Welcome to the Old National Bancorp Second Quarter 2021 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance within the SEC’s Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for 12 months.

Management would like to remind everyone that certain statements on today’s call maybe forward-looking in nature and are subject to certain risks and uncertainties and other factors that could cause actual results to differ from those discussed. The company’s risk factors are fully disclosed and discussed within the SEC filings.

In addition, certain slides contain non-GAAP measures, which management believes provide more appropriate comparisons. These non-GAAP measures are intended to assist investor’s understanding of performance trends. Reconciliations for these numbers are contained within the appendix of the presentation.

I would now like to turn the call over to Jim Ryan for opening remarks. Mr.

Ryan?.

Thank you and good morning. Starting on Slide 5, we are pleased to share our second quarter results and an update on our recently announced partnership with First Midwest Bank. I would characterize this quarter’s results as right on plan.

Adjusted earnings per share were $0.41 when adjusted for specific merger charges, ONB Way cost, and debt securities gains. During the quarter commercial loans excluding PPP loans grew nicely at 11%.

Our net interest margin was stable, capital markets and wealth management revenue were stronger, and mortgage revenue was down but consistent with our expectations with a lower pipeline valuation and a smaller gain on sale margins. Expenses were well managed and slightly higher primarily due to merit increases and higher incentive accruals.

Credit quality metrics remain benign. Adjusted return on average tangible common equity was a strong 14.6% and the adjusted efficiency ratio was just under 58%. During the quarter we worked hard with our clients on the SBA forgiveness process.

83% of Round 1 loans have been forgiven by the SBA and we already have 18% of Round 2 loans through the forgiveness process. Most of our reported credit quality metrics improved during the quarter. We have reduced reserves consistent with our modeling as a result of the better expected economic forecast and the massive stimulus programs.

We still have approximately 30% of our reserves supported by qualitative adjustments given the higher than average level of economic uncertainty that exists today. The further we move beyond the pandemic’s economic shock, the more confidence we will have in taking our reserve closer to Day 1 CECL.

A quick update on hiring, we continued to add significant talent during the quarter. The cost of the increased investment in talent will start impacting our expenses slightly in the back half of the year. Our talent pipeline remains strong, we have a fantastic story to tell, and we have strong interest from new team members wanting to join.

Moving to Slide 6 which contains a quick refresher on some of the more salient details of our merger with First Midwest. I will not bother reading the Slide but I will share that I am reminded each time that I'm with our First Midwest colleagues, how much our cultures are aligned and how strong our strategic fit truly is.

Additionally, conversations with investors and sell side analysts confirmed they understand and agree with our strategic rationale. Moving to Slide 7 both companies have a tremendous integration history and experience and our work is off to a good start. We have made the appropriate SEC filings and regulatory applications.

Kendra Vanzo and Jeff Newcom have been appointed to lead the merger integration efforts and we have assembled a group of over 350 team members from both companies to help with the integration. We have met with client facing and support team members from both companies and they're all excited and engaged.

Additionally, the management team and outside advisors are deeply involved in making technology selections which we hope to finalize this summer. We also expect a special meeting of shareholders to be held in the third quarter for each company.

And lastly despite the ongoing distraction from the pandemic and now our transformational merger we have remained focused on serving our clients and communities and I think our results illustrate the success of those efforts. I will now turn the call over to Brendon. .

Thank you Jim. Turning to Slide 8, our GAAP earnings per share are $0.38 while our adjusted earnings per share was $0.41. Adjusted earnings exclude $6.5 million in early merger related charges, $0.7 million in debt securities gains, and the last of our ONB Way related charges of $0.4 million.

Slide 9 shows the trend in commercial loans and the related commercial pipeline and production trends all excluding the impact of PPP loans. Q2 represents our fourth consecutive quarter of organic loan growth and over that year commercial outstandings have grown more than $1 billion.

Q2 commercial production of $1.1 billion was the second highest on record resulting in a $250 million increase in outstanding’s over prior quarter. Commercial activity continues to be strong throughout the footprint, and we are heading into Q3 with a very healthy $2.6 billion pipeline.

Turning briefly to pricing, Absolute Coupons and new business continues to be impacted by the low rate environment and a high percentage of floating rate versus fixed rate [production] (ph). However, spread and risk adjusted returns are strong and have remained consistent throughout this rate cycle.

The investment portfolio increased slightly in the quarter as deposit growth once again outpaced total loan growth. We are taking a disciplined approach of putting excess liquidity to work on our investment portfolio with new money yields of 1.53% and a portfolio duration well within five years.

Moving to Slide 10, average deposits increased 11% while the growth in period end balances have moderated. Total cost of deposits for the quarter was a low six basis points, a one basis point improvement over Q1. Next on Slide 11 you will see details of our net interest income and margin.

Net interest income increased $1.8 million quarter-over-quarter largely due to our strong commercial loan growth. Excluding the impact of PPP interest income increased $2.4 million which was slightly better than expectations as the impact of earning asset growth more than offset the decline in asset yields.

Net interest margin climbed three basis points to 2.91% from prior quarter, primarily due to the low rate environment impact on asset yields. Core margin excluding accretion and PPP declined just two basis points to 2.72%. Slide 12 shows trends in adjusted non-interest income.

Adjusted non-interest income was $51 million in Q2, $4 million lower than the $55 million we recorded in the first quarter. The decline was primarily driven by lower mortgage banking revenue that was partially offset by quarter-over-quarter improvements in all of our other major fee categories.

The decline in mortgage revenues reflects the macro headwinds impacting the industry today. While mortgage production was largely flat from Q1, a decline in both the size and value of the secondary pipeline resulted in a $5.6 million decrease in revenue.

I would also remind you that Q1 was positively impacted by $1.2 million recapture of prior year’s MSR impairment charge. Next Slide 13 shows a trend in adjusted non-interest expenses. Adjusting for merger charges, ONB related charges and tax credit amortization, non-interest expense was $121 million.

These results were consistent with their expectations and our Q1 guidance. Turning to PPP loans on Slide 14, you will see a roll forward of those balances, which stood at $721 million at quarter end.

We continue to assist PPP clients with forgiveness with approximately 83% of Round 1 and 18% of Round 3 loans formally through the SBA forgiveness process. Unamortized fees on the remaining PPP loans totaled $26 million.

We continue to believe that most of the remaining loans will be forgiven and the related fee income recognized in the second half of 2021. With that, I will turn it over to Daryl to discuss credit. .

Great, thank you Brendon. As we've presented in the past this quarter’s Slide 15 reflects the performance of our loan portfolio, both on a current quarter and historical trend basis. Total 30 day delinquencies continued their improving trend for a fourth consecutive quarter falling to nine basis points at the most recent quarters end.

As our commercial delinquencies have historically been on the low side, the improvement we have seen over the past several quarters has been concentrated in retail portfolio with lower than historic delinquency rates in the 1 to 4 family residential mortgage, indirect auto, and HELOC portfolios.

Government payments and higher levels of savings due to reduced spending during the pandemic have almost certainly been a contributing factor to the lower retail delinquency numbers.

While the effect of these things will diminish over time, many of our borrowers will benefit from the child tax credit payments, which began last week and will continue at minimum at least through the end of the year. With all that being said, these extremely low levels of delinquencies are in my opinion unsustainable in the long run.

Net charge offs continued well-contained with a $300,000 recovery posted in the quarter. While total recoveries were slightly lower than last quarter, and at the lowest level posted over the last six quarters, gross charge offs were less than a million dollars, which led to the net recovery for the period.

Non-performing loans fell for the second consecutive quarter, mainly on the reduction of non-accrual loans in the period. As you can see the gap between Old National and its peers in this particular metric has favorably narrowed over the last several quarters.

We continued to perform well in the net charge offs and non-performing measurement category with net charge offs as a percentage of non-performing loans being well south of 5% over the last six years. This as you can see is significantly lower than peer levels over the time period.

As a closing comment, I would say that the challenges our borrowers are currently facing are much different than what we might have imagined 15 months ago. On the C&I side the most significant challenges many of our clients seem to be facing are supply shortages and the lack of dependable, adequately trained labor.

Additionally, we may see impacts on margins going forward with borrowers who are unwilling or unable at the present time to pass along higher input costs to customers. On the commercial real estate portfolio front, we think all banks continued to watch and see what long-term impacts the pandemic might have on the retail and office portfolio segments.

With those comments I'll turn the call back over to Brendon. .

Thank you, Daryl. On Slide 16, you will see the details of our second quarter allowance, which stands at $109 million, a decline of $4.6 million from Q1. The improving economic outlook and the positive trends in credit quality supporting modestly lower reserve levels.

That said, we recognize that not all sectors of our economy have recovered and the threat of future COVID related disruption persists. As a result, we believe it is prudent to maintaining larger than normal qualitative reserves until we have greater clarity on the economic outlook.

I would also like to remind you that we continue to carry $41 million in unamortized mark from our prior portfolios. While these marks will not directly offset charge offs, any remaining mark will increase your margin upon resolution. As I wrap up my comments here are some key takeaways, we are very pleased with the fundamental results of the quarter.

Double-digit commercial loan growth with a higher core net interest income despite interest rate headwinds. Mortgage revenues were down due to pipeline valuation and normalizing margins while all our other key businesses posted quarter-over-quarter improvements.

Expenses remained well-controlled and our strong credit quality continued to keep credit cost low. Slide 17 includes thoughts and our outlook for 2021. We ended the quarter with a healthy $2.6 billion commercial pipeline, which supports our favorable outlook on loan growth.

This historically low interest rate environment will continue to put pressure on net interest income, which should be mitigated through continued earning asset growth.

The PPP loan forgiveness process continues for our Round 1 and Round 2 clients and we expect runoff of Round 2 balances to occur in the latter half of 2021 and the recognition of most of the related $26 million in unamortized fees to occur at that time. We expect our fee businesses to continue to perform well.

We are encouraged by the momentum in our wealth business and the strong commercial activity should help maintain the high level of performance in our capital markets business.

While mortgage revenue will continue to follow industry trends, current production levels and gain on sale margins should support quarterly revenue consistent with Q2 throughout the remainder of the year. Our other fee lines are expected to be stable in the near-term. A broad look on expenses is consistent with our prior guidance.

We expect a modest increase in the back half of the year as our efforts to attract top revenue talent picks up momentum. Lastly, a brief update on taxes. We continue to expect a reduction in the volatility caused by our tax credits as we worked through the last of the remaining one-year historical tax rate commitments.

In total we were expecting approximately $5 million in tax credit amortization for the year with a corresponding full year effective tax rate of approximately 21%. With that, we're happy to answer any questions that you may have, and we do have the full team here, including Jim Sandgren and John Moran..

[Operator Instructions]. Our first question comes from Ben Gerlinger with Hovde Group. Your line is open..

Good morning guys. I wanted to start off with just loan growth in general. You guys seem to have pretty consistently beat both Midwest and national peer growth trends over the past, let's call it four quarters or so. I know you guys have done a great job getting out in the markets.

I was wondering if you could shed a little light on to kind of the secret sauce, if you will, of what Old National is doing to not only exceed peers, but also have pretty sustainable growth really for the past four quarters?.

Yeah. Ben, this is Jim Sandgren. I don't know if there's any secret sauce, obviously we're up -- we're a strong relationship bank. We've been out calling on customers really for the last 12 months. Well, many other banks [sadly] (ph) were working from home and so that provided us an opportunity to serve our clients. We brought in a lot of new prospects.

I think we were pretty opportunistic as other banks might've changed kind of their credit stances. So, I just think it's kind of blocking and tackling, being out, helping our customers when they need us. And so that mentality has carried throughout the year and has certainly helped us as we've started the first half of this year.

Obviously pipelines look good for the back half of the year. And so again, I think, I don't know if there's any secret sauce. I think the fact that we restructured through the ONB Way and aligned skill sets of our relationship managers with the client needs, I think that's played a major as well.

But, I just think it's the fact that we are out and building strong relationships and being there for our clients and being an opportunistic for those new relationships as well. .

You know Ben I would just add, it's all hands on deck. I'm going to spend the next two days in Northern Indiana, I'll call on clients. So it's all hands on deck. We're all locked arms and we continue to believe we're doing -- building quality relationships for the long-term health and success of our company.

And, it's a primary focus of our entire leadership team..

Okay, great. It was a bit of a softball question. So the harder one would be your new production yields are a little lower than your net interest margin today.

And then even though you have a great deposit base and its very low cost, I was wondering how you weigh continued growth against the net interest margin, every loan you put on should be a little dilutive today. I get that they're floating.

So I was wondering how you manage balance sheet growth relative to maintaining NIM?.

Hey Ben, this is Brendon. Yeah, we've looked very closely at the pricing. We have very strict risk adjusted return hurdles for all of our loans. And as I said in my comments earlier, our spreads have held in throughout this rate cycle. They've been strong.

So you think about that floating rate production today relative to the LIBOR, that's 200 plus basis points over the LIBOR for that floating rate production. I think, so we'll continue to put on loan at that rate and feel really good about it. .

Okay, great. I will step back and get in the queue. .

Thanks Ben. .

Our next question comes from Scott Siefers with Piper Sandler. Your line is open. .

Good morning Scott. .

Good morning guys.

How you doing?.

Good. Maybe, you didn't get up as early as some others this morning, but I get to hear from you anyways..

Oh man.

You just couldn't let it pass, could you?.

Sorry Scott. .

No worries. I'll get up earlier next time. Honestly, there are so many -- I'm just thankful that I dialed the right phone number. Let's see, but thanks for taking the question. Just wanted to sort of follow-up on the environment for commercial lending.

I feel like last year you guys capitalized so well on some of your larger competitors in particular, kind of shutting down for the year.

To what degree have you noticed that there, especially the larger guys, are they sort of back in the market in a bigger way, number one? And then number two, how, if at all, is that impacting the competitive dynamic as you see it?.

Yes, Scott, this is Jim Sandgren. There's no question that really everyone is back in the market now. So, competitive pressures are certainly heating up. Again, we're staying very disciplined as we think about credit structure, but we're still getting a lot of it back. Our pipeline, I think remains robust as we pointed out.

So still feel good about the back half and there'll be deals that we're going to walk away from, cause there's certainly some structures out there that are getting stretched and that's okay. But, overall I think clients feel really good about their opportunities to be successful in the back half of the year and into 2022.

So, it's always going to be competitive out there and I think we like our chances given our relationship banking model, so..

Okay, perfect. Thank you. And then I guess just a question on the merger, President Biden had put out that executive order a couple of weeks ago, have you guys seen any impact in discussions with regulators on the approval process.

I mean the order kind of left a lot to the imagination, so just I'm curious how the conversations are going, if there's any change vis-a-vis what you might've thought prior to seeing the order?.

No changes, no additional feedback from any of our regulators. Obviously we're curious, we're not sure if it applies to us or maybe our biggest brethren out there. So, time only tell as we go through the regulatory approval process, but really no indications of any difference, just full steam ahead. .

Okay. Perfect. Alright, thank you guys very much. I appreciate it..

Thanks Scott..

Our next question comes from Chris McGratty with KBW..

Good morning Chris..

Hey Jim, how are you doing? I wanted to ask about the bond portfolio, given the back down, move down in rates lately. You are obviously not growing it too dramatically, but interested if you're a bit more cautious about growing at near-term, and maybe what reinvestment rates are today versus the 153 that you gave in the quarter? Thanks. .

Yeah. So we'll continue to grow that investment fully to the extent we have excess liquidity that we can't put to work in the loan portfolio. And new business rates are probably down a little bit marginally from average for the quarter, but not dramatically.

So at this point -- so we'll continue to be disciplined and our hope is that we continue to grow loans at the pace that we're growing. And as we talked about the end of period deposits have sort of moderated, that growth has moderate a bit, so is hope that we can continue to drive a better earning asset mix through the back half of the year. .

Okay. And on the loan growth, historically the origination has been quite granular.

I'm interested if any of the growth this quarter was a deviation from that, or if it continued?.

No, it's still pretty granular Chris. I mean, average loan, new production still continues to grow over time. And I think we're still just a little bit over, I think, a million bucks. So that, again, that's grown over the last few quarters, but still fairly granular..

Okay. And then maybe just one last one for Darryl.

I mean, looking at your slide on the reserve, I'm trying to -- I think we're all trying to figure out where reserves bottom with the improvement, appreciating that you think around 30% of your reserve is still qualitative, but do we get to -- do we breach CECL day one this year if the economy continues to improve at the pace it is?.

Hey, Chris, this is Brendon. I'll take that one. Look, what I'll tell you is this credit portfolio is actually a better quality than it was pre-pandemic day one CECL. That said, we are going to be very, very judicious in bringing that reserve down until we get some clarity around the economic outlook.

But as we look forward, it's a possibility and we'll measure it. We'll measure our portfolio on a CECL reserve based on the model when the time comes..

Great, thank you very much..

Our next question comes from Terry McEvoy with Stephens. Your line is open..

Good morning Terry..

Hi. Good morning, everyone. Maybe the first question, your outlook for expenses. You talk about the investment in new revenue generating talent positions.

I'm just wondering if you could expand on certain markets where you're hiring talent in what areas of the bank?.

Yes, Terry, this is Jim Sandgren. We're really focusing really primarily on wealth and commercial, and we've added some really good talent in both those areas and up in the Minnesota region. We've added some talent in our loan production office there in St. Louis as well. Recently added some great talent in [indiscernible].

So it's really across the footprint. We're being again opportunistic and we can find great talent where we're adding them to the team, and we're going to continue to do that.

I would also -- we actually put a couple of key hires in our IT and data areas here recently too, which is a function of us getting bigger, us getting better at some of those technology needs. And well, it is a much smaller part of the total. We are investing in some key support areas as well..

Thanks. And then maybe Jim Ryan a question for you.

What's been the feedback from your customers in say Michigan, Indiana, and the Twin Cities, where there's just no overlap with First Midwest, I'm just curious from their perspective, is there any reason for them to expect or worry about change at all or are they may be excited about the merger, given what it could bring to the table?.

Yeah, I think by large, I would characterize that the team members and our clients are excited about the prospects of just being bigger, being able to bring more products to the table, more services to the table.

I think everybody's kind of genuinely excited, and obviously we don't know if there'd be any impact to those individual clients, but I think generally everybody's really excited about the prospects of just having a bigger balance sheet as well..

Great, thank you..

Thanks, Terry..

Our next question comes from Jon Arfstrom with RBC Capital Markets. Your line is open..

Good morning, Jon..

Hey, good morning. Good morning. A couple of follow ups, Terry's question on some of the new hires and you're flagging that as maybe some bit of an expense headwind later in the year.

How material you expect the hiring to be in terms of the expense impact?.

Yeah, not material. I'm thinking about $1 million to $2 million range per quarter. It's pretty consistent with what we said as we were heading into the year about building that pipeline of talent, $1 million to $2 million approximately..

Okay. Brendon, a question for you or maybe Jim on the deposit growth slowing a bit. It's a little bit different than peers kind of like your loan growth is a little bit different than peers.

But why do you think that is for you and does that potentially make you a little more optimistic on the ability to hold the NIM later in the year if this continues?.

Yeah, we'll see. I think the excess liquidity has been certainly outside of control, largely driven by stimulus. I know Jim and the team are still after that gathering deposit, it is still a focus of ours. But I think the stimulus generated excess liquidity seems to be not moderating, at least in our book and in our portfolio today.

And as I talked about earlier, I do think it'll be helpful to margin as we are able to put that back to work in the loan portfolio rather than the investment portfolio..

Okay.

And is it too simple to say that maybe some of your commercial clients are using some of their deposits and you're seeing some of this may be pulled through in terms of loan growth, or is it just the stimulus slow down?.

Yeah. Like I said, so core deposit still did grow quarter-over-quarter, just not at the rapid pace that they grew before. And actually our business deposits actually grew more than our retail deposits this last quarter. PPP funds are starting to get drawn down a bit but we are still holding a lot of PPP money still on deposit today..

Okay. And then Daryl one for you. You touched on commercial real estate, retail, and office.

Just any changes in terms of your thinking there, any new concerns or any information you can share?.

No Jon, I don't think they are. I think that has to play out as leases expire, right. So you've got people in the office buildings today and in the retail structures that are still paying these payments. The real decision making comes when those leases expire and what they do, do they vacate those buildings, do they renegotiate much lower rates.

So we're all concerned about it or watching it. But I think we still got probably 12, 24 months before that all kind of plays out and we see the trends..

Alright. Thanks for the questions or the answers. I appreciate it..

Thanks Jon. .

[Operator Instructions]. Our next question comes from David Long with Raymond James. Your line is open..

Good morning, David..

Good morning, everyone. First question is related to credit and maybe this is more for Daryl but as you were going through the process, the due diligence process with First Midwest, I'm sure you got to look at a lot of their loan book.

Are you having constant discussions with them, free closing about the loan makeup and how they're thinking about their ratings or is that something that won't really happen until after the deal closes?.

Yeah David, Darryl. We're not having extensive conversations only because as the two banks put their books together, there is very, very little difference in the way we approach loans, in the way we look at risk. And so the transition with the two banks is going to be probably as easy as any merger.

We've done our partnership, we've been up to this point in time. So we're getting policies together, we're looking at those, we're tweaking those, we're communicating a lot but there's not a lot of kind of arm wrestling about you're doing this right, you are doing this wrong. It is just pretty much the same..

Got it. Thank you, Daryl. I appreciate that.

And then as far as IT spending goes, in the near-term prior to the close of the deal, do you guys adjust how you're spending or how are you thinking about spending and then, any changes in your longer-term spending strategies once the deal does close?.

Hey David, this is Brendon. I think as we talked about in the call, I think both banks had really robust IT roadmap. We're going to continue to complete those roadmaps and make incremental investment because it makes sense as the time goes, but no material change in the run rate of our IT spend has been contemplated.

But we think we have plenty of room to invest in some technology investments that are meaningful to the combined organization going forward..

David, I would just add, the war for talent will continue on our side. We're going to continue to ramp up talent at all of our markets and especially doubling down in Chicago and Milwaukee and places like that. So, I'll just add that we're going to continue to invest.

I'm convinced that the key to our success and our story resonates really well right now, and we're going to take advantage of that and make sure we invest in a lot of great talent..

Got it. Thank you, guys. Appreciate it..

There are no further questions at this time..

Well, great. Again, we appreciate all your support. And as always, we are here to answer any questions when you have follow-up questions. Have a great day everyone..

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 Dominion’s website -- I am sorry, Old National’s website, oldnational.com. A replay of the call will also be available by dialing 855-859-2056. Conference ID Code 7447647.

This replay will be available through August 3rd. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call..