Old National Bancorp

Welcome to the Old National Bancorp Third Quarter 2020 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with 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 as noted on slide two, certain statements on today's call may be forward-looking in nature and are subject to certain risks 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 its SEC filings. In addition, certain slides contain non-GAAP measures, which management believes provides more appropriate comparisons. These non-GAAP measures are intended to assist investors' understanding of performance trends. Reconciliations for these numbers are contained within the appendix of the presentation. I'd now like to turn the call over to Jim Ryan for opening remarks. Mr. Ryan?

Thanks, Dorothy. Good morning. I hope this call finds all of you and your families safe and healthy. We are pleased with our third quarter results as we made significant progress on client deferrals. We improved our operating leverage and grew the loan portfolio and ended the quarter with a robust commercial pipeline. We remain committed and focused on the health and safety of our team members, clients, and communities. We are currently occupying about 50% of our office buildings by rotating team members every four weeks. Our branch lobbies are open, and we are active in our communities. Many larger banks have told their relationship managers to stay home and not worry about goals this year. By contrast, our relationship managers are proactively serving existing clients and winning new relationships rather than being distracted or derailed by COVID. Tim Zankert and I have also been actively calling on new client opportunities to help win business. I've been impressed by the quality of the new relationships we've been able to win this quarter, many of them moving from long-term relationships from other larger banks. I would like to thank our team members for their hard work and dedication. Starting on slide three, our third quarter net income was $77.9 million, or 47 cents per share. I was particularly pleased with our progress on operating leverage and strong balance sheet growth. Growing our balance sheet and watching our costs should help us mitigate the near zero interest rate environment. While we did not take a provision this quarter, we did grow the reserve given our net recoveries for the quarter. Brennan will fill you in on all the details with respect to our reserve. End of period commercial loans increased by 10.5% annualized primarily due to the record commercial production. Our commercial production was $978 million up from $658 million in the second quarter. Line utilization was about the same. Core deposits were higher by 7% on an annualized basis, driven by continued growth in non-interest-bearing deposits. Net interest income was unchanged, but the margin was lower from the effect of new business yields. Mortgage and capital markets revenue continued to be exceptionally strong and offset COVID-related lower deposit service charges. We continued to achieve lower expenses as we execute on our own DOA initiatives. Our adjusted efficiency ratio for the quarter was 53%. Year-over-year operating leverage improved by almost 300 basis points. When we introduced the OMB way, I told you I was more excited about the revenue initiatives than the cost initiatives. Many of these revenue initiatives have been delayed because of the pandemic, but we are now making progress on building systems and hiring talent to support these initiatives. I'm excited about the team members we've already hired and the ones we have in the pipeline. We have a great story to tell, and we have strong interest from senior relationship managers from other larger institutions. We have hired and expect to hire more in wealth management, private banking, commercial, treasury management, and key support team members in IT and digital marketing. These hires will put near-term pressure on personnel costs over the next few quarters, but will ultimately lead to higher revenue from these growth initiatives. Most of our reported credit quality metrics are relatively unchanged during the quarter, but we expect that credit metrics will ultimately worsen and losses will materialize once the stimulus and deferral programs run their course. We proactively downgraded some of our most vulnerable loans into the watch asset quality ratings and are meeting weekly to review credit quality loan by loan. We still don't know when losses will meaningfully materialize, but we suspect sometime in the first half of next year, depending on additional government stimulus programs. We believe our historically strong underwriting practices, our diverse and granular loan portfolios, and Midwest footprint should help us weather the impact better than most. We continue to share with our board of directors multiple economic forecasts and various stress tests. As a result, we don't anticipate any capital actions, and we expect to maintain our current dividend. On last quarter's call, I stated we are open for business and are extending new credit. Old National has always managed with a long-term view. We will continue to make new loans if we are comfortable with the underlying cash flow structure and pricing. The loans we are booking today are generally with better structures than we would have accepted last year. We do not jump into businesses or sectors during the good times only to exit during the tough times. Our balance sheet and capital remain strong, our markets are diverse, and our experienced team will help us manage this uncertain time. Speaking of experience, I will turn the call over to our 41-year tenure team member, Mr. Darrell Moore.

Great. Thank you, Jim. The first update we'd like to provide this morning relates to our client relief programs. With respect to deferrals, we have previously reported that we've granted some type of deferral on roughly $1.3 billion in loans, which represented roughly 10% of the portfolio. At the end of this most recent quarter, the dollar amount of loans still in deferral mode had dropped to $138.6 million, which represents approximately 1% of the total portfolio. In the commercial area, requests for deferrals have effectively dried up, and we've taken a position that any applications for future deferrals That would result in total aggregate deferment period in excess of 180 days would be granted only in the most unusual of circumstances. On the retail side, while we continue to receive both new deferral requests and requests for renewal extensions, the volume of those requests has fallen significantly. While we attempt to hold aggregate deferral periods to 180 days in this portfolio as well, we are a bit more lenient with individual borrowers when the cause of their financial issues is clearly COVID-related. As you know, we were very successful in securing PPP funds for our clients, having originated just short of 10,000 loans with balances in excess of $1.5 billion. The recent announcement by the SBA of a streamlined forgiveness process for loans of $50,000 or less is good news for many of our clients who receive PPP funds in that roughly 5,600 or 57.5% of the PPP loans we help facilitate fall into the streamlined forgiveness category. To date, we've submitted over 2,300 loans to the SBA for forgiveness, representing $486 million in outstanding balances. Remaining fees on PPP loans not yet taken into income total $37.8 million. Slide 5 sets out those industries that many across the banking landscape feel are most vulnerable to our current economic conditions. There has been little change in our exposure to these industries, which remains at only roughly 7% of total loans. While there is merit in acknowledging that these industries as a whole may be suffering disproportionately in the current environment, it is important to note that not all of the borrowers in these categories are experiencing difficulties, with some even doing well. The chart at the bottom of slide five shows the breakout of our consumed portfolio along with corresponding average FICO scores. This portfolio has shown little change as well since our last presentation to you. That having been said, we are watching this portfolio closely. With future labor market trends uncertain and deferments expiring, consumer portfolios could come under increased stress in the coming quarters. Slide 6 lays out trends in the most significant credit indicators. Delinquencies rose in the quarter slightly to 20 basis points of the total portfolio, with the increase in delinquency rates wholly attributable to the retail lending portfolio. This increase in retail loan delinquencies was not unexpected. given the level of retail loans on deferment at the end of the second quarter that were subsequently required to resume their payments by September 30th. With respect to charge-offs, in an ironic twist of fate, we posted a net recovery in the current quarter, in large part due to recovery of the write-downs we took back in the fourth quarter of 2019 and the first quarter of 2020 on a pharma-related project. This particular project became much more valuable given its intended use in the COVID vaccination process. Non-performing loans increased in the quarter as was expected. The increase in the current quarter came about in great part through the downgrade of relationships that had shown weaknesses prior to the pandemic, as well as from the hotel segment that, as we all know, experienced sudden and deep troubles early on in the pandemic. Further downgrades into the non-performing category are certainly a strong possibility, with the pace and magnitude dependent in some part on the continued impact of the pandemic and the ability of Congress to come to an agreement on additional fiscal stimulus. One final comment I'd like to make is around the loan growth in the quarter. While we have given direction to our underwriters to be mindful of current economic conditions, we've also asked them to keep in mind more intermediate and long-term factors as they evaluate credit requests. Requests from borrowers with balance sheet and liquidity staying power are viewed as opportunities and not discouraged from consideration if they meet our lending standards, which have always been intended to live through economic cycles. With that, I'll turn the call over to Brendan.