Jul 29, 2013
Executives
Lynell J. Walton - Senior Vice President and Director of Investor Relations Christopher A.
Wolking - Chief Financial Officer and Senior Executive Vice President Daryl D. Moore - Chief Credit Officer and Executive Vice President Robert G.
Jones - Chief Executive Officer, President and Director
Analysts
Emlen B. Harmon - Jefferies LLC, Research Division Alex Kovtun Jon G.
Arfstrom - RBC Capital Markets, LLC, Research Division Michael Perito - Keefe, Bruyette, & Woods, Inc., Research Division Taylor Brodarick - Guggenheim Securities, LLC, Research Division John V. Moran - Macquarie Research Peyton N.
Green - Sterne Agee & Leach Inc., Research Division
Operator
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?
Lynell J. 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 improvement, with declines in nonaccrual and classified loans, combined with low net charge-off levels and continued low delinquencies.
Our core noninterest expenses were well controlled as we reported a continued improvement to our efficiency ratio. As we continue to review our branch network to transform our franchise from low-growth markets to those with higher growth demographics, we did announce the planned consolidation of an additional 18 branches.
These consolidations should take place in the third quarter. As we look to Slide 6, and as an aid to you in building your models, you'll see a list of other items included in our second quarter results that impacted the quarter in either a positive or negative way.
Looking to the positive items on the left, our strong credit position allowed us to record a recapture of provision for loan losses of $3.7 million. We did receive a $2.1 million benefit from the reversal of provision for unfunded commitments.
Also included in the quarter was a refund of $1.3 million in FDIC assessment. This refund resulted from our filing amended call reports from prior periods.
We should also benefit from lower FDIC in future quarters relating to these amendments and changes. And while not having a financial benefit in our current period, we will see future benefit from our recent announcement to switch to the NASDAQ stock market.
This change, along with various other initiatives, reflect our continued focus on reducing noninterest expenses and achieving our $0.65 -- 65% efficiency ratio target. Reviewing some of the larger negative items on the right side of the slide, we did record a $1.3 million impairment on a bank property held for sale during the quarter.
Also included in the quarter was $1.3 million adjustment to our Indiana deferred tax asset relating to a change in the Indiana statutory corporate income tax rate. While we are pleased with the future benefit we will receive from the lowering of the tax rate from 8.5% to 6.5%, it did require this current period adjustment to our state deferred tax asset.
The acquisition charges in the quarter relate to our Bank of America branch purchase and the BSA/AML professional fees should be the last we see for this project. Now to provide you with more detail, I'll turn the call over to Chris.
Christopher A. Wolking
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 of the original loan mark has been stable at approximately $15 million for the past several quarters. In the second quarter, we recognized $600,000 in loan income from impaired Monroe assets.
Integra impaired assets generated $9.1 million of income in the second quarter and the expected nonaccretable mark declined $2.4 million for the quarter. The current expected nonaccretable component of the original mark is $146.5 million compared to $222.5 million expected at the date of acquisition.
Indiana Community impaired assets generated $4 million in income for the quarter, and expected nonaccretable discount declined an additional $1.9 million after declining $1.6 million in the first quarter. We expect that the ICB accretion will be variable in future quarters as we work out of several large impaired loans.
On Slide 10, I will highlight the growth in total average core ONB loans. I included Monroe loans in our core loan number this quarter and adjusted previous periods to include Monroe in core.
Average loans increased $130.5 million or 3% in the second quarter compared to Q1 2013. This follows a 1.3% increase in the first quarter from the fourth quarter of 2012.
Core loans have increased every quarter since the first quarter of 2012. Slide 11 shows trends in commercial loan growth and production.
The first chart on Slide 11 shows C&I loan balances, excluding covered assets, going back to first quarter of 2010. End of period C&I loans increased 7.2% or $94.4 million from first quarter 2013.
As you can see from the chart, we've seen a pretty steady increase in C&I loans since second quarter 2012. The fourth quarter 2012 course was lifted by the ICB acquisition.
The second graph on the slide shows the trend in an internal performance metric used by our banking business unit to measure commercial and commercial real estate loan production. commercial and commercial real estate loan production averaged $198.8 million per quarter for the 4 quarters beginning third quarter 2012 and ending with this quarter, second quarter 2013.
For the 4 quarters beginning third quarter 2011 and ending second quarter of 2012, commercial and CRE production averaged only $136.6 million per quarter. So for the last 4 quarters, commercial loan production is averaging $62.2 million more per quarter than for the previous 4 quarters.
If we move to the loan pipeline trends on the next slide, you will see another reason we remain optimistic that loan growth should continue for the remainder of 2013. Even with the strong loan growth and production we saw in Q2, the loan pipeline at the end of the quarter was $508 million.
This is our strongest commercial loan pipeline since second quarter of 2012. Moving to Slide 13.
Noninterest income, excluding gains on the sale of securities, was $44.3 million in the second quarter, down $1 million from the first quarter, but up $2.2 million compared to second quarter 2012. I noted earlier indemnification asset amortization expense was $1.5 million, down from $2.3 million in the first quarter.
For accounting purposes, we include IA expense in our total noninterest income. We expect IA amortization expense of approximately $3 million per quarter for the remainder of 2013 but this number may continue to be variable from quarter to quarter.
Service charges on deposits, including overdraft fees, increased $700,000 with the impact of a new deposit fee schedule effective in late April. Service charges are lower than second quarter 2012 however, and we expect deposit service charges to remain under pressure, largely due to continued decline in overdraft presentments.
Fees and wealth management, insurance and brokerage declined $400,000 in the second quarter compared to first quarter of this year. However, they were $1.5 million higher than second quarter of 2012.
Because we received a large portion of our insurance contingency income in the first quarter, the comparison of second quarter insurance revenue to first quarter is not particularly meaningful. Insurance revenue in the second quarter was flat compared to second quarter 2012.
Wealth management revenue and brokerage income are higher than both first quarter 2013 and second quarter 2012. Wealth management revenue was $6.4 million, up from $5.7 million last quarter and up from $5.8 million in the second quarter of 2012.
Brokerage revenue was $4.1 million versus $3.6 million last quarter, and $3.2 million a year ago. Some of the year-over-year increase is attributable to the ICB transaction, but both wealth and brokerage are experiencing good performance in 2013.
Year-to-date 2013 brokerage income is $7.7 million, up 26% over income for the first 6 months of 2012. We expect that brokerage will continue to perform strongly for the remainder of 2013.
Other income was $5.1 million for the quarter, down $2.5 million compared to first quarter 2013. Last quarter included $2.4 million in gains recognized from the sale of 9 branches in our Illinois and Kentucky markets.
On Slide 14, it is important to note that ONB core expenses were virtually flat compared to the first quarter of the year. Second quarter core expenses were $85.2 million for the quarter compared to $85.1 million in the first quarter.
Our annual merit increases were effective in April of this year and accounted for about $600,000 of additional core expenses for the quarter. We expect $4 million to $4.5 million of additional charges related to the Bank of America branch acquisition, most of which should be expensed in the third quarter.
We successfully closed the transaction and converted customer accounts July 12 with approximately $575 million in deposits and $5 million in loans. Deposit balances at closing were about $200 million lower than at the time the transaction was announced in January.
We did build deposit attrition into our model. We expect to have lower operating costs expenses than originally modeled and loan growth has been strong as well.
We are evaluating all of these impacts on expected accretion from the transaction and should have a better idea of 2014 accretion at our third quarter earnings call. We expect additional onetime charges of $2.7 million related to the consolidation of the 18 Indiana Bank branches, which we announced in May 2013, in the third quarter.
These branches will be closed by mid-August and we expect the consolidation to contribute $3.5 million to $4 million annually. And I expect that the benefit will begin to phase in -- will phase in through the fourth quarter of 2013 and be fully recognized in the first quarter of 2014.
Slide 15 should provide some perspective on the success of our acquisitions and the impact of our productivity-improvement projects. Full-time equivalent employees declined to 2,578 from 2,589 at the end of the first quarter of 2013.
Through second quarter 2013, FTE employees had declined 8% from the fourth quarter of 2009. During the same period, total assets increased by 20%.
We should have an increase in FTE employees in the third quarter due to the Michigan and Northern Indiana branch acquisition, but this should be partially offset by the staff reductions from the branch closures. We track these statistics closely and I believe this chart demonstrates our commitment to deploying our branch resources in good markets, our ability to successfully integrate acquisitions and our ongoing commitment to improving productivity at the company.
Slide 16 breaks down our net interest margin in the second quarter and the trends we've experienced over the last 2 years. Net interest margin on a fully taxable equivalent basis was 3.97% in Q2, down from 4.04% in the first quarter.
Core interest margin declined 2 basis points in the quarter to 3.29% from 3.31%. The yield on our investment portfolio declined to 2.89% from 2.96% and was a major contributor to lower earning asset yield in the quarter.
Interest-bearing deposit cost declined to 40 basis points from 42 basis points in the first quarter. Average CD balances declined $84.2 million and were a major contributor to lower core deposit costs.
Repricing of CDs in the third and fourth quarter of 2013 should reduce our interest-bearing deposit cost for the remainder of the year. The bullet point on Slide 16 shows the third and fourth quarter CD maturities and the current cost of these deposits.
Third quarter core net interest margin should be flat to down just slightly compared to second quarter 2013. Core margin will be helped by the repricing of the CDs but may be impacted by the increasing volume of commercial loans and the decisions we make regarding the reinvestment of investment portfolio cash flows.
Net interest income generated by the accretion of purchase accounting discounts translated to an estimated 68 basis points of margin for the second quarter when annualized. Although interest income from purchased assets will likely continue to be variable in 2013, we expect that the Monroe and Integra accretion income will continue to decline during the year.
Slide 17 and 18 provide information on our current sensitivity to rising interest rates. Slide 17 shows 2 interest rate risk scenarios of the several we model.
I've also included an estimate of the output of the model as if we had the Bank of America branch deposits on June 30. The Bank of America transaction closed on July 12 and the deposits we acquired are not included in our published second quarter rate sensitivity reports.
The first scenario models the impact on 2 years of net interest income from a 200-basis-point, instantaneous increase in rates along the entire yield curve. In this scenario, we estimate that cumulative net interest income would decline 5.18% based on our balance sheet as of June 30, 2013, or 2.31% if we used the pro forma June 30 balance sheet that replaces short maturity borrowed funding with the acquired deposits.
The second scenario models a more likely scenario, which uses a series of implied forward yield curves over 2 years. In this scenario, we estimate net interest income would increase 1.67% based on our balance sheet at June 30, 2013, or 1.82% if we use the pro forma balance sheet that includes the acquired deposits.
These models include many assumptions, of course. The most material assumptions driving our rate risk models are related to the repricing of our non-maturity deposits.
We believe we use conservative estimates of non-maturity deposit repricing in our models. In the model outputs I've included on this slide, approximately 40% of our total non-maturity deposits repriced immediately at 62% to 100% of the increase in the federal funds rate.
Moving to Slide 18, you will see a simplistic assessment of our current rate risk and our recent or pending actions. With the increase in long-duration assets on our balance sheet since June 2012, we believe we have become more sensitive to rising rates.
Since November 2012, we have been selling our agency-eligible 20- and 30-year mortgage production and we are currently evaluating a mortgage whole loan sale. We also sold long-duration securities during the second quarter and have executed derivative trades to reduce exposure to rising rates beyond 2014.
Overall, we are comfortable with our current exposure to interest rates but the movement in rates demands that we pay extremely close attention to our balance sheet and the output of our rate risk models. We will continue to evaluate our rate risk and may execute more transactions to maintain or reduce our sensitivity to rising interest rates.
I'll finish my portion of the presentation with Slides 19 and 20, which show our current capital ratios. Because our investment portfolio is primarily accounted for as available for sale, the increase in interest rates during the quarter had an impact on the market value of our investments and other comprehensive income.
Slide 19 shows that common tangible equity declined by $46.5 million due to the change in investment portfolio OCI. I will also point out that we repurchased 500,000 shares of stock in the open market in May at an average price of $12.99 per share, which reduced tangible equity by about $6.5 million.
At 8.65%, we believe our tangible common equity to tangible asset ratio at second quarter will continue to be higher than the average ratio of our peer group. We don't yet have second quarter peer information.
For the past several years, the company has been focused on tangible common equity, in part because we assumed Basel III would disallow trust preferred and include accumulated other comprehensive income and regulatory capital. With the finalization of Basel III rules that will allow us to continue to include trust preferred in and to lead AOCI out of regulatory ratios, we included our tier 1 risk-based capital ratio on my slides this quarter.
Even though we have only $28 million of trust preferred, our high common equity and relatively low risk-weighted total assets shows that we are above the average tier 1 capital ratio of our peers. I'll now turn the call over to Daryl Moore.
Daryl D. Moore
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 was the main driver of this reduced coverage ratio.
The overall recapture of allowance balances of $3.7 million was driven predominantly by the continued lower loss rates in our portfolio, slowing into the loss migration model used in our a ALLL adequacy analysis. As we move to slide 24, you can see that we have displayed the combined allowance for loan losses and loan marks as a percent of the pre-marked loan portfolio for each of our differently tracked portfolio.
Similar to the past quarters, the combined ALLL and mark to pre-mark loan balance percentages appear to appropriately rank and reserve for the risk levels in each of the portfolios, with the Integra portfolio remaining the most troubled, followed by the most recently acquired Indiana Community Bank portfolio. You can see that combined allowance and marks represent roughly 6.5% of the pre-marked Monroe portfolio, 12.76% of the Indiana Community bank portfolio and slightly more than 28% of the Integra portfolio.
Keep in mind that the majority of the Integra portfolio is subject to our loss share agreement with the FDIC. On a combined basis, the allowance for loan losses and loan marks as a percent of the pre-mark loan portfolio is now 4.31% as compared to 4.77% at the end of last quarter.
On Slide 25, we have displayed trends in the second quarter results with respect to portfolio delinquency levels. At 42 basis points, 30 days or greater non-covered delinquencies showed modest improvement from last quarter-end's level of 49 basis points and continue to compare very favorably to peer results.
90-plus-day non-covered loans delinquencies fell in the current quarter, moving from roughly $2 million or 4 basis points of period-end loans at March 31, to $1.2 million or 2 basis points at the end of the second quarter. If you recall, virtually all the prior quarter's increase was related to our residential mortgage portfolio and an issue with our servicer.
A portion of the improvement in this category in the current quarter is attributable to progress associated with this mortgage service initiatives. As in prior quarters, Old National's results continue to be at a level considerably lower than that of our peers, whose average trailing quarter results stood at 52 basis points.
Moving to Slide 26. You can see that within the non-covered portfolio, the trend of significantly increasing criticized loans continued in the current quarter.
Non-covered criticized loans rose $25.5 million in the period as a result of the addition of a number of larger relationships. As you can see from the trend line which excludes Indiana Community Bank, the net increase in this category came in the ONB core portfolio.
Each of the largest borrowers added in the quarter are expected to show improving results over the next 4 to 5 quarters, but we will continue to watch each of them closely and move to reduce any potential loss exposure if improvement does not occur as expected. Moving to Slide 27.
We can see that the trend of falling non-covered classified loans continued in the quarter. On a consolidated basis, classified loans fell by $7.5 million in the second quarter to a level of $68.9 million.
This decline continued the trend of improvement which began in the last quarter of 2012. Over this 3-quarter period, we have reduced non-covered classified loans by $29.6 million or 30%.
As Slide 28 reflects, non-covered nonaccrual exposure fell again this quarter, declining $15.8 million on a consolidated basis. Without the additions associated with the Indiana Community Bank merger in the third quarter of last year, you can see that the trend in this category reflected a modest quarterly decline over a number of quarters prior to the slight uptick in the current quarter.
Overall, we are encouraged with credit quality trends in the bank especially with respect to the highest risk loans in our portfolio, our classified and nonaccrual loans. While we do not see any serious or immediate issues within those large credits that have led to the increase in criticized loans over the last 2 quarters, the trend is certainly worth watching closely.
While it is our belief that the economy will continue to improve over the coming quarters, we are mindful that the current softness in U.S. exports, the reduction in government spending and the possibility of higher interest rates could create potential headwinds for the economy and have an adverse impact on our borrowers.
As the need for increased loan production continues, proper and timely identification of portfolio risk, as well as emphasis on loan structuring, appropriate terms and meaningful covenants, continue to be important points of emphasis within our organization. With those comments, I'll turn the call over to Bob for concluding remarks.
Robert G. Jones
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, and with our entry into new markets, we are encouraged by the prospects for growth for the balance of the year. This is in part reflective of our continued transformation from low-growth markets to stronger markets with more economic activity such as Bloomington and Columbus, and our new markets in Michigan, along with our expanded presence in the South Bend area.
Slide 32 serves as a good review of the actions we have taken since 2004 to improve both the growth characteristics as well as the economics of our franchise. The growth is also the result of the strength of the economies of our markets.
Indiana was recently named one of the top 10 states to do business in by CEO Magazine, and was also ranked in the top 5 states for the creation of manufacturing jobs. The strength of our markets was the reason that the state of Indiana was able to reduce their corporate tax rate.
While it did have an initial negative impact on banks, we believe that the overall long-term effect will be positive in terms of job creation as well as economic development. I might add that the Louisville market has many of the same characteristics and we see the economic activity there strengthening as well.
We are also pleased with the performance of our deposit service charges. The impact of our fee changes enabled us to reverse a negative trend in this line item that had been occurring for some time.
While we are still early in the cycle of our client seeing this increased fees, currently our attrition rate has been below our estimates and only slightly higher than what we would normally experience. As usual, Chris did a great job of discussing our net interest margin as well as the expense management.
From my perspective, the interest rate environment has moved to the top of what keeps our CEO-awake-at-night spectrum. That worry is not so much from our ability to manage this cycle, but from the volatility and rapidity of the changes that we have seen.
As to the efficiency ratio, I continue to believe we are taking the appropriate actions to achieve our target of 65% this year as evidenced from our previously announced closure of the 18 branches that will occur this quarter, which we estimate will provide a full year positive impact of $3.5 million to $4 million pretax. In addition to these closures, we have numerous other activities in place to improve the efficiency of our company that are focused on both revenue as well as expenses.
All this on this call can achieve -- assure you from the board down, we are collectively focused on this goal. I, for one, look forward to the calls when I do not need to reassure you the focus is intact.
Let me now update you on the Bank of America transaction. Chris covered the financial aspects.
I will focus on the conversion and the people side. The conversion went very well.
We had no major issues, either from a systems or a client perspective. As many of you remember, we have a dedicated integration experts on staff and they continue their keen ability to convert with no issues.
In addition to these dedicated folks, we had over 100 volunteers go to our new facilities and act as client and associate ambassadors. These individuals did a great job of reassuring our clients.
We also had another 200-plus individuals working on other key activities over the past weeks. I am continually amazed at how special our associates are day in and day out.
We recently announced that we have hired Phil Harbert as our Michigan Region president. Phil joined us after 28 years at a competitor, the last 7 as their Michigan president based in Kalamazoo.
He will be based in Kalamazoo for us as well, and I can tell you we are absolutely thrilled to have him on our team. He is well connected in the market and has hit the ground running.
In addition to ensuring a smooth transition for our clients, one of Phil's major tasks will be building his team. We are currently recruiting for 2 commercial loan officers, 2 investment advisors, a wealth management advisor, as well as a mortgage originator.
Our pipeline is full of potential prospect and Phil assures us that he will have his team in place very soon. We also have a manager in place for our Michigan indirect line business, who hit the ground running in June.
We have already booked over $1 million in new deals in Michigan and have seen a 100% improvement in production in our expanded Northern Indiana markets. So what's next?
Our M&A pipeline remains very favorable and it is our hope that recent increase in deals will bode well for M&A activity overall. We remain very active in our culling efforts and diligent in terms of adhering to our committed strategic and financial goals.
That will conclude my remarks and I would ask that Holly now open the line for questions. As always, we appreciate your time.
Operator
[Operator Instructions] And your first question will come from the line of Emlen Harmon with Jefferies.
Emlen B. Harmon - Jefferies LLC, Research Division
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?
Robert G. Jones
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.
Emlen B. Harmon - Jefferies LLC, Research Division
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?
Robert G. Jones
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.
Emlen B. Harmon - Jefferies LLC, Research Division
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?
Christopher A. Wolking
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.
Operator
Your next question comes from the line of Scott Siefers with Sandler O'Neill.
Alex Kovtun
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?
Robert G. Jones
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.
Alex Kovtun
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?
Christopher A. Wolking
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.
Robert G. Jones
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.
Operator
Your next question will come from the line of Jon Arfstrom with RBC Capital Markets.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
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?
Robert G. Jones
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.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
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?
Robert G. Jones
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.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
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?
Robert G. Jones
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.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Daryl, would you say the pipeline quality is better than maybe it was a year ago?
Daryl D. Moore
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.
Operator
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.
Christopher A. Wolking
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...
Robert G. Jones
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?
Robert G. Jones
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.
Operator
And your next question comes from the line of Taylor Brodarick with Guggenheim Security.
Taylor Brodarick - Guggenheim Securities, LLC, Research Division
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?
Robert G. Jones
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.
Taylor Brodarick - Guggenheim Securities, LLC, Research Division
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?
Robert G. Jones
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.
Operator
And your next question comes from the line of John Moran with Macquarie Capital.
John V. Moran - Macquarie Research
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?
Robert G. Jones
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.
John V. Moran - Macquarie Research
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?
Robert G. Jones
Yes, it is about $68 million in impact on a quarterly basis from the Durbin Amendment -- no...
Unknown Executive
$3 million to $4 million.
Robert G. Jones
$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.
John V. Moran - Macquarie Research
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?
Christopher A. Wolking
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.
Robert G. Jones
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.
John V. Moran - Macquarie Research
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?
Christopher A. Wolking
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.
Operator
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?
Christopher A. Wolking
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.
Robert G. Jones
Peyton, if you turn to Slide 36, it gives you a little bit view of that in the appendix.
Christopher A. Wolking
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?
Christopher A. Wolking
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.
Robert G. Jones
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?
Robert G. Jones
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
[Operator Instructions] And at this time, we have no further questions.
Robert G. Jones
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.
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 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.