special mention category to the substandard category of two relationships totaling approximately $18.7 million was a significant contributing factor in this shift.

Of note, in the quarter we moved a large relationship out of non-accrual back into an accruing loan category and recognized $1.4 million in previously collected but unrecognized interest income. The relationship had been in non-accrual since 2010, but over that time period to the present quarter operations have improved significantly.

To provide a bit of additional color in this area, when a loan moves to non-accrual in our organization we assess factors such as the skill of management, the industry in which the borrower operates, the capital at hand to support ongoing operations -- all in an attempt to determine our posture on whether the borrower should be asked to remain at the bank. This previously mentioned relationship is just one example of a company that we chose to keep in our portfolio that worked out well over time.

The first quarter was certainly a good quarter from a credit standpoint. The present lending environment, however, is very competitive which, as we have seen over previous cycles, can lead to problems in the future if our industry does not remain disciplined in its approach to lending. Getting to the right balance between growth and risk is one of the biggest challenges we face in the current lending environment.

In order to grow the portfolio we will need to continue to consider opportunities to take on additional credit risk, while at the same time assuring that the aggregate sum of that risk remains within our established tolerances.

With those comments I will turn the call over to Bob for concluding remarks.

Good. Thank you, Daryl, and by the way, happy birthday. My closing remarks will begin on slide 25, but before I begin those remarks, let me formally acknowledge Jim Sandgren's participation on the call.

As with any change, there are new ideas and energy that are generated and that is truly the case with Jim's promotion. Barbara did an incredible job for us and Jim has big shoes to fill, but he is off to a great start.

Let me begin my formal remarks with an overview of the economies in our market. I will begin with our home state of Indiana, which just announced its lowest unemployment rate since July of 2008, a rate of 5.9%.

The Indiana labor force grew by 25,000 jobs in the first quarter. In addition, the state has recently experienced several significant economic development wins highlighted by GE's decision to locate its aircraft engine plant in Lafayette, Indiana. Another piece of positive news for growth in Indiana is the recently passed reduction in business tax moving from a 6.5% rate over time to a 4.9% rate.

Kentucky is also seeing positive trends, though not as strong as Indiana. Kentucky's unemployment at the end of the first quarter was 7.9%, though the Louisville market was better at 7.5%. The Kentucky job force grew by over 11,000 jobs in the first quarter.

Southwest Michigan looks a lot like Kentucky with a similar unemployment rate of 7.6%. In Illinois the unemployment rate dropped to 8.1%, which is its lowest rate since 2008. All of these positive numbers are supported by conversations with business owners who are expressing a much more positive outlook for their businesses than we have seen in some time.

This is supported by the 24% increase we saw in our commercial and pipeline, as well as the day-to-day increase in activity we are seeing with our relationship managers. While this activity gives us reason for a positive outlook for our loan growth going forward, I would be remiss if I didn't point out that the competition is also very fierce.

While we believe we compete very well with our community brand and by adhering to our credit and pricing guidelines, this can be a tough mandate because of the competition. Let me just give you a few examples of deals that we lost last quarter.

We lost a seven-figure deal in the Columbus market on a 12-year fixed rate of 3.65%. In Southern Illinois we lost a $10 million-plus deal based on the competition offering a 25 basis point spread over a 10-year fixed rate, a deal that, quite frankly, was below our cost of funds. We also lost another large seven-figure deal in Louisville. The winning bid had very limited guarantees and no debt service coverage covenants.

But enough crying over spilled milk, I believe we are very competitive and there is a strong, positive energy amongst our folks that should transform into good opportunities for us. This is especially true in the new markets we have entered in the last few years. Northern Indiana, Bloomington, Columbus, Southwest Michigan, and now Fort Wayne all provide us good growth opportunities.

While our commercial and consumer businesses should provide growth for us going forward, the mortgage business is one in transition. Clearly the refinance business has slowed considerably, if not completely. This should provide us with an opportunity to look at the expenses related to this business and make adjustments.

We have seen a good increase in purchase business with our pipeline increasing over 30% since the first of the year. This increase is partially attributed to weather, as well as timing, but one issue we do face in many of our markets is the surprising lack of available housing stock.

We should continue to see good growth from our fee-based businesses in the next few quarters. All three -- insurance, wealth, and investments -- are seeing good pipelines of opportunity as a result of better sales management and referrals from their business line partners. These three businesses also have benefited from our new markets.

The biggest challenge going forward will be our service charge revenue, particularly overdraft fees. We saw a 12% decline in presentments when comparing this quarter to the first quarter of 2013, which remember did not include our BofA branch purchase. If we compare ONB without that purchase to the first quarter of last year, presentments are down 21%.

Even more striking is the fact that we saw a 23.6% decline in presentments from just last quarter. This is a direct reflection of an improving economy and a better and appropriately educated consumer. This negative trend will more than likely continue as the economy improves. As you might remember, we did increase our checking fees last year and this stage we have no plans to make further changes in our pricing.

I will close the business portion with a quick overview of the M&A market. Clearly, we are seeing more activity in the Midwest with 23 deals announced since last year. We have seen a steady amount of deal books cross Jim Ryan's desk and we remain very active in reviewing potential partnerships and it is possible that we could not something in 2014.

Our focus is still on providing better growth opportunities for our shareholders with reasonable risk. We are still looking at the potential partners in Northern Indiana, Western Kentucky, as well as Southwest Michigan.

One of the roadblocks that many banks have seen is the ability to get deals approved through the regulators. We feel very positive about our ability to get this done and we will keep working very hard to ensure that we are always working to stay ahead of the curve in terms of the needs of our regulators.

In closing, I want to share some personal information with you in the spirit of the transparency. In the immediate future you will see a filing that I have gifted approximate 14,000 shares of Old National stock to our family's recently established foundation. This will allow my wife and I to continue to carry on our philanthropic commitment to our communities.

Please, don't read anything into this. I continue to buy Old National stock every month and with this gift will still hold over 410,000 shares. Finally, I am as optimistic about our Company as I have been at any time in my 10 years serving as President and CEO.

With that, Selena, we will be glad to open the lines for calls.

(Operator Instructions) Scott Siefers.

Bob, I was hoping that you could talk a little bit more on your thoughts on loan growth. You guys provided a bunch of good color. It's kind of a mixed story though, right? I mean the pipeline is up a ton, the newer markets generating really strong growth that pretty much speaks for themselves, and then your commentary is very strong as well.

Just curious; is there anything specifically, say, this quarter versus last quarter that makes you feel more confident? And then just as I look at the components of the pipeline, it looks like the bulk of the growth was in the discussed category, which I guess is probably the earliest stage there. Maybe if you can just provide a little more color on the overall pipeline.

Then I guess the other part of the question would be, given that there is such strong growth from the newer markets, which ones are a little weaker than you would've hoped? Because, just to make the math work, if there is growth in X there has got to be some compression in Y just to keep the overall number flat, so maybe if you could touch on that as well.

I think part of it is, Scott, fourth quarter, as you know, the pipeline was down. Activity at the time was a little down for us and we saw a significant increase in our RM activity in the first quarter, which really has translated strongly into the second quarter. And I think Barbara did a great job of setting the stage and getting things put in place. I think with Jim's elevation it really kind of increased our energy.

Partially, Jim comes from a credit background so we understand how to navigate and Jim has spent a lot of time in the field. So I think the combination gives our RMs a great deal of confidence; the great work that Barbara did along with Jim.

I think we are also seeing folks coming off -- and I hate to use weather, Scott -- but January/February there wasn't much going on, particularly in the North. We discovered as we expanded into the North there is a lot more snow.

Chris I think covered -- one of our expense items was we spent almost $700,000 in snow removal. It's hard to get out and make calls and get business, so I think the weather --. But I think really it's the customers are more confident and I think our RMs are more confident.

Markets, clearly we are seeing on a relative basis good growth in the North, particularly in Michigan. But our legacy markets -- Evansville, Muncie, Terre Haute -- are all doing well.

If I had markets that I am a little disappointed in I think Louisville is very, very competitive. Indy is very, very competitive and it's finding that right niche in those markets for us to grow. And we continue to work through the marked credits in Columbus, but a lot of great activities. We just completed a marketing campaign where we made 100 calls in 100 days and we have spent some good money there in marketing and we are starting to see that pipeline grow.

I am very, very encouraged with Fort Wayne with the team that Wendell has assembled there. So hopefully that answers your question.

Yes, it does. That's perfect color and I appreciate it.

Then just wanted to ask one separate one just on expenses. Just given the volume of transactions it's always a little tough to figure out exactly what is going on kind of on an apples-to-apples basis, but it doesn't sound like there is any concern about the efficiency ratio target by the fourth quarter this year.

Just curious as you see things, Bob, will hitting that target be more revenue driven or will it be cost saving driven given that you've got the two deals that will close -- one that just closed and then the next a little later on in the year. How do you see things panning out from a cost/efficiency standpoint?

Great question, Scott, and I would tell you that as we talk to our Board it's all about expenses. I think you have heard my stupid saying that revenue growth is called if come. If it comes, it's great. If it doesn't come, I'm not going to bank on it.

We really are focused on reducing that cost basis to get to the 64.5% and beyond. Any growth that we get in revenue will be great, but I think Chris -- we've asked Mark Gorski to take a strong leadership role. Many of you may remember Mark from his days at IBT as their CFO. He's been a great addition to Chris's team and he really is knee-deep in working with Jim and others and Chris to make sure that it's all about expenses.

And it runs the gamut. It's looking at things like imaging and how do we move paper, how do we do a better job in our back room. Part of the reorganization we just announced with the multitude of changes, but most particularly Julie Williams, is really to start with a blank sheet of paper and redesign our operations so that we can be much more efficient serving the client and save money.

So long-winded answer again, Scott, but it is all about reducing costs.

Okay. That's terrific. Thanks a lot, Bob, I think that does it for me so thanks again.

Emlen Harmon, Jeffries.

Good morning, everyone. Chris, I was hoping you could provide a little bit of the detail on your new assumptions regarding deposit repricing and outflows. I think it was last quarter or the quarter before you guys had talked about your base case assumption was 20% deposit outflows when rates started to move. Just kind of curious how and how much you changed those assumptions.

I haven't translated those numbers yet to an overall number yet, Emlen, but I will tell you that we went through every line item in our transaction book and made some adjustments to duration, repricing, what we call beta model which is really the speed of repricing.

And I am -- like we have said, in fact I think we even went back a couple of quarters talking about how we were going to work on this. We have had such tremendous growth in our transaction accounts that I think overall we are pretty certain that we were being a little hard on ourselves when it came to repricing and I feel like we are in really good shape.

But I think, importantly -- we've talked about this -- it doesn't really change the way we look at our overall rate sensitivity. We will still be very careful about our investments and what we retain on the balance sheet in the way of residential mortgages and things of that sort. So while the output is a little bit different, I don't know that we generally feel that much different about how we're going to manage the market risk on the balance sheet.

Got it. Okay, thanks. Then is the core margin -- I think it was 3.36% this quarter and you're talking about a 3.30% to 3.32% going forward. Could you just talk us through what the drivers of the change are going to be there?

I think as we talked about, clearly moving that large asset to accruing status helped us a little bit. After we subtract that out we are probably back down to our normal core margin and Daryl, I think, specifically said that that was $1.3 million, $1.4 million.

I think that, again, I still look at us being able to manage that core margin in a relatively stable fashion. We don't have as much deposit repricing as we had last year. Still have some, but we are still getting good growth in our transaction accounts and that helps us quite a bit, as well as I mentioned core loan growth doesn't hurt either.

So when we continue to have that I'd expect that that might give us a little bit of lift, but the look forward kind of is flattish. Loan pricing continues to be actually somewhat of a little bit of the drag, but we are still -- a lot of floating-rate loans. We've gotten through the bulk of our repricing over the last couple of years. Feel pretty good about it.

Okay, great. Thanks for taking the questions.

Stephen Geyen, D.A. Davidson.

Maybe just a follow-up question to Scott's comments on the commercial loan pipeline utilization. Great to see the pipeline building there.

But as far as utilization, just curious if you are seeing existing customers kind of scale back or is it really a function of the lower rate there? Is it a function of loan growth and that it just takes a while for those new loans to build to be utilized?

I think it's -- pipeline again would be lines of credit, people drawing on short-term working capital needs. And as Jim said, we have still got a lot of our larger line users that are flush with cash and instead of using our line at 25 basis points they are using their own cash.

I'm not sure that we will see in the immediate few quarters any significant movement in that pipeline because, as Chris has been saying, we've got so much cash from our larger borrowers we actually can tell you by almost borrower where they are in line utilization. And a lot of our normal, historical large users are still sitting at a zero balance. Keep talking to them trying to encourage them borrow, but they keep saying they have got cash.

The good news is they are getting deals. One of our larger borrowers has always been somebody in the contracting business and they are starting to get a lot of at-bats and a lot of significant deals, so that should transform at some stage in the future into them using their line again.

Okay. Last question; you gave some comments or color on the expected one-time costs for the Tower and UBMI acquisition in 2Q with [$68] million. Do you expect all the Tower expenses to be completed by the end of the second quarter? And do you expect all the UBMI one-time costs to be done by the end of the year?

Yes to both.

Okay, thank you.

Jon Arfstrom, RBC Capital Markets.

Pretty comprehensive in covering everything, but a couple follow-ups here. The borrower confidence comment you made a couple of times, Bob, you feel like it has changed or it's improved over the last quarter or two?

Absolutely. I was just in Bloomington Saturday night for a large client function at IU and its -- there is no apprehension to their positivity, if that's even good English. But it used to be: I feel really good about my business, but I am worried about the federal government, I am worried about this. You are hearing I'm feeling good about my business.

It's pretty broad-based and I will tell you it's like somebody took a cork off a bottle of champagne at the end of first quarter and maybe middle of first quarter and you are starting to see a lot more movement. Now could something change tomorrow, maybe, but I think the biggest example just look at Indiana with the 5.9% unemployment. We cut our business tax on a statewide basis and I think that really sent a strong message to our business owners that this state is really committed to growth.

Okay, good. Then, Daryl, I kind of judge the credit concern by the number of slides in the deck. (laughter)

We're trying to work Daryl out of a -- it's his birthday, guys. We're trying to give him a break.

So you are down to two slides, but anything -- obviously Bob talked about the pricing issue, but anything out there that makes you a little bit nervous or anything you are saying we need to be ultra careful here and avoid it?

Bob is evil-eyeing me here so I will be careful what I say. Seriously, I don't think that there is anything terribly troublesome that we see in our portfolio on the horizon. There are obviously industries that we just have to be a little careful about, for instance healthcare. Healthcare we are taking a real close look at anything that we have, any kind of requests just simply because of the uncertainty.

But as you look really through our portfolio, Jon, there's just nothing today that is creating a lot of anxiety for us in terms of things that are on the horizon that we are concerned about.

Maybe you could talk a little bit, Daryl, about competition and what you are seeing.

Yes, the competition -- the first thing that goes is pricing, obviously. The second thing that goes is structure. We are seeing a lot of competition with respect to what we in the credit area would see as weak structure. I think the regulators would see it as weak structure.

Some of that is going to have to happen. There are just clients who deserve to have a little softer structure than maybe we have four or five years ago.

But as I commented, the best banks are going to have to determine where you draw that line. We're just going to have to figure where that is and hold that line, because we know the next cycle will come but we need current production. So it's a balancing act today for sure.

Okay, good. Then just maybe your comments on the reduction in overdraft presentments and maybe changing consumer behavior. I guess tie that into maybe the Durbin mitigation and with your two deals closing give us an update on your thinking in terms of how to offset some of that blow? Or is this just something you accept and move forward?

Well, I think we accept the history and move forward. I think with our acquisition, our partnership in Fort Wayne and UBMI, and as I said the pipeline is there for Jim to do others, we clearly know we've got to grow above that purgatory base that we are in now with slightly over 10% just to cover it.

Now I've spent some time in Washington. It is our hope that at some stage in the future that line moves; maybe to $50 billion, but we're not counting on it. I think, Jon, all we know is we've got to continue to drive costs down, drive revenue up to cover the inherent effects of Durbin.

Hopefully, we can land another couple of deals that will more than cover it, but it is there and we are painfully aware of it. But I'm confident that we can get through it by the time we are assessed.

Okay. All right, thanks for the time.

Chris McGratty, KBW.

Good morning, guys. The color on your discipline on (technical difficulties) was helpful. I'm interested in the one credit you did lose that you didn't want to lose. Could you size up how large it was and what the rate and maybe who stole the credit from you?

I can do that because I was involved in that and I'm going to take partial responsibility for losing, mostly based on my personality. It was a technology-based company. They came to us for a new opportunity, which we priced aggressively and actually we matched the pricing of the Company we lost it to.

What we failed to do, quite frankly, is to go in and reprice the existing relationship, which our competitor did do. And the client just said, you know what, you guys gave me a great opportunity on the new credit but you left my old credit there. The other folks didn't.

And when we went back and said we can do it, he said you should've thought of that the first time. And quite frankly, that is -- I will take full responsibility.

I still stay in touch with the client. I've told them I'm going to stalk them till I get them back, but lesson learned for us. I think Wendell and his team were, at the time, dealing with a lot of things and we just kind of let something slide and we screwed up.

Okay. And just to be clear, this is in one of your newer markets, right?

It's in Fort Wayne actually, yes.

On the Fort Wayne book, can you remind me of the size of the loan book today versus when you acquired it (inaudible), all the disruption that occurred?

It's 450.

Yes, it's about 450. We are down about $50 million roughly, Chris. And as Chris or Daryl said on the call, or Jim, a lot of that was the -- we mark the credits.

Rick Sawyer and all the folks in Tower did a great job of working through those credits, so a lot of that was marked book. And as Chris said, we expect that the mark when we bring that book over should be less than what we originally stated.

And is the intention for the rest of the year to grow that book? Is that something --?

Oh, yes. We've got Wendell very energized. We hired the new head of -- our senior commercial banker from the Wells. We've got a good cadre of team we have built there.

I tell you what; one, it's a great market and very, very competitive as you have seen, but we going to grow that book. We've got an advisory board up there that's very committed to working with us to grow the book chaired by Keith Busse, who was the former chair of Tower.

Okay. And maybe I missed it, the size of that credit that Tower -- the one that moved away this quarter, is that like a seven-figure deal or an eight-figure deal?

Yes, it was low seven-figures.

One for Chris. On the capital ratio as they shake out once the deal closes -- I'm running quick math -- is mid to upper 7 on the tangibles kind of in the ballpark once all the merger charges have been --?

Tangible book value?

No, I'm sorry, tangible common equity to tangible assets.

I think the number we talked about was a little higher than that originally, Jim. Wasn't it about 8%?

I don't know that it's going to move too much, but it's awfully hard to tell, Chris, until I get all the marks done and we look at the size of the portfolio. About the only thing that I am sure of, as Bob mentioned, is that our -- the mark on our assets should be a little bit lower than we had anticipated, which will help.

Chris, I think when we announced the deal we thought it would be around 8%-ish and I'm not so sure it will move much below that.

Thanks a lot.

Taylor Brodarick, Guggenheim Securities.

Good morning. Thank you, everybody. A very thorough presentation and questions so I only have one left.

Daryl, just kind of looking at the provision negligible to zero, what would it take inflection point-wise to see a change in that trend? Just looking at what the reserve and marks are to the pre-marked loans.

That's a great question, that one. And let me ask you, when you see change are you thinking about higher provision or are you thinking about (laughter) --?

Yes, exactly, exactly.

You know, one of the things that we look very closely at obviously is our asset quality ratings. If we see a deterioration in those asset quality ratings and begin to see that play out, which we don't anticipate, that could move that. Loan growth, obviously, would be a great way to move that.

So I would say, in today's environment those would be the two biggest probably influencing factors.

Okay, great. And, Chris, I'm sorry, just to make sure I've got this right. On the nonrecurring stuff for 2Q and 3Q, because I had had I think 11.5% for Tower. So you take out the 2.5% one more time for 2Q and 3Q, what are we looking at for the one-times?

For one-times, our total was 6% to 8%, our expectation for the remainder of the year. Probably for second quarter largely most of that will be Tower and I don't have the breakdown before me, but --.

It's actually 2% -- we expect somewhere around 2% for Tower in the second quarter, the balance of that UBMI. Tower then would be pretty much done with one-times and anything else would be UBMI related.

Okay, great. Thank you, everybody.

Peyton Green, Sterne Agee.

Question maybe, Chris, on the interest rate risk. Not that we expect rates to go up anytime soon, but what is the cash flow profile like of the combined portfolio on a pro forma basis? How much cash flow do you expect over the balance of the year? What is the roll off yield and where are you buying paper today?

Peyton, generally I have that in the slides. We didn't include it this year, but -- this quarter, but it's $300 million to $400 million kind of on a current run rate. It hadn't changed that much, and if it's significantly different from that I will let you know.

But it's still pretty high cash flow expectations. As I mentioned, we are largely looking at relatively short-term reinvestment opportunities there. The real benefit comes obviously as that money gets moved into loan growth.

Okay. Would you say -- how much would you give up on the roll-off yield versus what you are buying, 150 basis points, 100 basis points?

I don't think it's that much. We haven't looked at it specifically. I would have to tear into our forecast a little bit, so I don't really have that at my fingertips.

We will get it for you.

Okay. All right, great. Bob, how is the M&A opportunity? You mentioned that commercial customers are decidedly more optimistic, which makes the organic growth probably easier to achieve. Does that give others maybe pause to exploring strategic options or what is your thought on that?

It really does, Peyton. I think we are still in a market where everybody thinks they are a buyer. I think every call I have listened to most everybody says they are actively looking at M&A, which I think the industry needs to have happen.

I think over time what happens is you will see maybe organic growth come back, but you have still got regulatory cost that lays on top of that. You've got an interest rate environment that is still a challenge and I think those are the two things that most boards are thinking about now.

Quite frankly, without being arrogant, the fact that we were able to do a conversion in Fort Wayne with virtually no hiccups over the weekend, the fact that we can get regulatory approval when a lot of banks are still hoping for that, we've got advantages when we established three years ago that M&A was going to be a line of business.

So I think clearly it is competitive. You're seeing a lot of books and you are getting a lot more people at the dance. And you just got to do what is right for your shareholders at the end of the day.

Okay, great. Thank you very much.

John Moran, Macquarie Capital.

Hey, guys. Most of mine are asked and answered. I just have two ticky-tack follow-ups; one is just on the tax rate. Chris, I want to make sure that I heard you correctly. It sounds like it is ticking up a little bit in the second quarter and then 26% to 28% for the year, is that correct?

Yes.

Okay. And we ran a little bit below 26% I think effectively this quarter. So maybe run a little bit above the high end of the range and then just normalize it for the rest of the year and kind of shake it out where it's going to shake out?

Yes.

Okay, great. Then, Bob, I think you alluded to this a little bit in the answer to somebody else's question on some of the newer markets, but just wondering what the hiring pipeline looks like and thought you have up there. I know that you were looking to upgrade, add, or change in some of the markets, if you could just give us a quick update there.

Obviously, with Wendell's leadership we've done a very nice job in Fort Wayne. We still have some opportunities in Indianapolis. In fact, Jim and I are heading up to Indy on Friday. We think there's some opportunities to add talent in the Indy market with some of the changes that have been going on with the large regionals.

We are moving the bank side. Where we are seeing a good amount of opportunity, John, is really with our insurance group. We are seeing the Wells purchase, or sale I should say, has created some real opportunities and there's kind of some disruption on the insurance side. We've added staff in wealth and investments.

So a long-winded answer, as usual, but I really want to be opportunistic in hiring people. If you are getting an inflection point with the growth in the economy, now is the time to add good quality talent, and we are continuing to look to do that.

Sounds good. Thanks very much, guys.

John Rodis, FIG Partners.

Good morning, guys. I guess most of my questions have been asked and answered, but, Chris, I guess one quick question for you on expenses.

You had, what, the $2.5 million in M&A charges during the quarter, but it looks like most of that was offset by some real estate related items, or I guess some tax items. Could you to sort of talk to that real quick?

We would have had I think in that -- some of those numbers we had some good recoveries and some OREO. We also had --

(inaudible - microphone inaccessible) real estate and property tax.

Oh, I'm sorry. And $2.2 million on a nice recovery of previously paid real estate taxes as we reappraised in a challenge to real estate taxes, which worked out very well for us. Obviously we don't anticipate those kinds of things to happen every quarter.

Okay. So sort of those tax-related items sort of offset the merger charges, is that sort of the right way to look at it?

(multiple speakers) I think that is pretty close, yes, yes.

Okay. Thanks, guys.

There are no further questions.

Great. Well, thank you, as always. I always say if you have questions, let Lynell know. If there is something you would like to see us either add or delete from the revised presentation let her know as well.

We appreciate everybody's interest in Old National. And happy birthday, Daryl.

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 29183728. 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.