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Insurance unit sale to improve Old National's efficiency ratio

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Insurance unit sale to improve Old National's efficiency ratio

During the company's May 2 earnings call, Old National Bancorp executives elaborated on the bank'sdecision to sell its insuranceunit for $93 million in cash.

"Our insurance leadership has done a great job of integratingtheir operations into the culture of the bank, so I can assure you that this isnot a decision we arrived at lightly," said President and CEO Bob Jones. "Butultimately as we look at the returns of this business, as compared to our cost ofcapital and the amount of investment and technology and people necessary to keepus competitive, the decision was made to search for the right partner to sell thebusiness."

Jones explained that the bank initiated the process in late 2015with a few interested parties. He said that Old National wanted to maintain a strongrelationship with the new partner and preserve a referral system for future business.He added that the bank will continue to be "a significant client" of thecompany, branded ONI Risk Partners.

Jones also said that the transaction, to be completed later inthe second quarter of 2016, should improve Old National's efficiency ratio by nearly150 basis points and should boost its tangible book value by more than 7%.

"We anticipate using a large portion of the recognized gainto further improve our operating leverage by terminating our previously frozen definedbenefit plan," he added. "Combined, the organic growth and incrementaloperating efficiencies should more than offset the current contribution from ourinsurance operation."

Executives said that the bank does not anticipate that the saleof its insurance business will impact its earnings in 2016. In terms of its expectationsfor 2017, Old National management said that they will cover the costs in an "efficientmanner."

In terms of Old National's acquisition of Madison, Wis.-based Anchor BanCorp Wisconsin Inc., which closed May 1, Jones said that the bank feels well-positionedin the Wisconsin market.

Executives highlighted Anchor's loan growth in the first quarterof 2016, which they said reflect its strong markets and able team. "At thisstage, the potential exists for our Wisconsin market to exceed the EPS accretionguidance of 4% for 2016 and 9% for 2017," Jones added.

CFO Chris Wolking said that merger and integration costs areslated to be around $18 million, lower than the bank's initial estimate.  He also said that full year 2016 operational costsshould be in line with the bank's fourth-quarter 2015 guidance, excluding the costsavings from the insurance sale. "Assuming the transaction closes later thisquarter, we expect additional cost savings of approximately $18.5 million for 2016from the transaction," Wolking said.

Jim Sandgren, chief banking officer, gave an update on loan growthexpectations during his prepared remarks. He noted that the most recent quartermarked the first time that Old National has seen organic, commercial loan growthin the first quarter, a fact which he said "bodes well for the remainder of2016." Sandgren pointed to strong commercial loan pipelines in "newergrowth markets" such as Ann Arbor and Grand Rapids, Mich. and Lexington, Ky.

In terms of M&A, Jones said that the bank will be "veryselective" in potential deals, but pointed out that he believes opportunitiesexist in Wisconsin; northern Indiana; Louisville, Ky.; and Lexington. Still, Jonessaid that Old National aims to continue to grow its tangible book value while consideringnew opportunities.

On May 2, Old National reported net income available to commonshareholders of $27.0 million, or 24 cents per share, for the first quarter of 2016.That compares to $20.9 million, or 18 cents per share, in the first quarter of 2015.