Welcome to the Old National Bancorp Second Quarter 2013 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. The call, along with corresponding presentation slide, 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 p.m. Central Time today through August 12. To access the replay, dial (855) 859-2056, conference ID code 15091293. Those participating today will be analysts and members of the financial community. [Operator Instructions] At this time, the call will be turned over to Lynell Walton for opening remarks. Ms. Walton?

Thank you, Holly, and good morning, everyone. Joining me today on Old National Bancorp's Second Quarter 2013 Earnings Conference Call are Bob Jones, Chris Wolking, Daryl Moore, 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 3, as well as our SEC filings, for a full discussion of the company's risk factors. Additionally, as you review Slide 4, certain non-GAAP financial measures will be discussed on this conference call. References to non-GAAP measures are only provided to assist you in understanding Old National's results and performance trends, and should not be relied upon as a financial measure of actual results. Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentation. At the conclusion of our prepared remarks, we'll be happy to open the line and take your questions. Turning to Slide 5, I'm pleased to announce Old National reported second quarter earnings this morning of $28.5 million or $0.28 per share. This net income represents a 4.7% increase over second quarter 2012 net income, and is an almost 19% increase over first quarter of 2013 earnings. Please note that while our net income has improved when compared to second quarter of 2012, earnings-per-share comparisons are impacted by the 6.6 million of additional shares issued for the Indiana Community acquisition in the third quarter of last year. The most significant highlight of the quarter is the $94.4 million or 7.2% increase in end of period commercial loans over the first quarter of 2013. This represents the largest increase in commercial loan balances in over 18 quarters. The credit quality of our loan portfolio showed continued…

Thank you, Lynell. I'll begin my presentation on Slide 8. Without securities gains in merger and integration expenses, pretax, pre-provision income at $37.6 million for the quarter was $3.3 million higher than the first quarter this year and $4.5 million or 13.6% higher than the second quarter of 2012. So you can see from the bar chart, we have maintained a steady increase in pretax, pre-provision income since the beginning of 2011. Lynell noted several positives and negatives to income and adjusting for these items, I estimate that pretax, pre-provision income was approximately $36.6 million for the quarter. Just a brief comment about our provision recapturing in the quarter, because Daryl will give you more detail on credit in his presentation, annualized net charge-offs in the second quarter were 4 basis points compared with 17 basis points last quarter and 17 basis points for the full year of 2012. Low net charge-offs and improving asset quality contributed to our ability to recapture loan loss provision this quarter. FDIC indemnification asset amortization expense for the quarter was $1.5 million compared to $2.3 million in the first quarter. The FDIC loss share asset at June 30 totaled $100.4 million. $89.6 million of the total is the remaining indemnification asset. We continue to monitor our IA closely and would remind you that we have accounted for our indemnification asset under the guidance of ASU 2012-06 since our Integra purchased. This guidance requires us to reduce the IA consistent with the resolution of assets or the expiration of the FDIC loss share coverage, whichever is shorter. Slide 9 is a slide that many of you have found helpful in past quarters. This slide illustrates our progress managing the impaired assets we acquired on our bank purchases. From Monroe impaired assets, the expected nonaccretable component…

Thank you, Chris. Slide 22 is where I will begin my remarks this morning. On the slide, we show a trailing-9-quarter summary of the net charge-offs for our core portfolio and our 3 most recently purchased portfolios. Overall, we experienced $470,000 in net charge-offs in the quarter, representing an annualized net charge-off rate for the period of 4 basis points which is materially better than the 13 basis points posted in the second quarter of 2012, as well as the 2012 full year charge-off rate of 70 basis points. As you can see from the chart, the Old National core portfolio continues to perform very well with roughly $1.3 million in net losses due to first 6 months of 2013, representing 6 basis points of net charge-offs on an annualized basis. With respect to the acquired portfolios as a whole, in the current quarter we posted net recoveries of approximately $200,000, which was significantly lower than the $1.5 million in net charge-offs reported last quarter. Net losses through the first 6 months of 2013 for these acquired portfolios were $1.3 million representing 55 basis points of net charge-offs on an annualized basis. Slide 23 shows our trends in the allowance for loan loss coverage of non-covered, nonperforming assets. On a consolidated basis, we increased our coverage of non-covered, nonperforming assets slightly from 29% to 30%. While this level typically might be of concern, I would remind you that this coverage number does not include the $14.5 million currently outstanding mark on the Monroe portfolio or the $49.6 million mark on the Indiana Community Bank portfolio. Excluding the acquired Monroe and Indiana Community portfolios, our allowance coverage of nonperforming loans fell 5 basis points to 49% in the quarter. Recapture of roughly $2.3 million in allowance balances in the legacy-related portfolio…

Great. Thank you, Daryl. And welcome to all of you on the phone today. As always, we appreciate your interest. My remarks will begin on Slide 31. As is evidenced by some of the comments of my colleagues, there was a little bit of noise associated with our second quarter, some positive and some negative. Given that noise, I want to use my time to focus on our core earnings and what we feel is a continuation of the earnings momentum our core bank has been achieving. This is not meant to minimize the noise or to ignore the impact that it had on our quarter, particularly when you look at the fact that a great deal of these items are related to initiatives that will have a positive impact on our earnings going forward, these items included our branch closures, the reduction in Indiana state tax rate and our BofA transaction; nor to underestimate the hard work and effort that it took on the part of our credit and origination teams to post such a consistent positive credit performance that necessitated the release of our loan loss provision this quarter. These actions are all part of our continued effort to achieve high performance. As we look at the core bank, this was a very strong quarter for ONB. The highlight for us was the core loan growth of 2.1% that we achieved over the end of the first quarter, which included 7.2% of C&I loan growth, the highest dollar volume of C&I loan growth since the fourth quarter of 2008. The origin of that growth was broadly distributed across our footprint and we estimate a pretty even balance between the expansion of current relationships and market share gains. Even with this growth, we have seen our pipelines remain stable,…

[Operator Instructions] And your first question will come from the line of Emlen Harmon with Jefferies.

I guess first question for me would be, sounds like you're a little bit more comfortable on Basel III now that we have a better idea what the final rules look like. Could you talk a little bit about -- I mean, does this give you any additional kind of leeway on capital deployment? And just kind of how are you guys thinking about returning capital to shareholders?

I think, Emlen, you make a great point. I think it's a tribute to a lot of efforts on community banks that the final rules on Basel really were helpful to all community banks. And -- but I would say it's consistent, while it does help our capital position, our use of capital remains consistent. First and foremost, we continue to look for growth, I think, evidenced by the commercial loan growth that Barbara Murphy and her team put on board, we're encouraged by that. After that, we continue to be very active in M&A. We do think that provides our shareholders with the best return, but we did purchase -- repurchased 500,000 shares this quarter, as we saw the opportune time to do that.

Got you. Okay, and then, you gave us some -- gave us kind of some background on the loan growth this quarter and just in terms of being kind of broad, both, I guess, in terms of geography and customers. I guess, what are you guys doing differently today versus what you were doing, say, a year ago. I mean, we've seen a big pickup in the pipeline as we look out over the next 2 or 3 quarters. So just kind of curious if something you guys are doing differently or there's just an environmental effect there?

I think it's a little both, Emlen. I think a lot of credit goes to Barbara Murphy and her team. Not having Barbara and her team engaged in Integra and IBT has allowed them to really focus more on clients. And I think the message that she's delivered has been one of we have an opportune time. I think the second part of it is, we probably have not done as good a job of reminding people, but we've really transformed our franchise. As you look at that graph on 31 or 32, we've moved out a lot of lower markets. Our Bloomington market, we're dominant in market share. We're getting great loan growth there. Columbus is very encouraged now. I was just up there a couple of weeks ago. Our activity in Evansville with the Integra purchase, once we got through that, we have a significant market share. And our team here does a great job. So I think, it's one, it's Barbara and her team doing a much more focused job; and then secondly, I think the environment, given the way we transform our franchise, has helped us a lot. Plus, it's great to be in Indiana.

Got you, okay, and then one last quick one for me. The variable comp true-up in the quarter, I think, was about $0.5 million. Could you give us a little bit of the background on that, whether that was kind of production driven or just what the driver was there?

It was Chris. Really is more of just a fine tuning, I think, where our accrual was and the number of participants we expect in the plant. So I don't think that we've adjusted it material based on an outlook change or anything of that sort.

Your next question comes from the line of Scott Siefers with Sandler O'Neill.

This is actually Alex Kovtun for Scott. For the first question I have is on C&I growth. I was wondering how your customers are feeling and how sustainable the strong growth in this quarter is going forward?

Our clients continue to feel a little better. I think I've said on other calls, as we talked to them, they've kind of gotten past the Washington malaise, and they're focused on their own business. Continued great frustration with our leadership, et cetera, but I think they're moving past it. So I think they're more optimistic. I don't think they're doing cartwheels. But they've held off on so long from doing expansion. And again, with the strength of the economy and in our areas, it's been positive. And then again, as the pipeline shows, and I think as we look at it, there's no reason to believe that we've seen a significant change in the third quarter that we've seen in the last couple.

Great. And then as a second question, on the NIM, so the core performance, so it declined a little less than the first quarter. What would you say the puts and takes in the NIM in the next few quarters?

Well, certainly the benefit is that continued repricing of the CDs that we've got, Alex. And I think, as we talked about several quarters ago, we felt like that was going to be a real nice element for our margin in 2013. I would also say positive, and maybe a negative is the loan growth. Some of that's floating rates, so it's relatively low rate but it's very good from a long-term standpoint. So those are probably the pluses and minuses. We still have a big investment portfolio and that moves around a little bit. But with all of that, we still feel pretty good about the core margin. And as I said, I expect to see that stable to down slightly for next quarter.

Just to remind, I'm sure everybody in the call remembers, but the impact in the first quarter, some of that was getting ready for the BofA transaction. We had prepurchased some investment securities that had a bit of an impact, too. And obviously, we don't have to do that going forward.

Your next question will come from the line of Jon Arfstrom with RBC Capital Markets.

Just a follow-up on BofA in terms of the attrition, was that -- I know there was a plan but was that more about accounts or balances leaving, if that question makes sense?

It really is both, Jon. And what we knew going in, BofA is a national bank. So we had clients that domiciled in California who opened their account when they're at University of Michigan. And so, a lot of that we knew was going to come because people had moved away from Michigan and obviously we're not a national franchise. And then some of it was larger corporations moving. But I'd say a fairly good balance, not inconsistent with what we thought. The nice thing is it happened prior to us having the right to check, so we didn't have to pay for those balances. So I think it's real tribute to, again, Barbara and her team, as well as the BofA team notifying their clients.

Okay. And I guess the other question on BofA. As you look out, what do you think is possible loan to deposit or how significant is the lending opportunity. I know you touched on it a bit, but what's possible there?

Anything is possible, Jon. You know that. You just got to believe. No, I think Jon, we're very encouraged with Phil Harbert. We couldn't have gone in a computer and designed a better person to be our leader in the Michigan market. I think between he and Alex Strati and the team they're going to build, we're very encouraged by our growth prospects. We've had very little negative on -- come out of those markets and I think we're encouraged. Obviously, it's too early to give you any kind of a forecast. But just based on the receptivity of our indirect business in the first few weeks after we got up and running, I think there's a real opportunity for banks that's deeply committed to the communities.

Okay. And then just a follow-up on credit, maybe Daryl or Bob. But in terms of your approach to granting credit, I know we talked maybe a year ago, Bob, about whether or not you're taking enough risk. I look at the delinquencies getting better. You're far better than peers. Have you loosened up a bit? Is the environment good enough, strong enough for you to be a little more loose with your credit?

We still have Daryl. I would say, that maybe goes back to the answer I gave Emlen, which is, I have seen just a wonderful amount of cooperation between Barbara and her team of originators, and Daryl and his team of underwriters that probably didn't exist during our more difficult times. We generally are working very hard to get deals done. And I think based on our market share, we're willing to do a lot. We will not give up on our credit stance. We're going to give up a little, Jon, but we're not going to start to go back to pre-2008, things that we saw our competitors do. So I think, what we've actually seen is a significant increase in cooperation and ability. But I wouldn't say we've gotten any easier, but I think there are moments when Barbara and Daryl, they had good discussion.

Daryl, would you say the pipeline quality is better than maybe it was a year ago?

Well, Jon, I think, one of the things is, that when we underwrite -- when any bank underwrites loans, you look at the total risk. And when you were looking at loans a year ago and 2 years ago, part of the risk that we have to take into consideration was just the risk of not knowing where the economy was going. So when you put that in your total kind of analysis of how much risk you want to take on with each of those loans you were underwriting, it was a little difficult. Now that we've moved into a period where there's probably less uncertainty with respect to the economy, you can take on a little more inherent credit risk in each of those loan requests. So I would say incrementally, we're probably seeing better, stronger loan request. But I also think that there's a degree of risk we're taking now that we can because the economy seems to be getting a little better, if that makes sense.

The next question comes from the line of Chris McGratty with Keefe, Bruyette, & Woods. Michael Perito - Keefe, Bruyette, & Woods, Inc., Research Division: This is actually Mike Perito on for Chris. I just -- most of my questions have been answered. I just have a couple of quick ones. I guess first, with the loan growth accelerating, how do you guys think about the size of the securities book going forward? I know you referenced that earlier on in the call. Just some thoughts on that will be helpful.

That's a great question. We -- not only the size of the securities book but overall leverage. A lot of -- there's a lot of uncertainty with capital as we were going on Basel III, the analysis, things of that sort. So there is no question that we would prefer to reinvest our investment portfolio, cash flows in the loans, and that will continue to be our priority. Now having said that, we also think about overall interest rate risk and the benefit we're seeing from these deposits that are coming in. So it's kind of a balance, but all things being equal, we would much rather see balance sheet growth in the form of loans. Michael Perito - Keefe, Bruyette, & Woods, Inc., Research Division: And then I guess if I can just quick comment on M&A. Geographically, are you guys still more focused on the Michigan market? Is that fair? Are you guys kind of giving the whole footprint a good look? I just...

I would say we're -- home is still Indiana. We continue to believe that being Indiana's bank is a great value to our shareholders. So while our recent extension into Michigan, we are an Indiana-based bank and continue to look to fill in the gaps in the markets that we aren't in today. Then we also spend time in Michigan, and then we love Louisville as well and some parts of Western Kentucky. So the benefit of having a full-time corporate development, we can be a little more active and -- but we're again, also pretty defined on where we're going to be. Michael Perito - Keefe, Bruyette, & Woods, Inc., Research Division: And I guess, I know you guys have no direct exposure. But have you seen, in terms of the Michigan banks that you guys are having conversations with, has the stuff going on in Detroit changed any outlook for any of them or anything as such? Or has the effect been pretty minimal?

Well, because everything we have is west of 23, which is just kind of that line of demarcation between eastern and western Michigan. And I think everybody expected something to happen in Detroit. And I think most people were prepared. And it's sad for Detroit but I think ultimately for the western part of the state, it's going to be fine.

And your next question comes from the line of Taylor Brodarick with Guggenheim Security.

Just 2 questions. With the reserve release, how are we thinking about that going forward? Sounds like things are getting better. Is there a ratio we're feeling more comfortable in going forward?

I think what you look at our ALLL coverage today and our charge-offs, we're comfortable with the coverage as we have it, and we'll look at this. A lot of that was really, as you did the loss migration analysis as you loaded those new loss rates in. So I'm not sure you'll see as much, if any, of the recapture on a go-forward basis.

Okay, great. And I guess, a question for Bob. With your participation with St. Louis Fed, is there anything different, any interesting data points that you've gleaned from your meetings that you could share with the rest of us?

It's a great question because as you think about Chairman Bernanke speech just last month and the way the markets reacted, I think the market overreacted because very quickly, after that, the Fed presidents got out and kind of said, "Hey, wait a second. He didn't say what you thought you heard." I would just say that my perspective, and this isn't as member of the Fed board, but my perspective is, again, I think the markets overreacted to what he said, the Chairman said. I think there's still this belief that we're on a slow recovery and that interest rates probably are or maybe come down a little bit. But you're not going to see the strong changes that we saw. But we've got another press conference coming up or release coming out. And GDP is not forecast to be very strong, which I think just reiterates what I just said. So -- but job markets may be better. But I think the short answer, Taylor, is it's still the economy, while improving, there's still a lot of moving parts.

And your next question comes from the line of John Moran with Macquarie Capital.

Just a couple of quick follow-ups here and I apologize if I missed in the prepared remarks, line utilization. What that was looking like this quarter versus last quarter?

Yes, I'm glad you asked that question because you didn't miss it. We actually, I failed to put it in the appendix. Line utilization from the first quarter increased to 36.5% from 35.6%. Our average is, again, at 39%. But that 36.5% is just a little bit below the high point for us over the last 3 years. But we would anticipate that the potential is there for that to continue to grow as customers become more comfortable. Thank you for paying attention.

I appreciate that. And then, just I guess kind of a bigger picture question, maybe for Bob. Total assets are creeping up toward that magic $10 billion mark. You've got BofA kind of closed now, and I know that you guys pre-invested a bunch of that, and then a pretty robust looking pipeline and some presumably some opportunities on the acquisition side. Could you remind us again kind of thoughts about going over $10 billion and what that might mean for you guys?

Yes, it is about $68 million in impact on a quarterly basis from the Durbin Amendment -- no...

$3 million to $4 million.

$3 million to $4 million. $3 million to $4 million on a quarterly basis from the Durbin Amendment on a pretax basis. Clearly, we know that the $10 billion mark is measured at the end of the year. Our desire would not to be to go above it this year. Then if we do go above it, we need to make sure we go above it enough to cover that cost. We are working very hard with our mid-cap bank coalition as well as other people to try to educate Congress to maybe rethink the $10 billion cut off. We putting in more deservedly, if it belongs anywhere, it belongs at $50 billion. But we don't anticipate that happening any time soon. So it's an issue we talk a lot with our board and understand as we continue to transform the franchise. So it's important for us to realize. But again we know the measuring points and we're comfortable that once we do go above, we're going to have to go above enough to cover it.

Got you. Yes, that's helpful. The -- and then just kind of 2, I guess, nitty questions maybe for Chris, one on the tax rate. You guys have been running kind of 30% to 32%. With the change in state tax, does that drop from that range kind of going forward? And what's a good rate to think about?

Yes, we would have been up a little bit as we talked about that deferred tax adjustment, is reflected in our rate, cumulative rate for the first 6 months. I think we're expecting somewhere in that 29% to 30% on a GAAP basis going forward. Fully taxable equivalent probably 36% to 37%, so a little bit lower than we will see in that year-to-date number for 2013.

Let me -- this is Bob again, correct myself. Our Durbin impact is $2 million to $3 million a quarter. I apologize for getting that number wrong.

And then, forgive me, just one last kind of tiki [ph] type follow-up. Chris, I think in your prepared remarks, you had said that the IA was going to run kind of $3 million a quarter the rest of this year. And I know that, that can bounce around a little bit. But that's up a bit from where it was this quarter and in the first quarter. Anything going on there and is $3 million kind of the right run rate to think about into '14, too?

Yes, I think so. That's -- it's a challenging number because it's so variable. And so much of it is driven by how successful we are resolving the assets and we have been very good. That's one of those numbers that, frankly, I like to see continue to go lower because I don’t want to see a number hanging out there as we get closer to the end of the coverage. So I'd expect it to be $3-ish million in that per quarter for the rest of the year. And I think that's a fair number going into 2014. But like I said, it's just so variable, it's hard to keep tabs on that.

Your next question comes from the line of Peyton Green with Sterne Agee. Peyton N. Green - Sterne Agee & Leach Inc., Research Division: Chris, I was wondering if you could talk a little bit kind of what the cash flow expectation is on the securities book, maybe over the balance of this year and into '14? And then what the kind of marginal roll off yield is and then where you think you can buy in today's market?

Unfortunately, Peyton, I don't have that information in my fingertips. It's, obviously, a little bit less than it has been. But I think a $30 million to $40 million number is probably a good number for us. And it's not a small amount, that's even on a monthly basis.

Peyton, if you turn to Slide 36, it gives you a little bit view of that in the appendix.

Right. And we probably have a reinvestment rate in there, too, from the previous quarter. I think the bigger question is, how loan growth does and whether or not we deploy these cash flows into loans. There's no question, as we saw in the changes from the first to second quarter, that yields are going to continue to come down as we reinvest those. And we need to be sensitive to rate risk as well. So we probably won't be deploying as much of that as we had into municipal bonds and things of that sort, for longer duration. So it's just another element when we think about Basel III, we think about loan growth, we think about deposit flows, that makes managing balance sheet a little more challenging going forward. Peyton N. Green - Sterne Agee & Leach Inc., Research Division: And I guess, I mean, maybe in terms of managing the balance sheet towards a smaller, but yet more profitable, I mean, would you consider rolling the securities book down over the back part of the year and buying stock back maybe at a more aggressive pace?

I think, as really what we saw in the second quarter, they all factor into decisions about capital. Getting some more clarity on Basel III, for example, helps us think a little bit differently about capital. Putting money into the investment portfolio to lever up the bank would not be my first decision right now. So every month is a different month, every price point's a different price point. So we'll just continue to take advantage of the opportunities as they present themselves.

As we've often said, we view that investment portfolio as a way to manage interest rate risk not to make earnings. So I think they knew it, clearly, what we're trying to do, which is to increase the profitability of the company but not levering up that portfolio. Peyton N. Green - Sterne Agee & Leach Inc., Research Division: Okay. Great. And then maybe if you could talk, Bob, a little bit about kind of the marginal loan yield, of the paper that came on in the second quarter. Has there been any, I guess, customer reeducation that's been able to happen because of the steepening of the curve in terms of pricing?

Yes. A little bit. But it kind of came down almost as quicker, came down a little bit. But you have to just remember my people, that even in this environment, they're so far ahead. Most of our clients are -- been around for a while and they understand that things are pretty positive, so it really hasn't been an issue at all.

[Operator Instructions] And at this time, we have no further questions.

Great. Let me just say, if any folks or there are other people that want to talk to us, feel free to call Lynell and we'll do -- and we'll follow up any questions you have. And again, appreciate your interest in Old National. Have a great day.

This concludes Old National's call. Once again, a replay along with the presentation slides, will be available for 12 months on the Investor Relations page of Old National's website, oldnational.com. A replay of the call will also be available by dialing (855) 859-2056, conference ID code 15091293. This replay will be available through August 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.