Welcome to the Old National Bancorp Second 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 p.m. Central today through August 13. To access the replay, dial 1 (855) 859-2056, conference ID code 96399349. Those participating today will be analysts 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, Sarah, and good morning, everyone. Joining me today on Old National Bancorp's Second Quarter 2012 Earnings Conference Call are management members: Bob Jones, Chris Wolking, Daryl Moore and Joan Kissel. This conference call will contain certain 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 Old National'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 these adjusted metrics to be 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 second quarter items we will be discussing today. Chris and Daryl will provide you with an in-depth look at our second quarter performance, including our organic loan growth, net interest margin expansion, expense initiatives and capital position, as well as our credit quality metrics. Bob will then provide a strategic update, including an overview of the local economy. At the conclusion of our prepared remarks, we will open the line to take your questions. I'd now like to begin our second quarter review with Slide 6, as I'm pleased to announce Old National reported earnings this morning of $27.2 million or $0.29 per share. These results represent sizable increases over both first quarter 2012 and second quarter 2011 earnings. Included in the current quarter's results are security gains of just over $6 million, efficiency initiative expenses of $1.7 million, as well as $1.2 million of other expenses as noted. Now to provide more detail on the quarter, I'll turn the call over to Chris.

Thank you, Lynell. I'd like to add a couple of comments regarding our earnings highlights for this quarter. The securities gains resulted from transactions to continue to reduce the size and duration of the investment portfolio. The security sales also provided the liquidity needed to retire the $16 million in subordinated debt and trust preferred securities we called on June 30. The efficiency initiatives, for which we took charges in the second quarter, include the closing of 31 ATMs and other activities related to our simple EZ pass [ph] productivity and customer service improvement programs. These initiatives are ongoing, and we will keep you informed of future actions. Beginning with Slide 8. You will see that our pretax, pre-provision income was slightly higher than first quarter, increasing $700,000 to $33.1 million. Having closed on the acquisition of Monroe in the first quarter of 2011 and Integra in the third quarter of that same year, the impact the acquisitions have had on income is clear. In the second quarter of 2012 alone, accretion associated with the impaired loans we acquired in the transactions contributed $14.1 million in net interest income. We are also starting to see income from core loan growth and benefits from expense control on the timely consolidation of acquisitions. Average core loans increased $60 million from the first quarter to an average of $3,778,200,000 in the second quarter as indicated on Slide 9. This is the first material increase we've seen in core commercial and consumer loans in several quarters. While not shown on the slide if loans covered by FDIC loss share are excluded, period-end loans in the second quarter were $112.2 million higher than at period-end in the first quarter. Excluding covered loans, commercial and consumer loans increased $48.8 million and residential real estate loans increased…

Very good. Thank you, Chris, and good morning to everyone. I'd like to begin my remarks this morning on Slide 17, where you can see in the chart at the top of the slide that non-covered portfolio net charge-offs for the second quarter were $900,000, down from last quarter's level of $3.4 million. As reflected on the bottom chart of the slide, on an annualized basis, non-covered loan net charge-offs for the quarter were 9 basis points, a reduction of 24 basis points from the 33 basis point annualized rate posted in the first quarter of 2012 and down 47 basis points from 56 basis point annualized rate posted in the second quarter of 2011. Annualized loss rates continue to run at levels lower than our peer group on a trailing quarter comparison. Excluding covered assets, we recaptured $3.4 million of provision for loan losses in the quarter. Lower non-performing and problem loan levels, coupled with lower loss migration rates, had a major influence on the provision level in the quarter. Moving to Slide 18. We have laid out net charge-off trends separated -- or separating the performance in our core portfolio from that of our 2 most recently purchased portfolios. As you can see, the ONB core portfolio continues to perform very well, with net -- or with 0 net charge-offs in the second quarter. As the other portfolios mature, you can see that there is some lumpiness in credit results, although the second quarter saw improved performance in both of those portfolios. Net charge-offs in the Integra portfolio were roughly $700,000. Moving to Slide 19. We see that excluding the covered and Monroe loans, the allowance coverage of non-performing assets fell 8 basis points in the quarter to 59%, mainly as the result of the provision recapture in…

Great. Thanks, Daryl, and welcome, everybody. I'm going to close our prepared remarks beginning on Slide 28. First, I'd like to follow up on the 8-K that we filed on July 20 regarding the consent order that we executed with the OCC regarding the deficiencies within our BSA/AML program. As noted in that filing, we have been working towards remediation of those deficiencies since the OCC identified them approximately 16 months ago. Our plan of action includes new systems, operational enhancements, increased staffing and other actions designed not only to meet the demands of the issues that were noted, but more importantly, ensure that we have in place the appropriate controls to be compliant now and in the future. On the date that the consent order was filed by the OCC, we immediately executed a communication plan, which included the 8-K to you, our investors and analysts, as well as an internal communications plan that reinforced our commitment to ensuring we work as expeditiously as possible to move beyond this action. Following the filing of the 8-K, we did receive a few follow-up questions that, for the benefit of all of you and in the spirit of transparency, I'm going to recap this morning. First question was, "why did the order take 16 months to be filed?" Obviously, Old National has no control over when the order was issued, but I can tell you that once the issues were identified, we immediately began working to rectify the deficiencies. Second question was, "Will there be a material impact to Old National's 2012 net income?" We do not -- we do expect that there will be expenses of approximately $2 million over the next few quarters for outside resources to assist us with validating our work to ensure compliance with the consent…

[Operator Instructions] Our first question comes from the line of Mac Hodgson with SunTrust.

A couple of questions. First, maybe touch -- and you kind of mentioned this, Bob, a bit, on loan demand. It did seem like utilization rates are up, the pipeline is up. So it does seem like you're gaining positive momentum on the loan side, but you still sound somewhat cautious and guarded. And is the improvement -- the result of new hires kind of refocused on originations? How do you reconcile that with the environment?

First is, I think you'd all be disappointed if we weren't just a little tepid on the economy. We, at least, want to be consistent. I really think, Mac, it's 2 things. It's an increased sales effort. We have seen just a lot of energy in our RMs, a real testament to Barbara Murphy and our regional CEOs who've gotten people more engaged and more focused. And it was kind of a catharsis in the latter part of the first quarter when it was almost, "You know what guys, we can always continue to look backwards. But we're going to continue -- we've got to look forward." And we've seen a lot more positive activity. And the second part is a lot of the acquisitions we've done has given us pretty good market share, and we're starting to take advantage of that market share and getting a lot more at bats [ph] than we had in the past. And I think that's helped us quite a bit, too.

Okay, great. Daryl, a couple of questions on the ag exposure. Appreciate you all highlighting that. How much of the crop farming would be corn? And maybe if you could just walk me through a typical loan: loan size, structure, collateral, things like that?

I would tell you that as we look down, we would put together a list of all of our lines of credit for crop production of $250,000 or more. And I would say this past season, we had customers or borrowers who were planting probably more corn and soybeans than they have historically planted. So in retrospect, that probably wasn't the best thing, but who would have known. What we will do is we'll look at historic yields on farmers and underwrite lines of credit and make sure that as these lines of credit are paid out once harvest comes that if they aren't paid out in full, there are sufficient grains in storage with value to liquidate our lines, just to make sure that we don't have any carryover from our farmers. And as I've said earlier today, the last several years have been very good to farmers, and we haven't had much of that. But what's really going to be in play this year is crop insurance, and we went through and looked at all of these. And we have very few, less than half a dozen of our borrowers who don't have some type of crop insurance. Now crop insurance ranges all the way from catastrophic to something greater than that. So it's going to be very hard, Mac, to kind of figure out, until the harvest comes, what kind of coverage we're going to have. I would say, generally, I think this is a safe statement. Farmers are not going to make the kind of money with revenue insurance that they would in selling their grain with good yields, but it probably is going to protect a lot of these farmers from absolute crisis as we move into next year. As I said earlier, soybeans are still -- that's an open question, whether that will help farmers or not.

The lines generally do shortly after harvest? I mean, how does that -- are they on a year roll?

Most of them are on a year roll. Our best customers sometimes will put on a 3-year roll, with covenants. But we're going to have the opportunity to revisit each one of these exposures around harvest season. So late November, early December, you'll see most of these start to mature, and they'll be back in the bank to talk with us. This is a line of business we've been in for a long time, and we know that you're going to have these years. We're not panicking. We're going to, as much as we can, support our farmers through this. This is just something that happens in this industry.

And was the ag the driver of the increase in special mention?

It was not. There were no ags in that special mention increase.

Could you give any color on what drove the increase?

Yes, about half of it was commercial real estate, non-owner occupied commercial real estate. We had one large manufacturer that had a soft year, but it was kind of across the board. And as we look at it and bankers can always do this, you kind of look at these and one-off and say, "Well, this one's kind of unusual, and this one's kind of unusual." 10 in a quarter of your top 20. Yes, I could probably make an argument for 8 -- 7 or 8 of those being unusual, but it is concerning for us because of the dollars and the numbers. So we're going to watch it pretty closely.

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

Chris, I guess the first question is probably most appropriate for you. I guess, on a core basis, the margins seems to be holding in probably a little better than I might have thought. And I appreciate the outlook on the core margin for the remainder of the year. I was just hoping -- from your perspective, where are things holding in well, relative to where you might have expected a few months ago? And where do you see the best opportunity to keep that base of core margin sustained?

On the core, yes. I think problematic, obviously, is just reinvestment in the investment portfolio. We still get $50-plus million kind of in cash flows on a monthly basis in that portfolio. So reinvestment we watch closely. The very positive for this quarter was the period-over-period loan growth that we saw. That's the first time we've seen that in -- especially in the commercial side, in quite a while, so we'll watch that. As I mentioned in my comments, the fact that the pipeline's still hanging in there and that a large percentage of those are accepted commitments, we'll look for some -- should see some continued increase in loans going forward, so we'll watch that very closely. The other benefit continues to be our CDs. We're seeing repricing of liabilities. We don't have that much in wholesale funding, but we're fortunate to have gotten called that sub debt, so that will help us, too. So I'm reasonably optimistic on the margin given the continued pressure we're seeing on asset yields. The fact that liabilities continue to give us some opportunity to improve that margin is good. So -- and Scott, I might add, too, we're foreseeing growth. We continue to see growth in non-interest-bearing DDA. It seems like quarter-over-quarter, there's just no stopping it. And relatively speaking, there's not much cheaper than 25 basis point wholesale funding but pre-DDA is still pretty good, so we'll take it.

And then, Bob, I was just hoping you could maybe touch on the M&A environment, just sort of the things you're seeing at a top level. Obviously, you guys have been active and still remain very interested. But there just hasn't been a lot of activity industry-wide, at least, that we've been able to see from the outside. So just curious how conversations are going these days, things like pricing, overall interest in selling, et cetera.

Scott, I think the last couple of weeks, you would see TARP issues. We've seen a little more activity increase as people either got their letters or have started to put together their plans. We continue to have very positive conversations with potential sellers, and the reality is there's still a slight disconnect between seller expectations and our expectations. But I think that gap is beginning to narrow as people look out. The other real impetus I've seen, Scott, is Basel III. I think it's created a real just an almost terror look in some folks as they think about Basel III and all the changes to that in terms of their capital constraints. So I know we've all been predicting and consolidating for a while, but my sense is that the activity's picking up, and I think realism is beginning to hit in for all of us.

[Operator Instructions] Your next question comes from the line of Stephen Geyen with Stifel, Nicolaus.

Maybe a couple of questions for Daryl. The gross recoveries, it's been pretty steady over the last several quarters. Anything in particular that might be driving that, that suggests it can continue?

Stephen, that's very interesting. I think we have been relatively -- I wouldn't say aggressive, but we charge things down pretty appropriately. And as we have come through this cycle, I think we're seeing $200,000, $300,000. In this past quarter, we had a $400,000 recovery. I think it's just kind of garden-variety stuff that we charged off. Things are getting a little better. People may want to sell properties, can't do it without releasing our mortgage. So it's just probably what you would expect to see as you come out of a cycle, with respect to those recoveries. It is very difficult to determine at what levels these things are going to be at going forward. It's just so hard, I wouldn't want to take a stab at it.

And the compensation, Chris, is that kind of a good core number working with and maybe any additional thoughts on Indiana and what that impact might look like? I don't know if there's been any update, or any thoughts?

Yes, I think that's a good core number. When we go into the second quarter, we always want to talk a little bit about the increase in salaries and such that come along with our normal calendar year adjustments, a pretty good number. We do spell out the Integra operating costs. So I think you want to be cognizant of those 2 together. Really from Indiana Bancorp, I would say nothing's really changed from our outlook when we initially announced the deal. I think we're in pretty good shape. So...

Steve, you might remember that our full year lift was we get $0.06 to $0.08 in accretable earnings after onetime -- before onetime, excuse me, and then 35% cost saves. And there's nothing that we've seen that would precipitate anything different.

Okay, good. And last question the line utilization, that's great to see it's up. Some of the banks that I've been talking with say part of the reason they're seeing some increase in line utilization is that over the last couple of years, the actual lines available to credits have been cut to some extent. Can you kind of -- how much do you think there's any of that involved in the increase? And how much growth -- or what are your customers saying as far as what the potential going forward?

Stephen, I've got Jim Sandgren here, who runs our largest region within the bank. Barbara Murphy is on vacation. I might just let him answer that question because he sees the clients far more than we do.

Yes; Stephen. We have actually seen our clients' revenues bounce back maybe not to historical levels pre-2008, but they're bouncing back. And receivable bases are up. They're building inventory. So we're seeing the reason for the line utilization going up as just positive from our customer base. So we'd like to continue to see that going forward. But we didn't do too much as far as reducing lines of credit exposure. I'm looking at Daryl, and he's nodding. So it's really been from a core increase in revenues and corresponding increases to receivables and inventories.

Our next question is a follow-up question from the line of Mac Hodgson with SunTrust.

Just a couple of quick follow-ups. Chris, on the merger charges, $800,000 and then $1.7 million of efficiency initiative expenses, were those in other expenses? Or where were they housed, I guess, in the expense line items?

Yes, I think primarily other, Mac.

Okay. And you gave a little bit of color, I think, in your comments on the efficiency initiative, and I didn't quite catch it all. Could you elaborate a little bit on what you're targeting there?

Mac, this is Bob. We did close 31 ATMs in the quarter, and we've got -- as we always do, we've got a variety of different initiatives all with that aspirational target of 65%, that as we get closer to some public announcement of those, we'll let you know.

At this time, there are no further questions. Presenters, do you have any closing remarks?

Just as always, we appreciate your interest. And call Lynell if you have any follow-up questions. And 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 this call will also be available by dialing 1 (855) 859-2056, conference ID code 96399349. This replay will be available through August 13. If anyone has additional questions, please contact Lynell Walton at (812) 464-1366. Thank you for your participation in today's conference call.