Old National Bancorp (ONB) 2014 Q2 法說會逐字稿

Welcome to the Old National Bancorp second-quarter 2014 earnings and acquisition announcement conference call. This call is being recorded and has been made accessible to the public in accordance with SEC's Regulation FD.

The call, along with the 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 8 AM Central Time on July 29 through August 12. To access the replay dial 1-855-859-2056. Conference ID code is 73472033.

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.

Thank you, Holly, and good morning, everyone. Joining me today on Old National Bancorp's second-quarter 2014 earnings and acquisition announcement 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 5, as well as our SEC filings, for a full discussion of the Company's risk factors.

Additionally, as you review slide 6, 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 the financial measure of actual results. Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentation.

We have got a lot to review with you this morning. First, we will provide a detailed analysis of our second-quarter earnings and then we will discuss our announced acquisition of Founders Financial Corporation, an entry into the vibrant Grand Rapids, Michigan, market. I will start on slide 7, where you will find highlights of our performance as they relate to our 2014 initiatives: increasing core revenues, reducing operating expenses, and transforming the franchise into higher-growth markets.

As we focus on core revenue growth, arguably the most significant highlight of the quarter is the $139.6 million, or over 11%, annualized organic loan growth we experienced in the second quarter, which was spread across all loan categories. Year-over-year we grew loans $214 million, or 4%. This loan growth is net of loans acquired through acquisitions and excludes the change in covered loans.

Perhaps equally important was the over 4% increase in total revenue, excluding securities gains, accretion income, and a change in our indemnification assets. Banking, wealth management, and insurance all contributed to the improvement over prior year.

As we work diligently to reduce our noninterest expenses, we were pleased to see a year-over-year reduction in quarterly operational expense. Of course, we remain keenly aware of the cost saves we announced to you with our recent acquisitions. Looking at our Tower acquisition we recently completed, as well as the United acquisition set to close in just a few days, I am pleased to report that expected cost saves are tracking with what we anticipated at announcement date.

Consistent with our strategy of transforming our franchise into higher growth markets, we continue to be active with acquisitions and later in the call Bob will provide an update on these, as well as discuss our Founders acquisition announcement.

Moving to slide 8 you will see we reported net income this morning of $18.8 million or $0.18 per share. When analyzing our current quarter performance, it is important to note the following items on the slide which negatively impacted our second-quarter 2014 earnings. The first is a $6.3 million in pretax merger and integration expenses, and that amount is consistent with the $6 million to $8 million we discussed with you on our last quarterly call.

Second is a $10.5 million unfavorable pretax change in our indemnification asset, and Chris will provide more clarity on this item in his remarks. For those, I will now turn the call over to Chris.

Thank you, Lynell. I will begin my presentation on slide 10. To provide further clarity regarding our results, we added a new slide that illustrates our progress in a number of areas.

Over the last several quarters, we have discussed the impact of accretion income and the indemnification asset amortization expense on our earnings, but we believe this chart represents the sustainable long-term benefit of our work at Old National. Most notably, the chart shows the benefits of our acquisitions. The bars represent annual income before tax through 2013, minus the expenses associated with acquisitions and divestitures, minus accretion income, and minus the impact of the changes in the Integra-related FDIC indemnification asset.

The last bar on the chart shows adjusted income for the first six months of 2014. We believe the chart clearly shows the important contributions of our partnerships in Bloomington, Columbus, Michigan, and Fort Wayne. Additionally, adjusted income has benefited from the work we have done on expenses, our low credit costs, and our loan growth.

Slide 11 shows core revenue increased 4.1% over second quarter 2013. Total revenue for the quarter was $122.4 million, down slightly from first quarter of 2014 and from second quarter of 2013. We account for changes in the FDIC indemnification asset as revenue and the change in the IA generated a cost in the quarter of $10.5 million. This cost was the driver of lower revenue and masks our strong increase in core revenue.

Net interest income and most fees increased over second quarter 2013. Net interest income, not including accretion income, increased 3% over second quarter 2013; wealth management revenue increased 17%; debit card fees increased 9%; insurance premium revenue increased 5.3%; and brokerage revenue increased 1%. Mortgage was the only area that saw a decline in revenue from second quarter of last year.

As of June 30 we have approximately $28.9 million of indemnification assets that should be expensed over our remaining FDIC loss share period. Most of this should be amortized over the next two years. Our commercial loss share coverage ends September 30, 2016.

Slide 12 breaks down the components of our net interest margin for the quarter. Fully taxable equivalent net interest margin declined to 4.07% from 4.22% last quarter, due largely to lower accretion income from assets purchased in the Indiana Community Bank transaction.

Included in the second quarter is accretion income from the Tower Bancorp acquisition, which closed on April 25. The purchase accounting mark on the Tower loan book was approximately 7%, a lower mark than we have seen with previous transactions.

Core margin was 3.26% in the quarter. Our yield on consumer loans declined from 4.32% in the first quarter to 4.17% in the second quarter of 2014 due to strong growth in the quarter. Additionally, our investment portfolio yield declined from 2.94% to 2.89% as we deployed much of our cash flows into low-yielding short-term investments. Both trends impacted core net interest margin for the quarter.

We expect that core FTE margin will be 3.26% or slightly lower in the third quarter. Accretion income will continue to be variable over the next several quarters.

Slide 13 breaks down non-interest expense for the quarter. Merger charges and operating expenses for Tower lifted total non-interest expenses for the quarter. Merger and acquisition costs were $6.3 million in the quarter. We expect additional merger and acquisition costs in the third quarter in the range of $3 million to $5 million as we progress through our United Bank and Lafayette Savings Bank transactions.

Operational costs in the second quarter of $84.7 million compare to costs of $85.2 million in the second quarter of 2013 and $83.6 million in the first quarter of this year. A majority of the increase from the first quarter was related to annual merit increases.

We separated the costs of the acquired Michigan branches and the costs of the Tower operations to show the progress we have made on overhead and other expenses in the Company during the last year. So you can see in the slide we continue to be focused on productivity improvements and reducing expenses and are committed to attaining an efficiency ratio of 64.5%.

As you can see from our models on slide 14, we are asset-sensitive and net interest income should increase with a rise in interest rates, either if rates change as a market currently expects or with a 200 basis point increase in interest rates all along the yield curve. We intend to continue to manage our balance sheet to maintain an asset-sensitive risk position by lengthening the repricing of our liabilities, reducing the duration of our investment portfolio, and selling most of our new fixed rate mortgage loan production.

My final slide, slide 15, shows our tangible book value per share from 2011 through second quarter 2014. Our Tower loan fair value mark was approximately 7% at closing, less than the 14% we estimated when we announced the transaction. As a result, our tangible book value per share after closing the Tower transaction was higher than we originally estimated. We expect a similar difference for our United Bank transaction, which should close this week.

At the announcement of the United transaction, our estimate of the loan fair value mark was about 12.1%. We now expect the mark will be approximately 6.1%, which should result in a higher-than-originally-estimated tangible book value per share after closing.

My last comment is regarding our quarterly effective tax rate. Our effective tax rate for the second quarter was an unusually high 29% and resulted primarily from a correction in our first-quarter taxes. We expect the overall rate for the full year to be in the range of 26% to 28%.

I will now turn the call over to Jim Sandgren.

Thanks, Chris, and good morning, everyone. I would like to begin my remarks by expanding on a topic that Lynell addressed in her opening comments, the strong organic loan growth that we experienced in the quarter.

If you will turn to slide 17, you can see that our loan growth over the past 12 months, excluding covered loans, has been driven by a combination of partnership activity and solid organic growth. The $360 million in loans obtained through the acquisitions included $355 million from our Fort Wayne Tower partnership and $5 million from our Bank of America transaction. The $214 million we experienced in organic loan growth was boosted by a strong second quarter that included an increase of $76 million in commercial and commercial real estate loans and additional growth in indirect lending.

While we enjoyed success in a number of our markets, I was especially encouraged by increased production in our two largest markets, Louisville and Indianapolis, as well as one of our newest markets, Michigan. I also want to note that the loan sale of $109 million depicted on this slide took place in the third quarter of 2013 and included $96 million in residential mortgages and $11.6 million in commercial leases.

Moving to slide 18, you can see that we continued to build upon the positive momentum in our commercial loan pipeline that I shared with you last quarter. This is particularly good news given the excellent production we experienced in Q2. We had seen meaningful growth in the commercial pipeline in some of our newer markets -- Bloomington, Columbus, and Fort Wayne -- as well as in a couple of our legacy markets, Evansville and Terre Haute.

We also saw a nice increase in commercial line utilization in the quarter as utilization increased from 34% in the first quarter to 36.6% in the second quarter. The higher utilization represented an increase of approximately $24 million in commercial loan balances.

Similar to the organic loan growth we are experiencing, I believe the positive momentum we are witnessing in our commercial loan pipelines and line utilization can be attributed to increased consumer confidence directly related to a slowly, but steadily, improving economy. We believe this will continue to provide us with opportunities in all of our markets and we are extremely confident that we have the right people and products in place to take full advantage of these opportunities.

I would like to now turn your attention to slide 19, which illustrates the continued success of our fee-based businesses. As you will recall, 2013 was a very strong year for us in insurance and a record-setting year for our wealth management and investment divisions. I'm pleased to report that our investment team has thus far maintained the record pace they set in 2013 while our wealth management and insurance businesses both enjoyed organic growth in the quarter.

Second-quarter growth of wealth management can be attributed to a combination of factors, including several new large relationships, good retention of our key clients, and market appreciation. The growth in insurance revenues have been driven primarily by our commercial lines business.

Much like the loan growth we've experienced in the quarter, I believe these revenue gains in our fee-based businesses illustrate that we are executing our plan extremely effectively, with strong leadership and experienced, motivated producers in place throughout our footprint. With that, I would now like to turn the call over to Daryl Moore.

Thank you, Jim. On slide 21 we display for you net charge-off results for the most recently ended quarter along with comparative data for the same period in 2013, as well as the first quarter of 2014. Consolidated net charge-offs for the quarter were a respectable 7 basis points, although higher than levels posted last quarter and in the second quarter of 2013. Through the first half of the year, losses on an annualized basis are 2 basis points.

Losses in the current quarter came almost exclusively from the covered portfolio with over $900,000 of the total net charge-offs of $1 million coming from that portfolio segment. As you know, losses from that particular portfolio are sheltered in part by our 80% loss share agreement with the FDIC. One borrower in that FDIC covered portfolio accounted for over half of the total amount of losses in the period.

With respect to provision expense in the quarter, on a consolidated basis we reflected a modest $400,000 recapture out of the allowance account. While the non-covered portfolios identified a provision need of roughly $1.1 million, this was more than offset by an indicated recapture of $1.5 million associated with the covered portfolio. The need in the non-covered portfolio was driven in part by the loan growth experienced in the quarter.

On slide 22 we show trends in our special mention, substandard accruing, and substandard nonaccrual plus doubtful loan categories excluding any FDIC-covered loans. The levels of these categories all increased during the period, but in the case of our special mention and non-accrual and doubtful loans, the increase was due solely to the addition of loans associated with the closing of the Tower Bank transaction.

Without the Tower loan portfolio additions, the special mention loan levels fell by roughly $13.5 million in the quarter. Although there were a number of movements within this category, there were several large relationships upgraded to past category status in the period.

Excluding the Tower loans added in the quarter, substandard accruing loans showed an increase of $13.8 million in the period. Again, while there were several large changes within the category in the quarter, the transfer of one large construction-related borrowing relationship totaling approximately $10.9 million from the special mention category to the substandard accruing category was a significant contributing factor to the increase.

Without taking into effect the incoming non-performing loans from Tower, substandard non-accruing plus doubtful loans fell by $8.9 million in the period. The continuing ability to move non-performing credits out of the bank at little or no loss was a contributing factor to our success in this category in the quarter.

We continue to enjoy success with respect to credit performance in the second quarter of the year with low losses and generally improving credit quality. However, with significant liquidity chasing deals throughout our markets, the ability to hold structure and pricing in the current environment continues to be a challenge.

As I've said on a number of prior occasions, we continue to work hard to assure that we are underwriting in such a way to allow us to grow our lending portfolios at a reasonable pace without taking on risk levels that would materially impact us in the next cycle. Finding the right balance in that regard continues to be both an opportunity and a challenge.

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

Great. Thank you, Daryl, particularly for other strong or, as you said, respectable quarter for credit. As we began our presentation, we purposely started with the slide reinforcing the alignment of our strategy with what we have executed over the last few years. I believe that this is a very important message and particularly relevant as we look at the second quarter.

We committed to organic growth and this quarter saw strong loan growth and good fee-based business revenue growth, which led to an overall growth in revenue. We committed to strong expense management. Excluding the costs associated with our recent acquisitions, our operating expenses year-over-year were down. More importantly we of cover the additional cost of compliance and we have yet to realize the full benefits of the Tower integration or any benefits from the United integration or the number of projects we continue to execute aimed at improving our efficiency.

We committed to transforming our franchise from lower growth, small markets to a franchise with strong growth markets throughout Indiana, Michigan, and Kentucky. And as part of that committed strategy, we identified key markets we want to be located in to improve our growth profile. Our entries into Columbus, Bloomington, Michigan, and Fort Wayne clearly are an important part of the growth we saw this quarter, and as I will discuss later, we feel very good about the impact these and our other new markets will have on our future financial performance.

Bottom line, I am very pleased with this quarter and believe it is a good indicator of what the new Old National can achieve as we continue to execute our basic bank strategy.

Moving to slide 24, before I discuss the Founders transaction, I thought it would be beneficial to recap the other transactions we have announced over the last few quarters. I believe what you will discover is that we have met or exceeded the commitments we made to you, but that we also realize that we must continue to be laser focused on execution.

In Southwest Michigan and our South Bend branch acquisition, we have experienced very good loan growth, 50% in fact, over last quarter and our pipeline continues to grow. We have also seen a steadying of deposit retention at close to a 92% retention rate. We continue to feel very good about our presence in Kalamazoo as our initial entry into the Southwest Michigan markets. From an earnings basis, we are slightly ahead of what we had committed to when we announced this deal.

Our Tower and Fort Wayne entry, we are fully integrated and fully staffed, and despite the noise we experienced shortly after we made our announcement, our loan outstandings have held in very well. To date, we have lost three loan relationships: one for credit reasons, one for structure issues, and one we absolutely did not want to lose.

Our pipeline continues to increase, both in terms of the absolute number of deals we are looking at today as well as the size of the credits. Our deposit base has been steady with over 95% of our deposits retained in Fort Wayne. But in all candor, it is too early to celebrate given that it has not been that long since the conversion. However, I will note that the mood of our client seems very positive.

We expect our cost saves to come in as promised and our full-year accretion will be at or better than we committed. Of particular note, as I mentioned on our Lafayette Savings call, our market closing was lower than we had discussed in our initial call. As such, we have seen a 20% improvement in our tangible book earn-back, moving from slightly over 6 years to 4.75 years.

With our United Ann Arbor transaction, we expect to close on 7/31 with a conversion on 8/22. All of our sales team is in place and the morale is excellent, which is a real testament to Todd Clark and his team. We have already had two mock conversions, which both went very well and at this stage we would expect our cost saves and earnings to be as promised or slightly better.

Lafayette Savings Bank, we are off to a great start. Morale is excellent and we have seen no associate attrition. We have filed our application for approval and still plan to close in early the first quarter of 2015.

As I move into a discussion of today's announcement, the recap I gave you serves as a good foundation to introduce Founders. We spoke with you many times about our desire to transform our franchise into higher growth markets and as such we had very defined markets we wanted to expand in. Those were Bloomington, Columbus, Fort Wayne, Northern Indiana, and Southwest Michigan, which we defined as Ann Arbor, Kalamazoo, and Grand Rapids, as well as the Louisville market. As such, we have been very targeted in our approach, identifying key banks that we would like to partner with in these efforts.

With today's announcement we will have met most of our desires except Louisville. Given that, we know that the key to continuing to provide you, our owners, with value lies in our laser-like focus on execution. Our entry into Grand Rapids will allow us to be more opportunistic in the future of using your capital for acquisitions. That is not to say we will not be a participant, but we feel very strongly that we have built the foundation that will allow us to become the high-performing bank our strategy was designed around.

Let's turn to slide 25 to review today's announcement regarding Founders. Today we are pleased to announce that we have executed an agreement to enter the Western Michigan market by partnering with Founders Bank & Trust. Founders represents the ninth-largest bank and Grand Rapids based on June 30, 2013, data. They are also the fourth-largest Michigan-based institution in the market and have had a history of 16 years of serving this vibrant market.

We have deep, deep respect for their leadership team and feel that this is a perfect complement to our Michigan strategy and completes the foundation from which we can build our franchise in Michigan.

On slide 26 we provide you with more background in the West Michigan market. With a population of over 1 million, Grand Rapids is the second-largest market in Michigan and arguably one of the strongest and most promising markets.

Grand Rapids will represent the third-largest market for Old National in terms of population. The market has a very strong economic base. The unemployment in May was 5.4% with the employment being driven by a number of Grand Rapids-based businesses you'll be familiar with like Amway, Steelcase, Meijer, and GFS amongst the largest employers.

On slide 27 we do detail the transaction. The aggregate deal value, based as of the close of the market on July 25, is $88.2 million. The consideration given to Founders' shareholders is approximately 54% stock with the remaining 46% in cash. At this price it represents a price to tangible book of 210% and 15 times 2013 earnings.

While we acknowledge that the price is on the higher side of Midwest deals, I would note that this was a very competitive auction. And more importantly, we feel that this deal has very compelling strategic and financial benefits to Old National. I have discussed the strategic value of this in terms of solidifying the foundation that we design as we look to build our higher growth profile for our investors.

The financial benefits are as attractive as the strategy. We estimate that the deal, after one-time charges, will add approximately $1.7 million, or $0.02 per share, to our 2015 earnings and then $9.5 million to $12.5 million, or $0.05 to $0.07 per share, thereafter. Using these estimates we calculate a tangible book value earnback of 5.25 years, which is inclusive of the estimated $7.8 million in transaction costs. We do expect cost saves to be slightly above 30% and we do estimate that we will get 67% of these in 2015 and the balance of those will come in early 2016.

The total loan portfolio mark is estimated at 6.1% with 3% of that being the credit component. Even after this transaction, we will exceed all well-capitalized guidelines.

In closing, while purely by coincidence, combining the announcement of our second-quarter earnings with our new entry into Grand Rapids does allow us to continue to ratify our growth strategy with you. The revenue and loan growth that we experienced in this quarter is a direct reflection of the emphasis our company has put on prudent growth, much of which was driven by the markets we have entered over the last few years. When you combine that with our continual focus on expenses, we believe it meets our strategic imperative of providing our investors with consistent quality earnings.

Today's announcement of the Founders partnership provides us with an entry into a very strong market with a terrific leadership team, much like our previous partnerships. With all of the hard work and effort that our team has put into transforming our franchise, we believe we are very well positioned for the future in very strong markets with much more discipline around expenses and a continual focus on strong credit, which is why, as I said in our first-quarter call, I am as optimistic about the future of our company as I have been in the 10 years I have been at Old National. Not to say we do not have work to do. We know that we do, but we have the right people in the right markets all committed to working for our shareholders.

With that, Holly, we will be glad to take any questions.

(Operator Instructions) Taylor Brodarick, Guggenheim Securities.

Good morning, everyone. Congrats on the deal. First question, I was looking at the deck from the United announcement in January and where the kind of restructuring costs came in at. It seems like they are going to be a lot lower than anticipated. Am I reading that correctly?

Let me just pulled that -- I am looking at that. We estimated -- bear with me.

I have $18 million.

Yes, we got about $18 million. Our sense is they will be less than that. I think Chris covered what we expect to take this quarter, but they will be slightly less than the $18 million.

Okay so the $3 million to $5 million is going to be mostly United for 3Q?

Yes, almost entirely. A little bit of LSB.

Okay, okay. Then I guess a question for Jim Sandgren about sort of the organic and acquired breakdown. When -- obviously it seems like you didn't mention Monroe and some of the older, more seasoned deals. I guess when do you sort of incorporate them into the legacy franchise when you are looking -- when you are breaking that down?

As far as the timing, I can't tell you exactly, Taylor, but we continue to really see some nice directional growth from Bloomington and Columbus, especially in the pipeline. So we anticipate continued growth from those markets. But like you said, they are getting closer to being more of a legacy market, but still a lot of focus on both Bloomington and Columbus. We are continuing to be pretty excited about what we see out of those markets.

Taylor, this is Bob. I might add, if you look at Chris's slide on net interest margin and you look at the accretion, really when you get a steadying of the value of the accretion is really when it becomes a legacy market. We've seen multiple quarters with Indiana Community where it's been pretty much flat to even slightly growing. But you kind of get a sense when you lose -- when a lot of that accretion is gone that it really becomes legacy and it becomes awfully hard to compare. So I think that's a good indicator using Chris's slide 12.

Great. Thanks, Bob. I guess last question. It sounds like Jim Ryan is going to be going back and forth to Louisville from your comments. That's sort of the last (multiple speakers).

Everybody knows you can't -- we've been very lucky that we identified markets we wanted to be in. And actually Jim did a great job of identifying potential partner banks and the stars and the moon aligned. Louisville is a great market, got great institutions. My sense is there's a lot of people who want to remain independent in Louisville, but we are available if anybody is looking for a good partner.

Thanks, everybody.

Taylor, this is Chris Wolking. I might just add the total cost that we have talked about in our announcements include those costs that are absorbed in our income statement as well as the income statement of the partnership bank. So those costs, the costs that we provided at $3 million to $5 million would be those expenses we would expect to see on our income statement as we wind down the UBI, UBMI acquisition and get involved in the next transactions as well.

Okay, thanks, Chris.

(Operator Instructions) Jon Afrstrom, RBC Capital Markets.

Good morning.

It's 68 here in Grand Rapids. I don't know what it is up in Minneapolis, but it's beautiful.

Beautiful; it's balmy here. Well, now I get to ask all my questions if nobody else is in the queue. It'll be fine. Just a question on the pipeline. Is there a way to give us an idea of how much of the pipeline is more producers being in more markets versus change in the borrower sentiment or more willingness to borrow from maybe the existing core? Does that make sense?

Great question. Jim Sandgren is probably the closest to answer that.

Certainly the fact that we are in more growth markets I think that has certainly helped, but as I alluded to, I think the slowly improving economy are giving us more opportunities to look at deals. Obviously very competitive out in the market today, but I think it's a combination of us being in the right markets, more growth markets, as well as our borrowers are really starting to feel a little bit more comfortable about the economy and willing to invest and grow strategies for their businesses.

John, this is Bob. I might just add I think a real testament to Jim Sandgren, who has been out and visited a lot of these markets and really has our salesforce all focused on growth, prudent growth, and really has done a great job at getting the folks energized, too.

Okay, good. Jim, do you think, or Bob as well, the utilization rate that you lay out being I think maybe 3 percentage points below that, do you expect the Company to be able to get back there or maybe above since it is a long-term average?

I think with the improving economy, Jon, and what we are hearing from borrowers as they continue to talk about expanding inventory and producing more, I am reasonably optimistic that you will get to that level much more so than I would've been a year ago. One of our challenges is we've had a number of large line users, if that's proper English, that -- one sold their company and they were historically a big borrower. But I think other than that I am reasonably comfortable we can get pretty close to that.

Okay, good. Then, Chris, maybe a question for you on the margin. You went through some of the puts and takes and the near-term outlook, but longer term does it feel to you like the core margin, excluding all of the accretion noise, that core margin is starting to stabilize?

It's always hard to look too far out on the margin but I will tell you, Jon, that seeing the loan growth and thinking in terms of those -- of the investment portfolio cash flows being reinvested into loans, I really like that move. And as you know, we have always maintained a fairly high percentage of our earning assets in the investment portfolio and we are trying to be very careful about where we are placing that. So I think long term that benefits the margin. Our good deposit base benefits the margin long term, particularly of rates start to go up, but I really like the dynamic of the improved earning asset mix.

Good. Just more of a technical accounting question, but the $29 million left in the indemnification assets, pretty big amortization over the last two quarters and I think you mentioned you have a couple years left. I know it's almost impossible to predict this, but it seems like that's going to drop off pretty materially at some point. Is there a way to think through that?

I think that's fair. You know what we see here, have seen here recently is much of that accelerated amortization expense is due to the improvement of some large assets that we've got remaining in that portfolio. As we look forward we don't have as many large, potential asset quality improvements as we have had recently. There's still a couple left, which could drive that amortization expense around, but you're right, we were at I think about $38 million at the end of last quarter and we're down to $28 million. You wouldn't normally have expected that much amortization with still two years left remaining in the commercial indemnification period. We are watching it closely. We will certainly call out those changes, and to the extent that the expected expense changes, we will make sure to let you all know about that as well.

Okay, good. Then just one more for you, Bob, on Grand Rapids. Obviously you said it was competitive, but my sense is with a relatively small footprint there is more to come in Grand Rapids. Can you maybe talk a little bit about how you think through that market and where you would like to be longer term?

We think Grand Rapids is a great market. We think it's also a market that is looking for a bank of our size that is deeply committed to the communities like we are. We have kind of -- as everybody may remember, both Chris and Jim worked at the former Old Kent and there's a lot of opportunity for us to come in and kind of replicate what Old Kent did. And we think there's great opportunities in these markets, so we are committed to continuing to build here and look for the right way to do it. But saying that, with Lori and Greg and the management team here at Founders, we are very comfortable that they can do some great things given their resources.

Would you consider de novo and larger lending limits and more hiring? Is that the initial plan?

Well, you know, they are going to have larger lending limits because clearly our capacity to lend is much better than the Founders. We do believe there may be some opportunities to expand staff up in these markets. Again, based on a lot of -- our guys have connections and our Kalamazoo market is not that far away. Chris and I debate de novo entry. We're looking at it again, Jon. It may be a prudent way to expand a little bit, but we've got some other markets, like Louisville and others, that de novo also may make some sense. So we have those conversations, but I think, given the footprint that Lori and Greg have here, we've got a lot of good upside.

All right, thanks for the time.

Michael Perito, Keefe, Bruyette & Woods.

I thought maybe I would ask a quick follow-up on the Grand Rapids question, more pointed towards the lockups and how you feel about retention at Founders and more specifically on their lenders. But also there was a recent MOE closed in Grand Rapids and another deal in the last six months. Do you guys plan to aggressively pursue any additional lenders or anything of that nature once you guys close that deal in early 2015?

Great question, so let me address the first. Clearly, I learned a valuable lesson in Fort Wayne. As I said to you all and I have said publicly before, I made some serious mistakes in Fort Wayne and I don't want to do that again. So I will tell you that we have already got a retention plan in place. Greg and Lori have looked at it. It's the quickest we've ever put in place a retention plan. Again, I think Lori and Greg are fully on board. You never say never, but I feel very good about where we are in terms of retention of our associates. Again, we are going to be opportunistic at looking for ways to grow up here. Again, both Chris and Jim have a lot of contacts up here. I'm sure their emails have been buzzing, but it's up to us to prove that -- as I'm going to say to the associate at Founders this afternoon, we have got to earn their trust and respect and I think we have got to earn the market's trust and respect that we do the things we say we do. And if we do that then I think we have an opportunity to expand our associates here.

Okay, thanks. Another more big picture question, the organic growth in the quarter was very strong and obviously a function of the effort you guys have made to get into higher growth markets, like you said in your prepared remarks. At what point does it become a more efficient use of capital to just fund organic growth versus additional M&A?

A great question and I'm not so sure that -- as I've said in my remarks and I think Chris will reiterate, we've built the foundation and now is the time that we can continue to execute and be a little more opportunistic. As we look at the markets we are in, we have got great people. We are in the right markets we want to be in. Would I like to be bigger in Louisville? Absolutely. Is there some areas in Northern Indiana I could be bigger in? But right now we are really looking at in-market to build upon the foundation. So I think, quite frankly in all candor, I think there are probably some investors that would want us to take a deep breath and prove that we have used their capital in the right way. Chris, anything you would add to that?

We have always talked, Michael, about our priorities and our opportunities to use capital and we've always agreed that organic growth was at the very top of the list and acquisitions and return of capital was kind of below that. So absolutely. Obviously, it takes energy from our lenders, it takes enthusiasm by our customers, and it takes the new markets to gain some traction for all of that to happen. We are perfectly willing to do whatever it takes to make sure we are doing what we think is best with the capital for you all.

All right, thanks a lot, guys. I appreciate it.

At this time there are no further questions. It will turn the conference call back over to Bob Jones for closing remarks.

Great. I should've said this in the beginning; we do apologize for kind of giving earnings and then a partnership announcement all-in-one, but it's purely by coincidence. But as I said, I think it allows us to continue to put and illuminate our strategy. As you have follow-up questions, as always, Lynell is in, 812-464-1366 or drop her an email. We appreciate everyone's intent and we look forward to talking with you in the forward. Thanks, everybody.

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 855-859-2056, conference code ID 73472033. This replay will be available through August 12. If anyone has an additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation on today's call.