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Old National Bancorp (NASDAQ:ONB)

Q2 2014 Results Earnings Conference Call

July 28, 2014, 11:00 AM ET

Executives

Lynell Walton – SVP & Director of Investor Relations

Jim Sandgren - Region Chief Executive Officer

Chris Wolking - Senior Executive Vice President-CFO

Daryl Moore - EVP-Chief Credit Officer

Bob Jones - President & CEO

Joan Kissel - Principal Accounting Officer

Jim Ryan - EVP and Director of Corporate Strategy & Development

Analysts

Taylor Brodarick - Guggenheim Securities

Jon Arfstrom - RBC Capital Markets

Michael Perito - Keefe, Bruyette & Woods, Inc.

Operator

Welcome to the Old National Bancorp Second Quarter 2014 Earnings and Acquisition Announcement Conference Call. This call is being recorded and has been made accessible to the public in accordance with SEC's Regulation FD. The call, along with the corresponding presentation slides, will be archived for 12 months on the Investor Relations page at oldnational.com. A replay of the call will also be available, beginning at 8:00 a.m. Central Time on July 29 through August 12. To access the replay, dial 1855-859-2056, conference ID code 73472033.

Those participating today will be analysts and members of the financial community. At this time, all participants are in 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?

Lynell Walton

Thank you, Holly, and good morning, everyone. Joining me today on Old National Bancorp's second quarter 2014 earnings and acquisition announcement call are Bob Jones, Chris Wolking, Daryl Moore, Jim Sandgren, Jim Ryan and Joan Kissel.

Some comments today may contain forward-looking statements that are subject to certain risks and uncertainties that could cause the company's actual future results to materially differ from those discussed. Please refer to the forward-looking statement disclosure contained on Slide five, as well as our SEC filings for a full discussion of the company's risk factors.

Additionally, as you review Slide six, 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.

We've got a lot to review with you this morning. First we'll provide a detailed analysis of our second quarter earnings and then we'll discuss our announced acquisition of Founders Financial Corporation and entry into the vibrant Grand Rapids, Michigan market.

I'll start on Slide seven, where you can find highlights of our performance as they relate to our 2014 initiatives. Increase in core revenue, reducing operating expenses and transforming the franchise into higher growth market.

As we focus on core revenue growth, arguably the most significant highlight of the quarter is the $139.6 million or over 11% annualized organic loan growth we experienced in the second quarter, which was spread across all loan categories.

Year-over-year, we grew loans $214 million or 4%. This loan growth is net of loans acquired through acquisitions and excludes the change in covered loans and that's equally important with the over 4% increase in total revenue excluding securities gains, accretion income and a change in our indemnification asset.

Banking, wealth management and insurance, all contributed to the improvement over prior year. As we work diligently to reduce our non-interest expenses, we were pleased to see a year-over-year reduction in quarterly operational expense. Of course we remain keenly aware of the cost saves we announced to you with our recent acquisition.

Looking at our Tower acquisition, we recently completed as well as the United acquisition set to close in just a few days, I am pleased to report that expected cost saves are tracking with what we anticipated at announcement date.

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

Moving to Slide eight, you'll see we reported net income this morning of $18.8 million or $0.18 per share. When analyzing our current quarter performance, it is important to note the following items on the slide, which negatively impacted our second quarter 2014 earnings.

The first is a $6.3 million in pretax merger and integration expenses and that amount is consistent with the $6 million to $8 million we discussed with you on our last quarterly call. The second is a $10.5 million unfavorable pretax change in our indemnification asset and Chris will provide more clarity on this item in his remarks.

And for those, I'll now turn the call over to Chris.

Chris Wolking

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

Over the last several quarters, we've discussed the impact of accretion income and the indemnification asset amortization expense on our earnings, but we believe this chart represents the sustainable long term benefit of our work at Old National.

Most notably, the chart shows the benefits of our acquisitions. The bars represent annual income before tax through 2013 minus the expenses associated with acquisitions and divestitures, minus accretion income and minus the impact of the changes in the Integra related FDIC indemnification asset.

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

Slide 11 shows core revenue increased 4.1% over second quarter 2013. Total revenue for the quarter was $122.4 million, down slightly from first quarter of 2014 and from second quarter of 2013.

We account for changes in the FDIC indemnification asset as revenue and the change in the IA generated a cost in the quarter of $10.5 million. This cost was the driver of lower revenue and masks our strong increase in core revenue.

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

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

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

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

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

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

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

Operational cost in the second quarter of $84.7 million compared to costs for $85.2 million in the second quarter of 2013 and $83.6 million in the first quarter of this year. Majority of the increase from the first quarter was related to annual merit increases.

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

As you can see from our models on slide 14, we are asset-sensitive and net interest income should increase with the rise in interest rates, either if rates change as the market currently expects or with the 200 basis point increase in interest rates all along the yield curve.

We intend to continue to manage our balance sheet to maintain an asset-sensitive risk position by lengthening the repricing of our liabilities, reducing the duration of our investment portfolio and selling most of our new fixed rate mortgage loan production.

My final slide, slide 15 shows our tangible book value per share from 2011 through second quarter 2014. Our Tower loan fair value mark was approximately 7% in closing, less than the 14% we estimated when we announced the transaction. As a result, our tangible book value per share after closing the Tower transaction was higher than we originally estimated.

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

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

I’ll now turn the call over to Jim Sandgren

Jim Sandgren

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

If you’ll turn to slide 17 you can see that our loan growth over the past 12 months excluding covered loans has been driven by a combination of partnership activity and solid organic growth. The $360 million in loans obtained through the acquisitions included $355 million from our Fort Wayne-Tower partnership and $5 million from our Bank of America transaction.

The $214 million we experienced in organic loan growth was boosted by a strong second quarter that included an increase of $76 million in commercial and commercial real estate loans and additional growth indirect lending.

While we enjoyed success in a number of our markets, I was especially encouraged by increased production in our two largest markets, Louisville and Indianapolis, as well as one of our newest markets, Michigan.

I also want to note that the loan sale of $109 million depicted on this slide took place in the third quarter of 2013 and included $96 million in residential mortgages and $11.6 million in commercial leases.

Moving to slide 18 you can see that we continue to build upon a positive momentum in our commercial loan pipeline that I shared with you last quarter. This is particularly good news, given an excellent production we experienced in Q2.

We have seen meaningful growth in the commercial pipeline in some of our newer markets Bloomington, Columbus and Fort Wayne, as well as in a couple of our legacy markets, Evansville and Terre Haute.

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

Similar to the organic loan growth we are experiencing, I believe the positive momentum we are witnessing in our commercial loan pipeline and line utilization could be attributed to increased consumer confidence directly related to a slowly, but steadily improving economy.

We believe this will continue to provide us with opportunities in all of our markets, and we are extremely confident that we have the right people and products in place to take full advantage of these opportunities.

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

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

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

With that I’d now like to turn the call over to Daryl Moore.

Daryl Moore

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

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

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

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

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

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

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

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

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

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

Bob Jones

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

We committed to organic growth and this quarter saw strong loan growth and good fee-based business revenue growth which led to an overall growth in revenue. We committed to strong expense management.

Excluding the cost associated with our recent acquisitions, our operating expenses year-over-year were down. More importantly, we have covered the additional cost of compliance and we’ve yet to realize the full benefits of the Tower integration or any benefits from the United integration or the number of projects we continue to execute and then improving our efficiency.

We committed to transform our franchise from lower growth small markets to a franchise with a strong growth markets throughout Indiana, Michigan and Kentucky. And as part of that committed strategy, we identified key markets we want to be located in to improve our growth profile.

Our entries into Columbus, Bloomington, Michigan and Fort Wayne clearly are important part of that growth that we saw this quarter. And as I will discuss later, we feel very good about the impact these and our other new markets will have on our future financial performance.

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

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

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

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

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

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

With our United Ann Arbor transaction we expect to close on 7.31 with our conversion on 8.22. All of our sales team is in place and moral is excellent, which is a real testament to Todd Clark and his team. We’ve already had two mock conversions which both went very well. And at this stage, we would expect our cost season earnings to be as promised or slightly better.

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

As I move into a discussion of today’s announcement, the recap I gave you serves as a good foundation to introduce Founders. We spoke with you many times about our desire to transform our franchise into higher growth market. And as such, we had very defined markets we wanted to expand in.

Those are Bloomington, Columbus, Fort Wayne, Northern Indiana and Southwest Michigan which we defined as Ann Arbor, Kalamazoo and Grand Rapids, as well as the Louisville market. And as such, we have been very targeted in our approach identifying key banks that we would like to partner with in these efforts.

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

Let’s turn to slide 25 to review today’s announcement regarding Founders. Today we are pleased to announce that we’ve executed an agreement to enter the Western Michigan market by partnering with Founders Bank and Trust. Founders represents the ninth largest bank in Grand Rapids based on June 30, 2013 data.

They are also the fourth-largest Michigan-based institution in the market, and have had a history of 16 years of serving this vibrant market. We have deep, deep respect for their leadership team and feel that this is a perfect complement to our Michigan strategy and it completes the foundation from which we can build our franchise in Michigan.

On slide 26 we provide you with more background on the West Michigan market. With a population of over 1 million Grand Rapids is the second-largest market in Michigan and arguably one of the strongest and most promising markets. Grand Rapids will represent a third-largest market for Old National in terms of population.

The market has a very strong economic base; the unemployment in May was 5.4% with the employment being driven by a number of Grand Rapids-based businesses you’ll be familiar with like Amway, Steelcase, Meijer and GFS amongst the largest employers.

On slide 27 we do detail the transaction. The aggregate deal value based as of the close of the market on July 25 is $88.2 million. The consideration given to Founders’ shareholders is approximately 54% stock with the remaining 46% in cash.

At this price it represents a price for tangible book of 210% and 15 times 2013 earnings. While we acknowledge that the price is on the higher side of the Midwest deals, I would note that this was a very competitive auction. And more importantly, we feel that this deal has very compelling strategic and financial benefits to Old National.

I have discussed the strategic value of this in terms of solidifying the foundation that we design as we look to build on higher growth profile for our investors. The financial benefits are as attractive as the strategy. We estimated the deal after one-time charges will add approximately $1.7 million or $0.02 per share to our 2015 earnings, and then $9.5 million to $12.5 million or $0.05 to $0.07 per share thereafter.

Using these estimates we calculate intangible book value earn-back of 5.25 years which is inclusive of the estimated $7.8 million in transaction cost. We do expect cost saving to be slightly above 30% and we do estimate that we’ll get 67% of these in 2015 and the balance of those will come in at early 2016. The total loan portfolio mark is estimated at 6.1% with 3% of that being the credit component. And even after this transaction we will exceed all well-capitalized guidelines.

In closing, while purely by coincident, combining the announcement of our second quarter earnings with our new entry in the Grand Rapids does allow us to continue to ratify our growth strategy with you. The revenue and loan growth that we experienced in this quarter is a direct reflection of the emphasis our company has put on prudent growth, much of which was driven by the markets we have entered over the last few years.

When you combine that with our continual focus on expenses, we believe that meets our strategic imperative of providing our investors with consistent quality earnings. Today’s announcement of the Founders partnership is provides us with an entry into a very strong market with a terrific leadership team, much like our previous partnerships.

With all of the hard work and effort that our team has put into transforming our franchise we believe we are very well-positioned for the future in very strong markets with much more discipline around expenses and a continual focus on strong credit. Which is why, as I said in our first quarter call, I am as optimistic about the future of our company as I have been in the 10 years at Old National. Not to say we do not have work to do, we know that we do, but we have the right people in the right markets all committed to working for our shareholders.

With that Holly, we’ll be glad to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Okay. And your first question will come from the line of Taylor Brodarick with Guggenheim Securities.

Bob Jones

Good morning, Taylor.

Taylor Brodarick - Guggenheim Securities

Morning, everyone. Congrats on the deal.

Daryl Moore

Thank you.

Taylor Brodarick - Guggenheim Securities

First question, I was looking at the deck from the United announcement in January and where the kind of restructuring cost came in at? It seems like they’re going to be a lot lower than anticipated, am I reading that correctly?

Daryl Moore

Let me just pull that. I’m looking at that. We estimated -- bear with me…

Taylor Brodarick - Guggenheim Securities

I have $18 million.

Daryl Moore

Yeah, we got about $18 million. In our senses that will be that will be less than that and I think Chris covered what we expect to take this quarter, but they'll be slightly less than the $18 million.

Taylor Brodarick - Guggenheim Securities

Okay. Okay, so the three to five is going to be mostly united for 3Q.

Daryl Moore

Yes almost entirely. A little bit of LSB.

Taylor Brodarick - Guggenheim Securities

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

Jim Sandgren

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

Bob Jones

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

Taylor Brodarick - Guggenheim Securities

Okay, great. Thanks Bob and I guess last question, sounds like Jim Ryan is going to be going back and forth to Louisville from his comments. That’s where the last…

Bob Jones

Everybody knows he can’t -- we’ve been very lucky that we identified markets we want to be in and actually Jim did a great job of identifying potential partner banks and stars and the moon aligned.

Louisville is a great market, got great institutions and my sense is there’s a lot of people who want to remain independent and they’re in Louisville but we’re available if anybody is looking for a good partner.

Taylor Brodarick - Guggenheim Securities

Thanks everybody.

Chris Wolking

Taylor, its Chris Wolking. I might just add that the total cost that we talked about in our announcements include those costs that are absorbed in our income statement as well as the income statement of the partnership bank.

So those costs -- the costs that we provided at $3 million to $5 million would be those expenses we’d expect to see on our income statement as we wind down the UBI -- UBMI acquisition and get involved in the next transactions as well.

Taylor Brodarick - Guggenheim Securities

Okay. Thanks Chris.

Operator

[Operator instructions] Okay. We do have another question queued, the line of Jon Arfstrom with RBC Capital Markets.

Jon Arfstrom - RBC Capital Markets

Bob Jones

Good morning, Jon, how are you?

Jon Arfstrom - RBC Capital Markets

Good morning. Doing great.

Bob Jones

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

Jon Arfstrom - RBC Capital Markets

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

Bob Jones

Yeah, great question. Jim Sandgren is probably the closest to answer that.

Jim Sandgren

Yeah, certainly the fact that we are in more growth markets I think that has certainly helped but as I alluded to, I think the slowly improving economy are giving us more opportunities to look at deals.

Obviously very competitive out in the market today, but I think it’s a combination of us being in the right markets, more growth markets as well as our borrowers are really starting to feel a little bit more comfortable about the economy and willing to invest in growth strategies for their businesses.

Bob Jones

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

Jon Arfstrom - RBC Capital Markets

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

Bob Jones

I think with the improving economy Jon and what we’re hearing from borrowers as they continue to talk about expanding inventory and producing more -- I am reasonably optimistic that you get to that level much more so that I would have been a year ago.

One of more challenges is we have had a couple of large line users if that’s proper English that once sold their company and they were historically a big borrower, but I think other than that I am reasonably comfortable being pretty close to that.

Jon Arfstrom - RBC Capital Markets

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

Chris Wolking

It's always hard to look too far out on the margin, but I will tell you Jon that seeing the loan growth, and thinking in terms of those of investment portfolio cash flows being reinvested into loans, I really like that -- that move and as you know, we’ve always maintained a fairly high percentage of our earning assets in the investment portfolio and we’re trying to be very careful about where we’re placing that.

So I think long term that benefits the margin. Our good deposit base benefits the margin long term, particularly if rates start to go up, but I really like the dynamic of the improved earning asset mix.

Jon Arfstrom - RBC Capital Markets

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

Chris Wolking

I think that’s fair. You know what we see here -- have seen here recently is much of that accelerated amortization expenses due to the improvement of some large assets that we’ve got remaining in that portfolio.

As we look forward we don’t have as many large potential asset quality improvements as we’ve had recently. There’s still a couple left, which could drive the amortization expense around but you’re right, we were at I think about $38 million at the end of last quarter and we’re down to $28 million.

You wouldn’t normally have expected that much amortization with still two years left remaining in the commercial indemnification period. So we’re watching it closely. We’ll certainly call out those changes and to the extent that the expected expense changes we’ll make sure to let you all know about that as well.

Jon Arfstrom - RBC Capital Markets

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

Bob Jones

Yeah we think Grand Rapids is a great market. We think it’s also a market that is looking for a bank of our size that is deeply committed to the communities like we are and we've kind of -- as everybody may remember both Chris and Jim worked at the former Old Kent and there’s a lot of opportunity for us to come in and replicate what Old Kent did and we think there’s great opportunities in these markets.

So we’re committed to continue to build here and look for the right way to do it but saying that with Lori and Greg in the management team here at Founders, we’re very comfortable that they can do some great things given their resources.

Jon Arfstrom - RBC Capital Markets

And so they -- would you consider de novo and larger lending limits and more hiring, is that the initial plan?

Bob Jones

Well you know they’re going to have larger lending limits because clearly our capacity to lend is much better than the Founders. We do believe there maybe some opportunities to expand staff up in these markets again based on a lot of -- our guys have connections and our Kalamazoo market’s not that far away.

Chris and I debate de novo entry. We’re looking at it again Jon. It maybe a prudent way to expand a little bit but we’ve got some other markets today like Louisville and others that de novo also may make some sense. So we’ve those conversations, but I think given the footprint that Lori and Greg have here we know we've got a lot of good upside.

Jon Arfstrom - RBC Capital Markets

Yep. Okay. All right, thanks for the time.

Bob Jones

Thanks Jon.

Operator

And your next question will come from the line of Michael Perito with Keefe, Bruyette & Woods, Inc.

Michael Perito - Keefe, Bruyette & Woods, Inc.

Hey everybody.

Bob Jones

Michael, how are you?

Michael Perito - Keefe, Bruyette & Woods, Inc.

Good. How are you guys?

Bob Jones

Good.

Michael Perito - Keefe, Bruyette & Woods, Inc.

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

Bob Jones

Yeah, great question. So let me address the first. You know clearly I learned a valuable lesson in Fort Wayne as I said to you all and I've said publicly before. I made some serious mistakes in Fort Wayne and I don’t want to do that again. So I will tell you that we’ve already got retention plan in place.

Greg and Lori have looked at it. It’s the quickest we’ve ever put in place a retention plan and again I think Lori and Greg are fully on Board and you never say never but I feel very good about where we are in terms of retention of our associates.

And again we’re going to be opportunistic in looking for ways to grow up here. Again both Chris and Jim have a lot of contacts up here. I am sure their emails have been buzzing but it’s up to us to prove that as I am going to say the associates at Founders this afternoon, we’ve got to earn their trust and respect and I think we’ve got to earn the market’s trust and respect that we do the things we say we do and if we do then I think we have an opportunity to expand our -- our associates here.

Michael Perito - Keefe, Bruyette & Woods, Inc.

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

Bob Jones

Great question and I am not so sure that -- as I have said in my remarks and I think Chris will reiterate, we’ve built a foundation and now is the time that we can continue to execute and be a little more opportunistic. We look at the markets we’re in. We have great people. We are in the right markets we want to be in and what I would like to be bigger in Louisville absolutely is there are scenarios in Northern Indiana that could be bigger.

But right now we’re really looking at the end market to build upon the foundation. So I think -- quite frankly, in all candor, I think there are probably some investors that will want us to take a deep breath and prove that we’ve used their capital in the right way. I don't know Chris do you have anything to add to that?

Chris Wolking

So we’ve always talked about -- Michael about our priorities and our opportunities to use capital and we’ve always agreed that organic growth was at the very top of the list and acquisitions and returns of capital was below that.

So absolutely and obviously it takes energy from our lenders, it takes enthusiasm by our customers and it takes the new markets to gain some traction for all of that to happen and we’re perfectly willing to do whatever it takes to make sure we’re doing what we think is best for the capital for you all.

Michael Perito - Keefe, Bruyette & Woods, Inc.

All right. Thanks a lot of guys. I appreciate.

Bob Jones

Thanks Michael.

Operator

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

Bob Jones

Well great. I should’ve said this in the beginning, we do apologize for kind of giving earnings and then our partnership announcement all in one, but it’s purely by coincidence, but as I said, I think it allows us to continue to put and illuminate our strategy.

If you have follow-up questions, as always, Lynell is in (812) 464-1366 or drop her an email. We appreciate everyone’s intent and we look forward to talking with you in the Fort. Thanks everybody.

Operator

This concludes Old National’s call. Once again a replay along with the presentation slides will be available for 12 months on the Investor Relations page of Old National's website, oldnational.com.

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

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