Welcome to the Old National Bancorp Third Quarter 2012 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. The call, along with corresponding presentation slides, will be archived for 12 months on the Investor Relations page at oldnational.com. A replay of the call will also be available beginning at 1:00 p.m. Central today through November 12. To access the replay, dial 1 (855) 859-2056, conference ID code 35894910. Those participating today will be analyst and members of the financial community. [Operator Instructions] Following management's prepared remarks, we will hold a question-and-answer session. At this time, the call will be turned over to Lynell Walton, Director of Investor Relations, for opening remarks. Ms. Walton?

Thank you, Holly, and good morning. We'd be remiss if we did not acknowledge the pending landfall of Hurricane Sandy and the potential impact it may have on many of you. Please know that from the Old National family, you're in our thoughts and prayers, along with you and your family and your colleagues. Joining me today on Old National Bancorp's third quarter 2012 earnings conference call are management members: Bob Jones, Barbara Murphy, Chris Wolking, Daryl Moore and Joan Kissel. This conference call will contain forward-looking statements, and on Slide 3, you will find the standard forward-looking statement disclosure. Such statements are based on information and assumptions that are available at this time and are subject to certain risks and uncertainties that could cause the company's actual future results to differ materially from historical or projected performance. These risks and uncertainties include but are not limited to those which are contained in this disclosure and in the company's periodic filings with the SEC. Today's presentation also includes the use of non-GAAP financial measures, and you will find the corresponding disclosure on Slide 4. Various numbers in this presentation have been adjusted for certain items to provide more comparable data between periods and as an aid to you in establishing more realistic trends going forward. We feel that these adjusted metrics are useful supplemental information in understanding Old National's results and core performance trends. Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentation. Turning to Slide 5. You will see the specific third quarter items we'll be covering today. Chris, Daryl, and I will provide you with an in-depth look at our third quarter performance, including our continued organic loan growth, change in our net interest margin, various expense initiatives and our strong capital position, as…

Thank you, Lynell. I'd like to add a couple of comments to Lynell's highlights. Of course, the most important highlight of the third quarter was the closing of our acquisition of Indiana Community Bancorp in September. I will provide additional financial information related to the acquisition in a following slide, but I'd like to underscore how pleased we are to have completed the transaction. We are excited about the prospects in Columbus in southeastern Indiana and look forward to the contribution the company will make to Old National. Included in the securities transactions for the quarter were $39.5 million in sales of non-agency mortgage-backed securities. These securities have accounted for much of our mortgage security other than temporary impairment charges over previous quarters. As of September 30, 2012, $32 million of non-agency mortgage-backed securities remained on the balance sheet, down from $85.9 million at the beginning of 2012. The non-agency mortgage securities we sold had been carried as other classified assets. I have included additional detail on the investment portfolio in the appendix. While we don't expect additional securities gain in the fourth quarter of 2012, we may sell securities to generate liquidity for our branch sales to sustain loan growth or to continue to reduce market risk on our balance sheet. Moving to Slide 8. You'll see our pretax pre-provision income without securities gains and merger and integration expenses was $28.2 million in the third quarter compared to $33.1 million in the second quarter and down slightly from $28.6 million in the third quarter of 2011. This quarter, we adjusted the bar chart to show the contribution purchase-accounting-driven accretion income has made to our pretax pre-provision income. There are several fairly volatile items that are included in the non-accretion component of pretax pre-provision income, most notably the amortization expense…

Thank you, Chris, and good morning to everyone. I'd like to begin my remarks this morning on Slide 19, where we have laid out net charge-off trends, separated performance in our core portfolio from that of our 3 most recent purchased portfolios. As you can see, the ONB core portfolio continues to perform very well, roughly $0.5 million in net losses, representing 6 basis points of net charge-offs in the third quarter. With respect to the Monroe portfolio, we did post net losses of approximately $600,000, majority of which was centered in one [ph] credit, which resulted in 75 basis points of losses in the quarter. While relatively high compared to the other portfolios, you can see that the quarterly trend continues in the right direction. The good successes in the Integra portfolio, where, as you can see, we were in a net recovery position in the quarter. On a consolidated basis, you can see that our net charge-offs in the third quarter on an annualized basis were a very respectable 3 basis points continuing a 3-quarter trend of lower loss rates. With Slide 20, we can see that excluding the covered Monroe and Indiana Community loans, the allowance coverage of non-performing assets fell 5 basis points in the quarter to 54%. This decline in coverage came about mainly as a result of an increase in restructured loans in the ONB core portfolio. The increase in this restructured category was driven mainly by the addition of a $9.4 million commercial real estate exposure in our Indianapolis market. The loan is currently a performing occurring [ph] asset, but met the definition of a restructured loan and classified accordingly in the quarter. While the ONB non-covered consolidated percentages now reflect a 27% coverage, I would remind you that these numbers do not…

Thank you, Daryl. As has been mentioned, 2 weeks before the end of the quarter, the Indiana Community Bancorp transaction was closed, and the conversion occurred over the weekend of September 15. Of the original 17 locations, we've aligned 3 offices in southern Indiana to be managed from our Louisville region. 11 locations in Columbus, Seymour and other local communities are now folded into our Bloomington north central region. We have expanded the responsibilities of Mark Bradford, our region president and former CEO of the Monroe Bank, which we acquired in 2011, to grow and further develop the combination of these strong north central Indiana markets. We've already consolidated 2 locations, and we will close a retirement village banking location in January. In addition, we were able to consolidate one of our existing Old National locations in Indianapolis into one of the Indiana Community locations. Before the conversion event occurred, we were able to change deposit pricing and the deposit product lineup, including the elimination of free checking. As occurred with us when we eliminated free checking, we have experienced some exit of small balance Indiana Community DDA accounts, but balances are still solid, with about $740 million at the end of September. Commercial loans that are not special assets are primarily being managed in Indianapolis where Indiana Community had an LPO and in Columbus, with a very small proportion being handled out of Louisville. We've been able to absorb the loans in Indi with current ONB relationship managers and one Indiana Community relationship manager. In Columbus, we've created a new market president role and promoted Zac Nelson, who has extensive commercial background and is now managing our relationship managers there. We lost a couple of relationship managers to local small banks and already hired replacements, one of whom worked…

Thank you, Barbara. Let me just begin by reiterating what Lynell said. Our thoughts and prayers are with all of you that may be affected by Hurricane Sandy. Please let us know if there's anything we can do to assist you. As we wrap up Old National's third quarter 2012 analyst investor call on Slide 31, I thought it would be helpful to provide you with a review of the economy in our markets, as well as other business factors that may impact your 2013 earnings models. First, I wanted to share my perspective on the third quarter. This quarter is symbolic of the nuances that purchase accounting can have on reported earnings. As we have spoken about in prior quarters, most of the significant benefit of accretion attributable to purchase accounting has a potential lifespan of 4 to 6 quarters. This quarter, we saw the benefits of the accretion attributable to our Monroe acquisition significantly reduced. We would anticipate you may see that happen with our Integra acquisition in the first half of 2013. Obviously, some of that potential reduction and accretion will be replaced by our recently closed transaction, and I would encourage you, as you think about your 2013 models, to anticipate the reduction of this benefit from prior acquisitions. Also, as you build your models, remember that we had to issue 6.6 million shares for the acquisition of Indiana Community bank, taking our total share count to 101.4 million shares. In addition to the impact purchase accounting has on our earnings, we also saw this quarter the continued volatility of our indemnification asset with the FDIC, which had a negative $4.9 million impact on the quarter as compared to $4 million last quarter. As we continue to work through this portfolio, we would anticipate that this…

[Operator Instructions] And your first question comes from the line of Scott Siefers, Sandler O’Neill.

I just had, I guess, a couple of questions. Chris, maybe first one for you. I appreciate the commentary on the direction of the core margin, and then I know it sounds like there's going to be a little more clarity on the PAs, the ones we introduced or now we've introduced, Indiana Community maybe with 90 days or so from now. To the extent you can, just was curious if you might kind of venture, a guess, on reported margin for the fourth quarter.

I would really feel more comfortable not. I think, Scott, it's that question about IBT and the combined continued march down of Monroe and Integra, I'd really rather talk a little bit more about that after we see a full quarter of ICB.

Okay. All right, sounds good. And then, Bob, next question was for you. Kind of dovetailing on the comments that you made in your closing remarks. I guess as I look at things for the last couple of quarters, obviously, there's a little noise introduced into the equation with the balance sheet of INCB. But basically the last couple of quarters, your guys' loan growth has been a little stronger than I might have anticipated. Beyond kind of the comments that you cited sort of countervailing in commercial, maybe flowing consumer maybe a little better, I wondered if you could just sort of speak to the competitive dynamics or where you guys stand in that field and how you see things from that perspective.

Happy to. I hope everyone noticed that while we can't give you any optimism for the future of loan growth, we can surely maintain our negative view on credit cultures, so if nothing else, we're consistent. Scott, I would say that as always Indianapolis remains extremely competitive. We are seeing competitors both on structure and pricing be pretty aggressive. Fortunately, pricing dynamics in Indi are more on the larger credits and are more national partners. Structure tends to come down more into the smaller credits, and again, we won't get into those games. Absent Indianapolis, it's competitive. You see good strong competition, but I would say that it's rational in most cases. Again, smaller banks tend to be a little irrational. But for the most part, we're able to take advantage of that market share and have a fairly level playing field with competition. Again, Indi is tough, and Louisville is coming along, a little more difficult though. We have a little better opportunity in Louisville.

Okay, perfect. And then, I guess, along those lines, what you mentioned on credit. I guess, last question for you, Daryl. On the one hand, certainly sort of a characteristic cautious tone from you. By the same token, I think the charge-off numbers have been extraordinarily low, somehow even lower this quarter. I guess to a certain extent, I also still remember your comments from -- I guess it's probably 5 years or so ago, right, the start of the real estate downturn as kind of a precursor to what actually happened. I guess if you could sort of characterize your magnitude of concern on things you're seeing. Or is it just kind of your general conservatism? I guess, however you can answer that question qualitatively.

My inherent conservatism, so level with my answer [ph]. Scott, I think that maybe the difference this time than where we were 5 years ago is if you look at many of our mid- and small-sized businesses, they're just holding their own, right? So they've not had good, strong top line revenue growth. They're managing their margins pretty well. Their expenses are well managed. But any kind of blip that comes along seems to set these guys back a little more of a higher magnitude than when things are going great. So if you've got a company that has just been clipping along okay, you get some margin compression, then it kind of sets them back. If top line revenues come down for a quarter or 2, it's going to set them back. So this environment is more susceptible to higher credit risk in our portfolio of these little blips than we were 5 or 6 years ago. If the economy doesn't improve, that's going to continue with our clients, and we could see some increasing risk. If the economy turns back around, I don't think you're going to have a wholesale big increase in risk in the portfolio. It's just where this economy is going, I think.

And your next question comes from the line of Dan Werner, Morningstar.

A couple of quick questions. You discussed the line usage of Old National. How does that compare to what you've brought on with Indiana Community customers? Is there significant difference between their commercial customer usage and yours?

Yes, Dan, I would say this, the Indiana Community profile is probably a little less C&I, a little more small business and commercial real estate. So their line utilization would probably be a little higher if I had to wager a guess, but they probably don't have as many lines committed. So as you're building those models, I wouldn't think much about variable usage of lines in the IBT portfolio.

Okay. And then on Page 34 of your -- of the review, I'm looking at the balance sheet and looking at the deposits and kind of the organic change on some of those deposit categories. Was the organic change primarily from Old National? Or was there some contributed by Indiana Community? I'm trying to get a better sense of -- since it is such a recent closing, how much anticipated runoff on deposits are you going to get, especially given the branch consolidation that you guys are currently undergoing with -- both within Old National and Indiana Community?

So Dan, that would actually be just IBT -- or the core Old National prior to IBT. So that is more -- the large runoff in the noninterest-bearing DDA, we had one large client in our Bloomington market that was a hospital that got bought and they consolidated their accounts in the parent, and unfortunately, the parent didn't bank with us. The balance of that is really Barbara's work at trying to reduce deposit costs and margins, but the larger rundown there is a singular client almost -- had significant balances in Bloomington.

And these are quarter-end numbers so they're just subject to some inherent volatility. But I think important to note there is the change in other -- what we call other time deposits, which is our CDs, most -- our most expensive core deposit. And back and forth, we see some of that stuff moving into lower expense transaction accounts, but some of it's leaving the bank, which has been a help to our margin on the core side.

Your next question comes from the line of Jon Arfstrom, RBC Capital Markets.

Just a question on commitments. Can you -- I don't -- I didn't find the number. I didn't hear you talk about it, but can you maybe give us an update in terms of commitments during the quarter?

Loan commitments?

Yes, yes.

We'll have to get back to you on that. We'll pull the number, and we'll make sure everybody gets that number. We don't have it off the top of our head, Jon.

Okay. Just I mean, I guess, that it gets to the question of some of your tone is a little bit cautious, but we've all come to expect that from you. On the other hand, we have the commercial loan up and the commercial real estate up, and I think some pretty good description on the pipeline. Then I guess, what I'm trying to get at is are you optimistic? Do you think you can keep this pace going in terms of loan growth because obviously, core numbers are pretty decent.

I would say cautiously optimistic. I think -- and I probably should let Barbara speak. She's the one who does all the work, but we are seeing a lot more activity out of our RMs. And I would tell you that the one thing I've noticed as a significant change, Dan, is -- or Jon, we've been able to take advantage of market share in many of these markets, whether it's Terra Haute, Evansville, Bloomington, which gives me some optimism. But as you know, we're never very optimistic on the upside. We're a little more pessimistic on the downside. Barbara, anything you would add?

No, I think that covers.

Yes, but reasonably optimistic. I think the activity level continues, the calling activity is there. The pipeline dropped a little bit because of closings. But we're tracking it weekly, and I think the activity level is consistent over the last 3 quarters. So as much as the economy continues to drag, I think we're as optimistic as we can be.

Okay. And is the pipeline becoming increasingly commercial and commercial real estate? I understand it's probably still residential-heavy but maybe a little bit on the mix.

That pipeline would not include any residential, it's all C&I and CRE. It's a pretty good balance.

Okay, good. Okay, that's helpful. And then, I guess, in terms of the M&A, you talked about the dam breaking. Maybe anything qualitative you can add in terms of the mood of the seller has been softening and all, are there more conversations, just maybe an update on that front.

I'd say we're seeing -- books maybe have picked up a little. I think conversations are consistent with where they've been. I think we'll be able to judge the better mood after we get through reported earnings and people get the reality of the margin. I think, as you all know, you're smarter than I am. You're seeing a lot of banks talking about margin compression and then whatever happens with Basel. You saw Comptroller Curry come out again today and talk about reserve releases. I think that confluence of all those issues, our expectation is there may be more opportunity. But we've got to get some balance between our expectations on price and the sellers as well.

Just the last question on that, is it your sense that potential sellers feel they have anyone on their side? Or is this just something that they're going to have to fight on their own?

I'm not sure any bank thinks they have anybody on their side, right now, Jon.

Next question comes from the line of Chris McGratty, KBW.

Chris, one for you. How should we think about the size of the investment portfolio going forward? Maybe you could discuss what you're buying in terms of yield and product and then what is coming off. Obviously, banks are struggling with that this quarter.

Right. The size of that portfolio is driven as much by our continued success in deposits as anything else, I think, and I don't have yields on what we've been buying here more recently. But suffice it to say, we're looking at short duration product where we can with a little bit of spread. I think given our success in growing our mortgage whole loan business, just our residential mortgages with relatively low duration and low LTV-type product, that's where I'm choosing to put most of my kind of option risk investments. So I'd expect that the investment portfolio will continue to contract. It's hard to say if the quarter-over-quarter change is something that you might expect going forward. But I don't know that we've necessarily changed anything. Some of it is too driven by whether we sell some assets or not, but I don't expect that in the fourth quarter. So great deposit growth, but that means probably low-yielding investment opportunities.

Okay. That's helpful. Daryl, for you, obviously, with the purchase accounting there's a drop because of the logistics of the accounting. How should I think about balancing your cautionary comments with respect to credit and just if you have further reductions in the reserves? Or is this probably a good level to assume?

I think that as we look going forward, I'm going to take a lot of things into consideration. If we continue to grow, it's obviously going to spur some additional need for the provision. Bob, I think, talked about and made it clear that the OCC is not wild about a release of reserves, so we're going to have to be careful about that. And we're just going to watch our trends. And it's so difficult to say where we're going forward, but those are going to be the factors that we're going to have to consider as the quarters go along.

Great. One last one for you, Bob. Your comments on M&A, there's a lot of -- a lot to do about banks in the $10 billion threshold today. Maybe you can comment on that in terms of additional expenses once you've reached the $10 billion. And then would you consider a larger deal, potentially an MOE, to really gain scale in a more efficient manner?

Let me comment to the second part, Chris on an MOE. As a guy that lived through the Key-Society merger, that many of you may have not been around, I don't believe there is such a thing as an MOE. Somebody's going to be in charge. So would we do a transformational deal that would make sense to our shareholders? Absolutely. If it's the right deal and it made sense for the shareholders, we could provide great returns, we would do it, but we would prefer to say something transformational. I just -- MOEs, I lived through a couple of years of very difficult times, and I just don't think they make sense. To your first part, I just think we will continue to look for opportunities, and as you think about $10 billion, the way it's tracked, as you know, it's the end of the year. So given the time it takes to get a deal approved, even if we announced something in the fourth quarter, it wouldn't be approved until sometime in '13, which means that we'd get above $10 billion in '13 and affects -- Durbin affects us on the 6 [ph] of '14. So we clearly believe we've got time to either put it in mitigants or to continue to grow. I think our board has been very clear, if you're going to go above $10 billion, don't just go to $10.1 billion, make sure you can make it meaningful and you can cover the costs that are associated with going. Now all practical purposes, other than Durbin, today we're complying with almost all requirements of a $10 billion bank because Chris has been at the forefront of stress testing, and many of the other things we're doing are much like a $10 billion. The biggest effect is obviously Durbin, and maybe we get a good election in November and reality sets in or common sense, maybe we get a chance to look at Durbin again.

And what's that impact of Durbin?

It's about $2 million to $3 million a quarter on a gross basis. There's things we can do to offset some of that cost, but it would really come out of our service charge and other areas.

Okay. And just the last one on the BSAs, the guidance you gave, should I be thinking of those as kind of onetime catch-ups in the reinvestment? Or was this just kind of a -- is this pure investing in compliance systems?

It's really -- the ones that Chris and Lynell referenced are really the onetime charges related to outside resources we have to bring in to help us with the look-back and some of the systems and the audit of all this. So those are really costs that should go away. There is an ongoing support for BSA, but it's not material to your models.

Your next question comes from the line of Stephen Geyen, Stifel, Nicolaus.

Maybe just a clarification on the merger expense so far, you had the $1.5 million projected for the fourth quarter. In total, I guess, it's about half -- the expenses so far, about half of the total expected expense. And just curious if that's going to be front-end loaded in 2013.

Stephen, it shouldn't. That protracted period of -- between our announcement and closing allowed ICB to take some of those costs, so they actually pulled that through their earnings. Do you have that number?

INCB incurred $7 million, that's on the bottom of Slide 10. But they had already incurred on there before closing.

Yes. So I think we'd expect fourth quarter to be about the end of it, yes.

Got it. Okay, got it. And last question, where are you at with the cost saves with the Integra acquisition? You mentioned the 35% there, I guess, at the closing.

Yes, I would tell you that all of the Integra expenses, they're all in our run rates. So whatever is left -- and again, we've only got a couple branches left and not much else, so all of those cost saves are out. And you can build -- third quarter ought to give you a pretty good sense of what Integra's cost, and there's not much there.

And I would add, those branches that we're selling in the first quarter are probably the last vestige of that, too. And that won't hit us -- we won't see the benefit of that until the second quarter. And by then we're done.

Yes.

Your next question comes from the line of Emlen Harmon, Jefferies.

Chris, maybe can you get off with a question for you. You talked about the Monroe accretion kind of starting to roll over. How should we be thinking about the kind of the pace of that and how it comes off over time? And maybe just what are the key drivers there that we should be thinking about?

Well, I don't have a number for you there, Emlen, except for that which we saw in terms of decrease this quarter, which I think was about $1 million. But I think as we look for -- what I've seen there that's interesting with Monroe is the loans that we've acquired there have stabilized somewhat and also, the non-accretable yield has begun to stabilize. So I'd like to think that we'll see some fairly consistent numbers. But if you look year-over-year, we had so much of that early in 2012. That's really where we're driving our estimates for the full year impact of 2013 versus 2012.

Got you, okay. And then you guys noted in the deck that you had sold about $40 million in classified assets. Could you just give a little bit of the nature of those loans, and whatever has come from a covered, non-covered portfolio?

Yes, they were investments, Emlen, that's out of our mortgage-backed portfolio.

Got you, okay. Got it. Those are the MBS sales you talked about?

And I think there's a pretty good slide in the appendix. Lynell, did that we keep that slide this time? I believe we did. That kind of takes that number...

We did.

In a little more detail, Emlen.

Your next question comes from the line of Mac Hodgson, Suntrust Robinson Humphrey.

Just a quick couple of quick questions, one back on the spread income and the decline in accretion income. I just want to be sure I understood. You said a decline of $20 million to $25 million relative to the full year '12?

From both IBT and Monroe and then obviously, some of that will get replaced with -- or excuse me, from Integra and Monroe and then obviously, some of that will be replaced by IBT. And I think it's safe to say as you're looking at your model, Monroe would serve as a pretty good resemblance to what IBT might be able to do for us. Again, we'll give you better color at the end of the fourth quarter.

If you just look at the total discounts, it's kind of remarkable how close they are. But now the nature of the loans are different. And we -- I really feel better talking about that after I've seen a full quarter, and we take any kind of adjustments to the purchase accounting numbers once we see a full quarter performance.

Okay. And then on expenses, kind of a lot noise in expenses the next couple of quarters. If we look at just kind of a core $82.5 million core expenses for this quarter and just kind of take out all the stuff we're going to see the next couple of quarters, obviously, you have the $6.5 million to $7.5 million of annual expenses coming out from the branch optimization. You've got a full quarter impact of Indiana Community, and net of, obviously, the savings you're going to have. Anything else we should think about that's going to affect that core number? Is there any sort of core expense growth? Is there opportunity to get more cuts to get that core number down? Just trying to think.

If there's no growth other than our normal merit increases, which will come in the second quarter, I would anticipate that you shouldn't see anything going up. And more than likely, you should see the number come down slightly as we work through our procurement and operational excellence programs.

And then one for you, Daryl, and you may have mentioned this. But on the increase in criticized and classifieds, how much of that, if any, was from the Ag portfolio?

Very little of the increase, yes.

And at this time, there are no further questions.

Great. If any participants have further questions, as always, Lynell is open. And again, our thoughts and prayers with all of you during Sandy.

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 and conference ID code 35894910. This replay will be available through November 12. If anyone has any additional questions, please contact Lynell Walton at (812) 464-1366. Thank you for your participation in today's conference call.