Old National Bancorp Earnings Call INSIGHTS: Ag Exposure, Core Margin

On Monday, Old National Bancorp (NYSE:ONB) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Ag Exposure

Mac Hodgson – SunTrust Robinson Humphrey: Couple of questions, I guess first maybe touch and you kind of mentioned this probably on loan demand. It did seem like utilization rates are up, the pipeline is up, so it does seem like your gain in positive momentum on the loan side where 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?

Robert G. Jones – President and CEO: 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 Marc, its two things. It is 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 have 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 — look guys, we can always continue to look backwards but we’ve got to look forward and we’ve seen a lot more positive activity. 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 bats than we had in the past and I think that’s helped us quite a bit too.

Mac Hodgson – SunTrust Robinson Humphrey: Daryl couple of questions on Ag exposure. Appreciate you’re 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?

Daryl D. Moore – EVP and CCO: I would tell you that as we look down — we 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 and if they aren’t paid out in full, there is 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 have said earlier today the last several years have been very good to farmers and we haven’t had much of that. 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 to many is 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 — almost we’re not going to make the kind of money with revenue insurance if they would and 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, the soybeans are still — that’s an open question whether that will help the farmers or not.

Mac Hodgson – SunTrust Robinson Humphrey: The lines generally do shortly after harvest, I mean how does that – are they on a year roll?

Daryl D. Moore – EVP and CCO: Most of them are on a year roll, our best customers sometimes will put on a three-year roll with covenants where 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 the line of business we’ve been in for a long time and we know that you’re going to have these years. We are not panicking, we’re going to as much as we can support our farmers through this, just something happens in this industry.

Mac Hodgson – SunTrust Robinson Humphrey: Was the Ag, the driver of the increase in special mentioned?

Daryl D. Moore – EVP and CCO: It was not. There were no Ags in that special mentioned increase.

Mac Hodgson – SunTrust Robinson Humphrey: Could you give any color on what drove the increase?

Daryl D. Moore – EVP and CCO: About half of it was commercial real estate, non-owned or 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 one off and say well this one is kind of unusual, and this one is kind of unusual 10 in a quarter of your top 20, yeah I could probably make an argument for seven or eight 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.

Core Margin

Scott Siefers – Sandler O’Neill & Partners: Chris, I guess the first question is probably most appropriate for you. I guess on a core basis the margin seems to be holding in probably a little better than I might have thought and I appreciate 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 few months ago and where do you see the best opportunity to keep that base of core margin sustain?

Robert G. Jones – President and CEO: On the core. Yeah. I think problematic, obviously is just reinvestment in the investment portfolio. We still get $50 million plus 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, 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 is 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 the liabilities, we don’t have that much in wholesale funding, but we’re fortunate to have gotten to call that sub-debt, so that will help us too. So, I am reasonably optimistic on the margin given the continued pressure we are seeing on asset yields the fact that liabilities continue to give us some opportunity to improve that margin is good.

Daryl D. Moore – EVP and CCO: Scott, I might add too. We’re foreseeing growth, we continue to see growth in non-interest-bearing DDAs, it seems like quarter-over-quarter, it’s like – is just no stopping it. Relatively speaking, there is not much cheaper than 25 basis points wholesale funding, but pre-DDA is still pretty good, so we’ll take it.

Scott Siefers – Sandler O’Neill & Partners: Then Bob, I was just hoping you could maybe touch on the M&A environment just sort of the things you are seeing at a top level, obviously you guys have been active and still remain very interested, but 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 and things like pricing overall interest in selling, et cetera?

Robert G. Jones – President and CEO: 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 just tried to put together their plans. We continue to have very positive conversations with potential sellers and the reality is there is still a slight disconnect between solar expectations and our expectations, but I think that gap is beginning to narrow as people look out. The other real impetus I have seen Scott is Basel III. I think it’s created a real just almost care 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 it for a while, but my sense is that the activity is picking up and I think realism is beginning to hit in for all of us.