Old National Bancorp (ONB) 2014 Q3 法說會逐字稿

Welcome to the Old National Bancorp third-quarter 2014 earnings conference call. The 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 October 28 through November 10. To access the replay, dial 1-855-859-2056, conference ID code 19288537.

Those participating today will be analysts and members of the financial community. At this time all participants are in a listen-only mode. Following management's prepared remarks, we will hold a question-and-answer session. At this time the call will be turned over to Lynell Walton for opening remarks. Ms. Walton?

Thank you, Holly, and good morning, everyone. Joining me today on Old National Bancorp's third-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 financial measures are only provided to assist you in understanding Old National's results and performance trends and should not relied upon as a financial measure of actual results. Reconciliation for such non-GAAP measures are appropriately referenced and included within the presentation.

I will begin our analysis of our third-quarter earnings on slide 6, where you will find highlights of our performance as they relate to our 2014 initiatives: increasing core revenue, reducing operating expenses, and transforming the franchise by moving into higher-growth markets. With our focus on core revenue growth, I am pleased to report our organic loan growth of almost $87 million or 6.5% on an annualized basis in the third quarter, which was spread across all loan categories.

Year over year we experienced organic loan growth of $281 million. This growth is net of loans acquired through acquisitions and excludes the change in our covered loan portfolio.

Perhaps equally important was the 9% increase in core revenue. Banking, wealth management, and insurance all contributed to the improvement over prior year. We continue our focus on controlling noninterest expenses, specifically operational expenses, which increased just $0.6 million over the third quarter of 2013.

We also remain keenly aware of our cost saves we announced with our recent acquisitions. Looking at our Tower acquisition and our recently completed United acquisitions, I am pleased to report that expected cost saves are tracking with what we anticipated at each announcement date. Consistent with our strategy of transforming our franchise by moving into higher-growth markets, our third quarter saw the successful closing and conversion of our United Bancorp acquisition and entry into the Ann Arbor, Michigan market. We also gained regulatory and shareholder approval for our acquisition of LSB Financial in Lafayette, Indiana, and continue to be on track for a November 1 closing.

Also in the third quarter -- and, actually, combined with our second-quarter earnings call -- we announced our intent to acquire Founders Financial Corporation in Grand Rapids, Michigan. We were happy to announce in an 8-K just last Friday that we have received the necessary regulatory approval on this transaction.

Moving to slide 7, you will see we reported net income this morning of $29.1 million or $0.26 per share. These per-share results represent nice increases over both second quarter of 2014 and the third quarter of 2013 earnings per-share results.

When analyzing our quarterly performance, it is important to note the three items listed on this slide which impacted our third-quarter earnings, and Chris will provide more clarity on these items in his remarks. And for those I will turn the call over to Chris.

Thanks, Lynell. The graph on slide 9 shows our growth in income since we accelerated our strategy of adding growing, dynamic markets back in 2011. We have talked over the last several quarters about the impact of accretion, FDIC indemnification asset expense, and acquisition charges on our earnings, but have neglected to clearly show how our net income has benefited from the acquisitions, our operating expense control, and good credit quality.

As you can see from this chart, income adjusted for accretion income, acquisition charges, and the change in the indemnification asset has increased steadily since 2011. Through the end of 2013, we have seen a compound annual growth rate of 14.3%. Year-to-date adjusted income in 2014 also looks strong and has been lifted by strong loan growth and our partnerships in Fort Wayne and Ann Arbor.

Adjusted year-to-date income is up 7.6% compared to this period last year. With the anticipated closings of Lafayette Savings Bank and Founders Bank, we expect the trend in adjusted income to continue.

Slide 10 shows the Company's revenue performance in 2014. On this slide I would like you to focus on the dark blue segments of the stacked bar graphs. Revenue not including securities gains, accretion income, or the impact of the FDICIA was $124.9 million, up 8.3% from last year and up 9% from third-quarter 2013.

We saw a full quarter's benefit from Tower Bank and two months from United Bank, plus strong loan growth in other regions in the third quarter. As Jim will discuss in more detail, insurance, wealth management, and investment brokerage always performed well in the third quarter.

Accretion income for the third quarter of 2014 was $34.3 million compared to $17.6 million in the second quarter. The significant increase in accretion for the quarter was due largely to the successful resolution of two large Integra assets. Correspondingly, we saw a significant increase in FDIC indemnification asset amortization expense in the quarter. IA amortization expense was $19.1 million in the quarter compared to $10.5 million last quarter.

Our total remaining FDIC indemnification asset is $28 million as of September 30, 2014. We expect to amortize $13.4 million of this as expense, most of which should be amortized by September 30, 2016, when our commercial loss share coverage ends. Because we have only a few large covered assets remaining, we expect to both accretion income and IA expense related to Integra assets to be less volatile in future quarters.

Slide 11 breaks down the components of our net interest margin for the quarter. Fully taxable equivalent net interest margin increased to 4.78% from 4.07% last quarter. Included in the third quarter is a full quarter's accretion income from tower Bancorp loans and a partial quarter's accretion from United. The purchase accounting mark on the United loan book was 6.4% at closing, approximately equal to the mark on the Tower loan portfolio, but lower than the loan marks on our earlier acquisitions.

Core margin was 3.32% in the margin, slightly higher than 3.26% margin we expected. Core margin benefited in the third quarter from the improved performance of loans that had been considered nonaccrual loans. We expect core FTE margin will be lower in the fourth quarter, due to the impact on wholesale funding costs of the $175 million 4 1/8% coupon 10-year senior debt we issued at the Holding Company in August. Additionally, we expect to continue to reduce the size and duration of our investment portfolio. However, margin pressure should be mitigated somewhat by continued growth in our loan portfolio.

Slide 12 breaks down noninterest expense for the third quarter and compares expenses to second-quarter 2014 and to the third quarter of last year. Total noninterest expenses increased due to acquisition charges and the operating expenses of Tower and United. Excluding these costs, operating expenses increased in the third quarter to $90.3 million from $88.8 million last quarter and $89.7 million in the third quarter of last year.

With four acquisitions in various stages of closing or integration in the third quarter, we incurred operating expenses that we don't attribute to specific acquisition charters or operating costs of new units. Additionally, we incurred costs in the quarter to prepare for DFAS and to analyze our markets and products to help us in our ongoing performance improvement work. Our reported GAAP efficiency ratio for the third quarter was approximately 67.4%.

Excluding our acquisition costs, the efficiency ratio was approximately 64.9%. We expect additional merger and acquisition costs in the fourth quarter in the range of $3.5 million to $4 million as we progress through our United Bank integration and prepare for the closings and conversions of Lafayette Savings Bank and Founders Bank.

Moving to slide 13, we provide further information on our sensitivity to rising interest rates. As you can see in the chart on the right side of the slide, and our net interest income should increase over two years if rates increase immediately by 200 basis points along the entire yield curve or if rates increase as the forward curve implies over the next two years. These models do not reflect interest income from the accretion of purchase accounting marks.

On the left half of the slide, I've listed several important drivers for our net interest income models. Because over 64% of our balance sheet is funded by non-maturity core deposits, assumptions related to the interest rate sensitivity of these deposits are key to our rate sensitivity model results.

In the model that evaluates the impact of rates if they rise immediately all along the curve by 200 basis points, the cost of our $5.1 billion of non-maturity interest bearing accounts should increase from 8 basis points to 80 basis points. Additionally, 21.5% of our non-interest-bearing deposits, which represents approximately $510 million of DDA, are considered rate sensitive or volatile and would be replaced with market-rate funding in our models.

46% of our commercial and commercial real estate loans contractually reprice within one year. Additionally, most of the remaining loans, while considered contractually fixed rate, have principal amortization during the term and generate cash flows that should also reprice in our rising rate models. We believe our models accurately represent our current sensitivity to interest rates. We expect to continue to increase our asset sensitivity by shortening the duration of our investment portfolio, lengthening the repricing of our funding when possible, and selling most of our newly originated fixed-rate residential mortgage production.

Slide 14 shows our tangible book value per share from 2011 through third-quarter 2014. The third quarter reflects the tangible book value per share after the closing of the acquisition of United and after our stock repurchases in the quarter. As you can see in the graph of tangible book value per shares in third-quarter 2011, we have consistently recaptured tangible book value per share after each of our acquisitions.

My final slide, slide 15, shows that our key capital ratios at 9/30/2014 are in line with our peers. Our strong capital base gives us significant flexibility to manage our capital, depending on the outlook for acquisitions and organic growth. Given our current outlook for acquisitions and our ability to fund organic loan growth with investment portfolio cash flows, we have been able to return capital to our shareholders through stock buybacks.

We repurchased 1 million shares in the third quarter, and the Old National Bank Board of Directors increased our buyback authorization at their meeting last week. You might recall that in January of this year, the Board authorized a 2 million share buyback. The new 6 million share authorization supersedes the January 2014 authorization and is in effect from now until the end of January 2016.

I will now turn the call over to Jim Sandgren.

Thank you, Chris. Good morning, everyone. If you listened to our earnings call last quarter, you may recall that my comments were largely focused on three areas: the strong organic loan growth we experienced in Q2; the very positive momentum in our commercial loan pipeline and line utilization; and continued success of our fee-based businesses -- wealth management, brokerage, and insurance.

As we shift our attention to quarter three, I am pleased to say that my comments today are going to sound very similar to those from three months ago. We continue to trend steadily upward in terms of organic loan growth, growth in our fee-based businesses, and commercial line utilization, and we are seeing absolutely no signs of a slowdown in our commercial loan pipeline.

If you will turn to slide 17, I'd like to focus on our loan growth, excluding covered loans, for the third quarter. My remarks will focus specifically around end-of-period balances; however, we have also added average balance information on the slide.

Similar to last quarter, we experienced meaningful loan growth both quarter over quarter and year over year, which was driven by a combination of partnership activity and very solid organic growth. The graph in the top left quadrant illustrates quarter-over-quarter loan growth of 13.3%, which was aided by $631 million in loans obtained through our United Bankcorp acquisition, along with meaningful organic growth of $86.9 million. This included increases of $56.1 million in indirect loans, $21.4 million in commercial and commercial real estate loans, and $9.3 million in home equity loans and QHRs.

While we experienced commercial lending success throughout our footprint in Q3, I was particularly pleased by our results in Louisville, Evansville, Terre Haute, and Michigan. The graph on the lower left illustrates a year-over-year gain of 26.2%, which included $631 million in loans acquired through our United partnership and $355 million from our Tower partnership.

The $281.2 million we experienced in organic loan growth year over year was fueled by $168.7 million in indirect lending, along with $74.5 million in commercial and commercial real estate loans and $37.9 million in home equity loan and QHRs. I believe this positive trend is reflective of a slowly but steadily strengthening economy within our footprint and borrowers who continue to feel more confident and optimistic, leading to greater opportunities for our relationship managers.

Moving to slide 18, you can see that we continue to build on Q2 momentum in our commercial loan pipeline with $577 million in the pipeline at quarter-end compared to $530 million at the end of Q2. I can also tell you that as of last Friday, our pipeline had expanded to $640 million, which is the highest level we've seen since we have been tracking this metric.

We also saw an increase over the second quarter in commercial line utilization. We were at 39.1% in Q3 compared to 36.6% in the second quarter. Part of the increase can be attributed to the fact that line utilization for our United Bank customers was over 52%. We anticipate that utilization for these customers specifically would drop over time to more historical Old National rates. The solid quarter-over-quarter increase is especially significant when you consider that a 1% increase in line utilization equates to $13.6 million in additional outstandings.

Similar to the organic loan growth we continue to enjoy, I believe the positive momentum we are witnessing in our commercial loan pipeline and line utilization can be attributed to increased consumer confidence directly related to the improving economy. We believe this will continue to provide us with opportunities in all of our markets, and I am more confident than at any time in my career that we have the right people and products in place to take full advantage of these opportunities.

I'd like to now turn your attention to slide 19, which illustrates the continued positive momentum of our fee-based businesses. As I indicated to you last quarter, 2013 was an exceptionally strong year for us in insurance and a record-setting year for our wealth management and investment positions.

I'm pleased to report that our investments division, buoyed by Tower Bank and United partnerships, continues to slightly outpace the record results they experienced in 2013. And I can tell you, we believe acquisitions of Tower and United brought us more talent in the brokerage area that we feel will enhance our production going forward.

As you can also see, our insurance business is solidly ahead of the strong pace established a year ago, driven by good growth in employee benefits and commercial line growth from the Evansville book acquired from Wells Fargo. We also believe we have opportunities to acquire new clients by focusing on a consultative approach to helping our customers and prospects deal with the Affordable Care Act.

Our wealth management division also continued to raise the bar Q3, led by strong growth in our legacy markets, specifically Evansville, where we have enjoyed expansion of existing relationships and strong new business. I would also like to note that we have seen excellent client retention in our Fort Wayne market, along with new business that, frankly, has exceeded our estimates for year one.

Much like the loan growth we have experienced in the quarter, I believe these revenue gains in our fee-based business continued to illustrate that we are executing a plan extremely effectively, with strong leadership and experienced, motivated producers in place throughout our footprint.

I would now like to turn the call over to Daryl Moore.

Thank you, Jim. Slide 21 displays net charge-off and provision information for the current quarter, the second quarter of 2014, as well as the third quarter of 2013. Consolidated net charge-offs in the quarter were roughly $500,000, or 3 basis points of average loans.

Consolidated annualized net charge-offs for the nine months ended September 30 also stands at 3 basis points. Provision expense for the noncovered portfolio was $3 million in the quarter, meaningfully higher than the levels posted in the second quarter this year as well as for the same period in 2013.

On a consolidated basis the provision expense was $2.6 million. The higher level of provision expense in the quarter was driven in part from an increase in impairment on nonaccrual credits, but also by increased loan outstandings, period. On a consolidated basis, the allowance for loan loss as a percent of end-of-period loans stood at 0.77%, but, as importantly, combined allowance and loan marks as a percent of total pre-mark loan outstandings stood at 2.97%.

On slide 22 we show the trends in criticized and classified loans over the past year. We have displayed not only information for the consolidated portfolio as it stood at quarter's end, but also trends reflecting what the portfolio would look like exclusive of the effect of our two most recent partnerships, being Tower in Fort Wayne and United Bank in Ann Arbor.

As you can see in the upper left quadrant of our slide, our noncovered special mention loans increased significantly in the quarter even without the additions associated with the United portfolio. No single industry space was responsible for the increase, but we have noted some continuing softness in the contracting sector as well as weakness in not-for-profit segments reliant on government funding. Exclusive of the Tower and United portfolios, special mention loans increased $23 million in the quarter.

Moving to the lower left quadrant, we see that even with the addition of the United portfolio, noncovered substandard accruing loans fell by $6.6 million to the level of $100.6 million. The decline came about from a number of different avenues, including paydowns, upgrades, and some downgrades. The remaining chart on this slide shows that noncovered, nonaccrual loans increased $28.7 million in the quarter. $26.6 million of this increase came from the addition of the United portfolio, with the remaining amount of the increase coming as a result of the downgrade of a formerly acquired loan relationship during the period.

The quarter continue to reflect relatively good credit metrics, especially as it relates to net loss. While noncovered special mention loans did rise significantly in the period, it may take a couple of additional quarters of results to determine if this is the beginning of a trend or just a short-period aberration. Competition for good quality loans continues to be very stiff, and proper structuring of loans in the areas of firm guarantees and covenants remains a challenge in the current environment, where everyone is looking for loan volume.

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

Great. Thank you, Daryl. I will begin my remarks by reviewing a new slide we developed on page 24. These graphs serve as a good recap of the fundamentals that Chris, Jim, and Daryl reviewed in their presentations. These are the key measurements that we focus on in terms of measuring the process of our basic Bank strategy. We believe these graphs show the progress we have made in executing our strategy and the transformation of our franchise into better markets, as well as opportunities for improvement that will come as a result of a stronger focus on execution.

I will now open the call with a review of our key focus areas for 2014. They were to grow our core revenue, continue the focus on expense base, and to continue to transform our franchise by entering into higher-growth markets in mergers and acquisitions. As the first graph shows, core revenue third quarter of 2014 over 2013 grew 9%, driven in large part by loan growth and a stronger performance in our fee-based businesses. But we believe this graph is also an affirmation of the strength of our new markets.

At the same time, the second graph shows a continuing opportunity for us, where our core expenses were up slightly, approximately 7 basis points. And while the majority of that cost increase was driven by the increased cost of compliance and overall salary increases, we have admittedly not done as well as I would have liked.

In large part, this is the result of the amount of time we have spent ensuring the successful integration of our partnerships. Clearly, we still have an opportunity to reduce costs as the key lever to continued improvement in our overall profitability.

Our adjusted income shows an approximate 24% increase for the third quarter of 2014 versus the third quarter of 2013, which I believe is, again, a good indication that our strategy is working -- that our continued focus on execution should allow for continued improvement in our performance. As Jim Sandgren noted, we continue to see good growth in loans. And at the same time, we have seen a continuation of very strong credit metrics.

This is truly a balancing act, trying to find the right mix of incremental risk and growth. The task is even more difficult in our new markets, where we add a third dimension around client retention and are not trying to be too heavy-handed and driving our credit culture. Daryl and his team do a very good job of achieving this, but we are constantly striving to define this terribly important balance.

Turning to slide 25, I thought I would give you a brief update on our performance in our new markets. Overall, we continue to be very pleased with where we are in each market. At the same time we continue to learn how to do a better job of implementing and listening to our clients and our associates.

In Columbus we have reached a point of stability. We experienced 3% loan growth over last quarter, driven mostly by C&I loans. Our consumer deposits have also stabilized, and we are seeing new account growth. The decline on core deposits was driven mostly by a reduction in business deposits, which we view as another positive indicator of an improving economy.

The loan pipeline was down slightly, but that is mostly driven by very strong closings late in the second quarter. Our Michigan-Northern Indiana branch acquisition is doing very well. We saw strong loan growth of almost 28% over last quarter, driven in large part by our consumer lending activities. We are also seeing very good commercial activity, with a loan pipeline of over $30 million. The deposit story in these markets is much the same as in Columbus -- stable accounts, with the decline in balances being more seasonal and business-related.

We are very pleased with our performance in Fort Wayne. Our lending team is fully staffed and is actively engaged in client retention and prospecting. The loan pipeline of over $40 million reflects their activity and their hard work. While we do show a slight decline in outstandings, a large portion -- almost $10 million -- was driven by one syndicated credit, where the lead bank consolidated the number of participants by reducing the pricing on the credit.

While we continue to see some pressure on our lending, it has reached the stage of normalcy, and we are very optimistic going forward. Deposit story -- the same here, but we have seen some account attrition based on pricing and fee changes. It is early into our partnership in Ann Arbor, and we are off to a great start, fully operationally integrated. And although we are experiencing the normal challenges of our new fee structures, credit, and overall changes, our leadership team, led by Todd Clark, who is doing an outstanding job of working with clients and providing us with feedback on how we can improve our support of him and his team.

We did experience some attrition in our wealth management team, a very good investment rep being the biggest loss. While we had a good-sized book and we do expect to lose the majority of that look, the margins were very small, and we see little impact on our overall profitability.

The other losses were in our trust group, and so far we have been able to retain the vast majority of their business. While an important piece of the overall market, we do not view this loss is significant. We have lost one commercial RM to date, but feel comfortable we will be able to manage the balance of the portfolio.

As Lynell mentioned in her opening comments, we will close on Lafayette Savings Bank November 1, and we feel very good about where we are in the process. Last Thursday we did receive approval from our regulators for our partnership with Founders in Grand Rapids. We are well positioned with project teams in place and feel we are off to a very good start. Lori Beard and Greg Connolly are providing excellent leadership, and their teams are in a good ice. We have not experienced any loss of talent in that market.

Slide 26 provides you with a little color on the economy from our clients' point of view. Overall, what we hear from our clients is a positive picture, one that shows a continually increasing level of optimism and a focus on growth.

I recently spoke with an automotive supplier in Michigan who was predicting their best year since the crisis. And this is a story that is being reflected across our footprint. A large percentage of our clients are showing us plans and projections that are focused on growth and expansion rather than the status quo. In fact, the biggest issue that we hear from clients is the fact that it is very difficult to find employees, and issue in almost all of our markets.

The banking competitive environment is still hyper. Not much has changed since last quarter, nor do we expect any change anytime soon. I will note that regulators are airing some concern about issues relating to structure within the banking industry overall, and we are seeing some of what they are concerned about in some of our markets. And we are very conscious of these issues, and we will not sacrifice quality for growth. But as I have said before, it is a difficult task to strike the right balance between risk and reward. But I feel very good about how Daryl manages that process.

I will close on slide 27 with a quick look forward to 2015. For Old National 2015 is all about executing our basic Bank strategy. In 2014 we were very engaged in assuring that we properly integrated our partnerships, and that those partnerships lived up to the expectations that we had laid out for our investors. We also realize that we invested our owners' capital into transforming our franchise, consistent with the strategy we laid out over six years ago.

We do know that there's an expectation that we now focus on execution. And I believe we are as well positioned to do that today as at any time in my 10 years with the Company. We believe were in the right markets, and we have the right people and the right products to accomplish our growth strategies.

The major shift in our 2015 strategy will be in the area of M&A. While we are not completely out of the business, we do believe were in the markets we want to be in, and we are very fortunate to find the partners that were at the top of our list. We believe we can be much more opportunistic in our activities and not defer attention and manpower away from our executional abilities.

The analogy that I've used with our Board is that we have built the foundation of our house. And yes, we may remodel it a little within the foundation, but we are very comfortable with how our house looks. We look forward to a year of hopefully exceeding the expectations that our investors have set for us.

And with that, Holly, we would like to open the line up for questions.

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

First question I had -- Bob, you had made, sort of toward the beginning of your prepared remarks, that comment about not having done as good a job as you might have done on the cost side. And I think it segued into how you finish things, with 2000 being about execution. What would you do as you look over, say, the course of the next year? Some people have gone back, and in addition to cost savings they found from deals, just have done kind of a more holistic look at the cost structure of the organization.

So I guess what I'm asking is, broadly speaking, now that for the moment we've got a pause on M&A once we complete the pending deal, what are you going to be doing that's a little different on the cost side? Or what opportunities have you got?

Well, I think it's really, Scott -- great question. I think it's really an energy level around looking at every opportunity we have to be more efficient. And as everyone knows, we have often said that for us, cost efficiency is not about counting paperclips or duct-taping rips in carpeting. It's about how can we change the way we do business to make it better for our associates and our clients to interact with our Company?

And it's things like looking at our backroom operations, how we clear checks. It's looking at our franchises to see -- are we in the right markets in terms of where our branches are? It's really all of the above. And I think with taking the energy that we've had in integration and putting it towards our ability to really focus on improving our overall bottom-line performance, I think it gets the right focus.

I will say, while there is a pause on M&A, I just want to assure everybody that we understand that we've used your capital. And we want to be focused on those integrations. So for us, it's about that execution.

Okay, perfect. Thank you. And then I was hoping you could expand a little on your comments on loan growth; and just maybe qualitatively, if you could speak -- one, you have had the favorable shift in dynamic from kind of slower toward better growth markets. Then, two, it sounds like it's definitely a more optimistic tone from your customers.

And then maybe the third part of the story is just as you look over the last year, and certainly even a little further back, I know one of the -- about to call it a criticism was that you maybe weren't taking enough risk in looking at the overall loan portfolio. Have you guys changed the way you are looking at risk tolerances and what you are willing to accept?

I guess what I'm asking is: among all the pieces of the loan growth components, how would you characterize just general market sentiment, the better markets, etc.?

Yes. Not to air dirty laundry on the phone, but I think one of the biggest benefits that we've got is, I think, the level of cooperation between Jim Sandgren and the banking group. And our credit team is at a level I've never seen. So the fact that Jim grew up in the credit side and understands what we need in terms of maintaining our credit portfolio helps a lot.

And just the spirit of cooperation, Scott, has been exponentially raised. I think a lot of it goes to what Jim has brought. Anytime you bring in a new leader, you get kind of a new focus. And I think Jim has really taken us from an inward focus and to an external focus and has done a great job. You know, it's a balancing act in terms of risk. Daryl -- every day we have these conversations on credit. Are we taking the right amount of risk or not enough risk as you look at the competitive structure? But what I think helps us is our model allows for conversation at multiple levels to make sure that what we are ultimately doing what is right for the shareholder. And I think that, as I said in my remarks -- and Daryl was as optimistic as Daryl can get in his remarks -- I think we do find a pretty good balance. But we also understand that structure -- if you get away with it, and you get too far from what your core is, it's awfully hard to put that ketchup back in the bottle.

So, yes, are we taking more risk? Yes, a little bit. I wouldn't say it's extraordinarily -- if you talk to the field, they will say we are not taking enough. If you talk to Daryl, we are taking too much. So probably taking the right amount of risk.

But I don't feel -- and I think Daryl would attest -- I don't think we are taking any risk that is presenting any angst or concern. Again, I look at our charge-offs and delinquencies, and they are still very strong. Daryl, would you had anything to that?

No, I think that's cool.

Review time for Daryl. (laughter)

All right, that's perfect. I appreciate the color.

Emlen Harmon with Jefferies.

With the new buyback plan instituted -- or upsized, I should say -- can you talk a little bit about where the buyback ranks in your capital deployment opportunities? You guys have obviously been conservative on that historically, given the acquisition opportunities you had. But do you have a strategy in terms of how quickly you would like to deploy that, whether it's steady over the course of the next couple years; frontloaded; opportunistic? Just would be curious on your philosophy there.

Yes, great question, Emlen. Obviously, given the change in focus for 2015, our absolute desired use of capital is organic growth. And I think, as Jim said, and you look at our pipeline, where it's at, and just the energy level we are seeing, that's clearly a major shift in focus. But I think as you think of the buyback, it's really steady. We view it as a good way to send an indicator to the markets that our belief that we are well capitalized and, probably just as important, the commitment to returning to our shareholders the confidence that have given us to allow us to do the M&A.

But it will be -- over the period of time, as the opportunity presents itself, we both continue to execute against our buyback. But again, if you'll think about four quarters, it's pretty steady over that time frame.

Got it. Okay, thanks. And then, Chris, in your comments I thought I heard you say you expected the core FTE NIM to be down next quarter. I would just be curious if you could give us a sense of where you expect the NII to grow, given you said you are expecting some securities to run off. But obviously there's the balance of the NIM and the sub-debt, but then also the loan growth outlook that we have just heard a bit about.

Yes. I don't have any numbers for you on net interest income. I think I'd prefer to concentrate on the margin for the purposes of this call. And I think just with what we've done, certainly with the fixed rate debt yield we did in August and the fact that I continue to expect to see accretion down and all the other noise that's associated with a net interest margin -- but what I like to see is continued cash flows from the investment portfolio going into the loan book, which should help us a little bit, too.

So that -- we expected 3.26% in the third quarter. We are at 3.32%. I'd expect that the fourth quarter will be in the 3.26% range.

The biggest downdraft on our margin will be really through the debt offering and our belief that shrinking the duration of the investment portfolio is the proper thing to do. I think, as we look at loan pricing, we are pretty comfortable with how we are pricing credits today. So I think the pressure will come from those non-core areas.

Got it. All right, thank you.

Michael Perito with KBW.

A quick question for Daryl. I appreciate the color on the credits and the UBMI contribution and the higher NPL balances this quarter. When I looked at last quarter, the NPLs have gone up a couple quarters in a row here. And I know last quarter you guys had Tower close.

But it seemed, ex-that, they were up a little bit organically last quarter as well. You said there's no category, I guess, where this is concentrated. But are you finding that NPLs are being originated in your newer markets? Or are they spread between your legacy and newer markets?

Not having that information in front of me, I would say generally they are -- that out of our recently acquired, so I would say your Monroe and those -- but there are some that are out of the legacy. And as we look at those, we don't see a mass number of those moving. I think over the past couple of quarters we've seen, for our size, relatively larger credits. But, Michael, in answer to your question, I guess, in short, it's probably over both legacy and the acquired portfolios.

Okay. And I guess -- sorry.

On slide 22 you will see that, absent the acquired banks, that we are relatively flat other than the special mention loans. So that kind of gives you a sense of the comfort from the new markets.

Yes. And I guess I -- just kind of ask the question another way: should we -- as you guys have repositioned your franchise into the higher-growth markets, should we be assuming that as a result of that, that your credit cost be modestly higher than they have been historically. when you were in the slower growth markets?

I would say -- I wouldn't -- I think I made the comment on my call that the third dimension that we have whatever we enter a new market is to properly impart our credit culture. And we actually begin that very early on in any conversations we have with potential partner banks, because we have historically, at least in my tenure, been very conservative on credit. And as I've said, you can only screw up a bank in a couple ways. It's really -- the credit is the biggest issue, and we are not (multiple speakers) our stripes too quickly.

Now, will we take on some incremental risk? Yes. But I don't see us ever getting to the point where it's uncomfortable.

All right, thanks. And then just a quick follow-up for Chris -- do you have the dollar amount left on the remaining accretion for the Integra deal?

Yes. It's right at $28 million, Joan, I believe; about half of which we'd expect to amortize -- I think 13, 13 1/2. And the other half would we collected from the FDIC, assuming all the credits work out as we currently have modeled. Pretty small.

All right, thanks a lot.

Oh, I'm sorry, I'm sorry, Michael.

I apologize. That was actually the indemnification asset.

Indemnification asset.

And there's a corollary between that and accretion. But it's awfully hard to predict accretion, because it's cash flow related. But we've got about $28 million of the indemnification asset left that we will amortize, will steady it out for us.

And I do not have the accretion information in front of me.

It's actually awfully tough to predict accretion, because it's so cash flow driven.

Okay. So, I guess, how should we be thinking about -- I mean, you gave us the core margin guidance. How should we be thinking about the reported margin, though? I guess near-term -- I know you said it would be less volatile. Does that mean a number closer to last quarter, or does that mean even down further from there?

It's really tough to do on a modeling basis. But I think last quarter may be more typical than this quarter. This quarter we obviously had the two large -- and we do not have a lot of these large numbers. And if you look at our modeling, I would say that we predict a useful life of accretion about 18 to 24 months. So in modeling, if you take Monroe, for instance, it's pretty well done.

And if you look at any of the dates of our acquisition and you go 18 to 24 months, you will get to steady-state. But the great volatility is really over, given the fact that we've seen the Integra pretty much work its way through in the larger assets. So I think last quarter may be more typical as we mow on. And just to note that both UBT and Tower -- the actual market we brought on is about half of what we publicly announced when we did the transaction, both in the 6% range. So again, less volatility.

Yes. And we've got LSB coming on this quarter, which will introduce some more mark into the net interest margin, and then FSP shortly after that. So it's really, really hard to break that all out. But we do try to do a really good job just quarterly reporting the components of that margin, or the components of that accretion that flow into margin.

No, definitely. And I appreciate that.

Hope that helps, though. And we know it's confusing stuff.

Yes. No, it's helpful.

But we are all about execution. (laughter)

Yes. Thanks a lot for all the color, guys.

Stephen Geyen with D.A. Davidson.

Bob, maybe a question for you on the efficiency ratio. You had in the report or in the presentation, I think, the third-quarter 2014 core efficiency was 64.89%. I can't remember the page it's on -- maybe page 12. Any color or thoughts you can give us on maybe directionally where that might look like in 2015?

Too early to give you a specific number, because, obviously, as you all know, we will -- well, you don't know -- we both continue to have that part of our incentive comp in 2015. We are working with both our comp and finance committee to finalize that number.

But I would answer it this way. This kind of throws it -- I will be disappointed that if it's much higher than that range, in the 64.5% to 65%; because clearly, I think that as we execute and go forward, that we need to be in that range. So obviously, anything tied to our compensation will be decided by our Board. And whether they have a stretch target or not, we will find out. But Steve, I think for us in 2015 it's a ceiling. And I think 64.5% to 65% is clearly where my ceiling is at.

Okay, that sounds good. And another question -- on page 6 you'd talked about cost saves. I was curious. Are conversion costs some of the biggest cost saves associated with the acquisitions and the remaining cost saves from some of these acquisitions that were just recently completed? Is there anything to be expected that will be lumpy, just those cost saves? Or is it kind of --

We tend to get most of those out pretty much as upfront as we can, just because once we close an convert, a large portion of all those costs come out. So there shouldn't be any lumpiness in a UBT that's converted. Obviously, with LST, we will close on November 1. Our conversion is now scheduled for late first/early second quarter.

And that's when you'll start to see those cost saves come out. We've got them down to a finite sheet -- that we know where they are, and we hold our people accountable to get those. Pretty steady-state.

Okay. And maybe a question for Jim -- you talked about the pipeline and being up even a little bit more versus the end of the quarter. Can you talk a bit about the success of pull-through?

Yes. Success, I think, has gotten better. The majority of our pipeline -- some of the growth we've seen lately has been in the discussion phase. And typically, for a deal to get put on to the pipeline, we need to have at least a 50%/50% shot of getting a deal done.

I'd say our pull-through rate is improving. I don't have that exact number for you. But I think with the work of Daryl and his team, and our experience to our end, I think we are finding ways to get deals done at a little bit higher rate. But I don't have that specific number.

Okay. Thanks for your time.

John Moran with Macquarie.

A couple of housekeeping or ticky-tack questions for you. One, Chris, you had mentioned, I think, that non-accruals coming back in had helped margin a little bit this quarter. Can you quantify that?

I don't have the specific information in front of me. But it was enough to move the number around little bit. As I've mentioned, I think last quarter we talked about a 3.26-ish margin outlook for third quarter, and we were up at 3.32%. And I think a large portion of that was due to better performance there than we had anticipated on some nonaccrual assets.

Okay. So fair to say -- most of that.

Those were the core assets.

Okay, got it. So most of the 6 basis points would be --?

I think so. I don't have the exact numbers in front of me. But I think that 3.26% was a number that we like for the third quarter. And as we see the debt coming on and some of those things, it feels like a better number for the fourth quarter.

Got it. Yes, so fourth quarter, even with the debt, would be expected to stay kind of stable if we adjusted for the --?

Yes, down a little bit from where -- I think that a lot of it depends on how well we get the loan growth that we had expected. And we've seen a couple of nice quarters in a row. And that does an awful lot when you can pull cash flows out of the investment portfolio to -- call it 1, 1.5, into something that's a little more meaningful.

Sure, that clearly helps. The other kind of housekeeping one that I had for you was just tax rate. It has been bouncing around a bunch. Do you have a full-year outlook that's pretty firm at this point?

Yes. We are always ready for this question now. But probably a full-year GAAP number to be in the 27.5% range; fully taxed equivalent tax rate, maybe a little higher than that, 35.4%. This Europe we did see the adjustment to the state tax rate due to some DTA revaluation. And, of course, this year we've had some nondeductible acquisition-related charges that we would like to have taken care of in 2014 and not have to take that into 2015.

I think as you remember, John, Indiana also lowered their corporate tax rate, which -- we had to take a large charge/rebalance. And then, obviously, we'll get the benefit of that over time.

And then just two real quick ones on -- well, one recent M&A transaction, and then one pending. United -- I think you mentioned that the utilization there was over 50%, and that you expect it to drop over time. I was just kind of curious: why was utilization running as high as it was at that institution? And then that leads to: why would you expect it to revert down into kind of 30s or high 30s, low 40s?

I think it's a process point, John, more than anything. They probably had a little more permanent working capital in their lines. And we will look to move that to a more term facility to properly align with the cash flow and the client. And we are working with Todd and his team and -- they have to do that.

It's different philosophies. And, obviously, that's kind of the balancing act, that when we come in -- say that if it's permanent working capital, we think it should be term versus fully evergreen, as we would talk in the line. I don't think there's anything there that would give any foreshadowing to any of the other partnerships on a go-forward basis.

I got it, I got it. Okay, that's helpful.

And then the last one, the last one out of me: the Founders transaction, with the approvals in hand -- I think last call, the timing on this one, you guys had said sometime in the first half of 2015. With everything kind of lined up in terms of regulatory approval at this point, can you narrow that at all? Is it fair to think that that could come in first quarter?

Yes, I could. But I'd have to shoot you if I told you, so I couldn't. So, no. (laughter)

We actually are working with Laurie Beard and Greg Conway and their team. I think the good news is we were very, very pleased to get regulatory approval as quickly as we did. And I want to work with Laurie, and Greg, and their Board, and their counsel to see what their proper time to close. We will work through that. So I would anticipate early first quarter will be ideally for us. But again, we've got to work with Laurie and her team.

Perfect. Thanks very much for taking the questions, guys.

Taylor Brodarick with Guggenheim Securities.

First question for Jim Sandgren -- on slide 19, just looking at the contribution from United, is there an opportunity on the insurance side? And I'm just curious generally on -- of the fee-based businesses, how you -- what opportunity --

Joe, if you don't mind, it's Bob. I'd like to take those. This is actually reporting to me, but Jim reports on them because you guys get tired of hearing from me. So I just dominate Q&A.

So we have a real opportunity in Michigan for our insurance franchise. We are actively looking at opportunities to either look at producers or potential other partnerships in the market. But we have had great receptivity from our folks in the market. And I'm actually leaving this afternoon to go to an all-hands meeting with the insurance group. And part of that mission is to say we've got great opportunities in Michigan.

And I think for the other non-fee-based businesses, wealth -- obviously, Founders has got a huge platform there, a large platform at UBT. So I think where our opportunity is is in the Kalamazoo market and those areas. But we think they've got good opportunities. Obviously, at Tower we had a great team there. And we are actually seeing new opportunities and new sales. So I'm very encouraged by those.

The other side of it, our investment business, we just hired a regional sales manager for the investment group -- a long history of experience and actually a former old cat person. We like former old cat folks. So we've got opportunities to add investment reps in both Kalamazoo, up in Founders. Founders did not have investment reps. And then, obviously, expanding and continuing in Ann Arbor. And none of that, as you all know, is built into our models as we talk about these partnerships. But early on, we are very excited about these opportunities.

Thanks, Bob. And I guess one other question was -- you talked about expenses. Do you find you run into difficulties, and you are trying to reposition from, I guess, the less-banked, more rural markets, just from the regulatory side? Are there some hangups there as you try to reposition that footprint?

Not really. We -- Kathy Schoettlin and Gary Ronan, our team, do such a good job on community development and presenting opportunities for the underbanked and unbanked; it's really one of our strengths. So no, where we have issues there is that we really didn't have the right product to serve the middle-market client.

And I think Jim Sandgren very quickly in his leadership developed a new product. And in November we will roll out a product that really helps us to, we think, negate some of the attrition we've seen based on not having free checking. But the product gives more opportunities to waive fees based on relationships. It's really the way we should have gone.

All right. And one last one for me. So 3.5 to 4 acquisition in 4Q. Anything in 1Q? Or just an update on that, just for people interested on the reported side?

Well, a lot of it depends on how much we can take care of in the fourth quarter and how quickly these closings come around. But there's going to be, obviously, some as we work through the conversions in the first half of next year on any transaction.

Yes, I think as you look at the amount for the fourth quarter, if we close Founders in that same -- modeling, I'd say somewhere in that same range of 3 to 5 is not abnormal. Because if we close after the end of the year, then we're going to have to take those charges in the first quarter.

First quarter, right.

That's fair. Okay. Great, thank you. That's it for me.

Peyton Green with Sterne, Agee.

Sorry if I missed this, but I was just wondering if you could maybe mention -- if you do get the Founders acquisition closed in early 1Q, when could you convert it?

I would say, if we -- well, probably in the second quarter or so of 2015. Again, I've got to work with Laurie and her team, once they are prepared. We've got our project teams in place.

But once we have that information, we will get it out to you. We were very pleasantly surprised to hear that we got our approval as quickly as we did. So a nice problem to have, is you are scrambling to catch up a little bit, but better than nothing on the opposite side.

No, no. Absolutely. It's definitely the right problem to have.

Chris, in terms of marginal loan yields and maybe yield on the securities cash flow, where do you see those coming in? Where did they come in in the third quarter, and what would be your expectation in the fourth quarter?

I don't have the loan yields in front of me. But I can tell you that the investment portfolio cash flows are generally very low with the way we build that portfolio. I get a lot of short-term kind of stuff. So the reinvestment opportunities in the portfolio are 1.5% to 1%.

I don't have any information on the marginal loan yields in front of me, Peyton. I'm sorry.

Okay. All right. Thank you very much. That's my questions.

Jon Arfstrom with RBC Capital Markets.

A couple things -- Chris, just I want to make sure I understand what you're saying on the indemnification asset. You are saying that the last couple quarters were greatly accelerated, and this is going to be much, much smaller going forward? I know it's something we usually carve up, but just help me understand that.

Yes, it should be. I'd expect -- so much of that is driven by the size of the individual assets that we feel, if you will. And we just don't have many large Integra assets left in that book.

So I'd expect that the remaining IA will be pretty smooth going forward, but you just never know. So much is driven at this late stage of the IA coverage by how we do on individual assets. And that's, I think, why you've seen it grow so much this quarter or this year. But the fact that we only have $28 million left kind of portends to some nice numbers.

And John, the majority of that has to amortize by 2016. So -- because you have five years on the commercial and 10 on the consumer. And there wasn't much of a consumer book there.

Right.

Okay. And I guess that gets back to the Integra accretion number as well. So that just correspondingly drops down, but maybe a little bit favorable, all in? Okay.

Exactly. Well, a little favorable but not nearly as lumpy, to use a nonfinancial term.

This was a big quarter.

Yes, okay. In terms of the Fort Wayne pipeline, commercial pipeline, is that growing? You gave us the absolute number, but is that starting to grow?

Yes. No, it's actually up almost 50% over last quarter. And we've got some really nice larger opportunities. So one of the real advantages that you get when you go into a market like Fort Wayne is that we have larger capacity on our balance sheet.

And given the quality of the team that we hired -- if you remember, a lot of those folks came from Wells and other banks, where they are used to dealing more in the traditional middle-market. So we are getting better at that than larger companies.

So I'm optimistic that that pipeline will continue to grow. And I will also tell you, we added a director from Fort Wayne to our Corporate Board that I think knows every human being in Allen County. And he's been a great asset.

We will soon announce another hire that -- Kathy Cowan, who I'm announcing right now, by the way -- Kathy's father, for anybody that's been around banking for a while, was a guy named Dick Dormer. Dick Dormer is kind of the godfather of Fort Wayne banking, and Kathy is going to join us, working on Wendell's team in terms of getting us our community engagement. So I feel really good about where we are in Fort Wayne.

Okay. Good, good. Just two more things -- the organic -- on slide 24 you have the organic loan growth average versus period; it's probably a simple question, but there were differences the last two quarters. Is it just an easy explanation? Just saying -- the average growth was much higher than period end.

Yes. It's really timing. The beauty of Jim Sandgren's management style is he gets everybody to work their tail off and get loan closing by quarter end. So your average balance will pick up next quarter. So we tend to get a lot of good closings at the end of the quarter, particularly out of our Louisville market.

Okay, okay. That makes sense. Then bigger picture for you, Bob, just the change in focus that you alluded to -- I think everybody is writing about it -- away from acquisitions and more towards organic. Can you just talk a little bit about why? Is it investor feedback? You've accomplished your goals? You guys miss Jim Ryan, and you want him in the office again? Or what --

Well, it's just minor, but Jim Ryan also runs our mortgage company. So his plate is not exactly empty.

I think it's really about -- as I said, we laid out a strategy, and we knew the markets we wanted to be in. There isn't a market, absent Louisville, that I need or I would like to be -- obviously, you would like to remodel a little bit.

But I think it's really fatigue in a lot of places, John. I think our Board is looking for us to do a better job of -- you know, we laid out a strategy to be a high performing bank. I think we've got the right people, the right products. We're on the right track. But quite frankly, our numbers have been okay, and we are better than okay.

I think that to get to that level, we've got to focus on execution. I think the management changes we've made allow us to get better externally focused. And I look forward to taking advantage of that.

I may surprise everybody on the phone at some stage. If we get the right opportunity and the right market, I would be a silly fool not to look at it. But I don't feel a gun to my head to get to any particular market. I think it's really all about living up to our own expectations, which is -- we don't think that we are mediocre. We think we are a very, very good-performing bank, and we think we are on the right track to show people that that's the case.

All right, thank you.

Eric Grubelich, Highlander Capital.

I'm no longer with Highlander Capital, so please make that correction on the transcript. Thanks.

You are you with?

Just myself now, bank investor.

We're glad to have you.

And I own your stock, Bob. And so --

We appreciate it.

Anyway, I just had a similar question on the M&A outlook. That was answered. But maybe you or Jim Sandgren can -- can you just talk a little bit about the loan growth outlook? I know there's a some detail in the slides. Certainly, the period-end balances on a core basis.

But are we looking, going forward, at mid- to high single digits? And could you put a little bit of color on the type of growth that came in the quarter on a core basis, and where you see that going from a, say, commercial and consumer perspective? There was a comment that was made about, I think, Northern Indiana had some good consumer growth. Is that something new or what?

I'll answer that, and then Jim will cover the rest of it, Eric. One, we are glad to have you on the call.

But, two, if you remember when we bought the Northern Indiana, Kalamazoo, Michigan branches from BofA, we bought just deposits. So we have been able to -- we hired a great team under Phil Harbert and Jim Barnum in our Kalamazoo market on the commercial side. They got a $30 million pipeline and just a lot of at-bats.

We have had very good success in the indirect business in those markets, with very high FICO stores. But we have found a niche where the dealers really like to deal with local folks. And Phil and his team are very well respected in those markets. So it's worked out very well. So I think it's a great example of taking a deposit franchise and turning it into a lending function as well.

Jim can cover the balance of that question.

Yes. So up on the commercial front in the third quarter, we saw a nice mix of loans, both from an C&I perspective; I think we had some manufacturing growth -- some opportunities with some very strong medical groups; ag opportunity. We did do some commercial real estate. So it was a nice mix. And I would expect to see that kind of mix going forward.

I think when you see the demographic of some of our business owners, there's a lot of opportunity for succession planning/buyouts. We did have a major transaction that provided a nice loan opportunity for us. So that's the kind of sense that I get and I think will continue going forward.

And then the expectations for next year -- in the middle, I was talking about double-digit growth, but we are talking about single digits. I think where we're looking at, though, is the growth markets that Bob alluded to. And when I think about that, it's Indianapolis, Louisville, where we have had some really nice growth, but certainly a lot of opportunity for additional market share. And then when you think about Fort Wayne and our Michigan markets, we absolutely are expecting greater things out of those growth markets.

So the expectations and the bar has been set. And now it just comes down to execution. And I think we've got the right folks to get the job done.

Eric, what I might add to Jim's comment is that we really are seeing a very positive reaction from clients on the economy as opposed to what you read in the media. For us, again, in the markets we are in, that bodes pretty positive for next year.

Okay, great. And thanks for taking a non-sell-side question.

We are always glad -- Eric, we are always glad to talk to you.

Thanks. Have a good afternoon.

At this time there are no further questions.

Well, great. As always, any follow-up questions, 1-800-Lynell. (laughter) And we appreciate everybody's time and attention. Again, thank you so much.

This concludes Old National's call. Once again, a replay, along with the presentation slides, will be available for 12 months on the investor relations page of Old National's website, oldnational.com. A replay of the call will also be available by dialing 1-855-859-2056, conference ID code 19288537. This replay will be available through November 10.

If anyone has any additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation on today's call.