Old National Bancorp

Hello. Welcome to the Old National Bancorp Third Quarter 2021 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 certain statements on today's call may be 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 its SEC filings. In addition, certain slides contain non-GAAP measures which management believes provide more appropriate comparisons. The non-GAAP measures are intended to assist investors' understanding of performance trends. Reconciliation 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, you may begin.

Good morning. Starting on slide four, we are pleased to share our third quarter results and an update on our partnership with First Midwest Bank. I would categorize this quarter's results as right on plan. Earnings per share were 43 cents and net income was almost $72 million. During the quarter, commercial loans, excluding PPP loans, grew at a strong 7.4% on an annualized basis with $1 billion in new production. We also ended the quarter with a robust $2.7 billion commercial pipeline. Core deposits grew nicely by $327 million during the quarter. Our net interest margin was stable, capital markets and wealth management revenue were strong, and mortgage revenue rebounded from last quarter. Expenses were well managed and down slightly, primarily due to one-time benefits from incentive and real estate tax accruals. Credit quality metrics remained benign with another quarter of net recoveries. Adjusted ROATCE was a strong 15.16%, and the adjusted efficiency ratio was 55.4%. During the quarter, we worked hard with our clients on the PPP forgiveness process. 95% of Round 1 loans have been forgiven by the SBA, and we already have 51% of Round 2 loans through the forgiveness process. Remaining fees total $14 million. Most of our reported credit quality metrics improved during the quarter. We have reduced our reserves consistent with our modeling as a result of the improving economic conditions. We still have approximately 32% of reserves supported by qualitative adjustments given the long-term impacts from the pandemic, expectations for higher inflation, persistent labor supply and supply chain challenges. As we gain additional clarity around these issues, we may develop more confidence in moving our reserve closer to day one seasonal levels. A quick update on hiring. We continue to add significant talent during the quarter, especially on our wealth management team. This was highlighted by three key individuals that joined our wealth team from the former Wells Abbott Downey Group, including Jim Steiner, who started Abbott Downey and who will now assume the role of our Chief Investment Officer. The team will help expand our high net worth and institutional services. They opened the Scottsdale, Arizona Wealth Management Office to better serve the growing number of clients in that area. We also hired two new commercial relationship managers in St. Louis to build upon our recent success in that market. Our talent pipeline remains strong, and we will continue to hire talented team members. Moving to slide five, which contains a quick refresher on some of our accomplishments and next steps with our merger with First Midwest. Both companies have tremendous integration history and experience, and as a result, our work is going well. We have decision and communicated most client segment and support areas organizational structures and leadership. We've also settled on our core processing system along with the most of the supporting applications. We remain on track for a second quarter 2022 system conversion. You probably saw First Midwest earnings this morning. The results for the quarter were strong and consistent with expectations. We also received 99% support from our special shareholder meeting, and First Midwest shareholder provided a similar level of support. We've also received OCC approval, Our application with Federal Reserve remains pending with the Board in Washington, D.C., along with the merger applications of many other bank holding companies. We stand ready to close quickly once we receive final Fed approval. You may have seen that we were sued by the Fair Housing Center of Central Indiana, a nonprofit advocacy organization with a history of filing lawsuits alleging lending discrimination. We strongly and categorically deny the claims in this lawsuit regarding certain of our lending practices. while National is committed to engaging in fair and equal lending practices. A testament to this is that we have been named one of the world's most ethical companies for the past decade. As is customary for us and many public companies, I am unable to comment further on this pending litigation. Lastly, despite potential distractions from the lingering pandemic-related issues and 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 Brendan. Thank you, Jim.

Turning to slide six, our GAAP earnings per share and our adjusted earnings per share were both $0.43. Adjusted earnings exclude $1.4 million in early merger-related charges, which were largely offset by $1.2 million in debt securities gains. Slide 7 shows the trend in commercial loans and the related commercial pipeline and production trends, all excluding the impact of PPP loans. View 3 represents our fifth consecutive quarter of organic loan growth, and over that year, commercial outstandings have grown 11%. Our strong commercial production of $1 billion was once again led by our Louisville and Minnesota markets, with all other regions posting quarter-over-quarter growth. On-balance sheet production was also well-balanced by product. with a 60-40 split between CRE and CNI, respectively. Commercial activity remained strong throughout the quarter, and we were heading into Q4 with a very healthy $2.7 billion pipeline, with almost $800 million in the accepted category. Turning briefly to pricing, new money yields on commercial loans increased from prior quarter, which meaningfully narrowed the gap between new production and portfolio yields. The investment portfolio increased $263 million this quarter as deposit growth once again outpaced total loan growth. We continue to put much of our excess liquidity to work in our investment portfolio, with new money yields of 1.62% and a portfolio duration well within five years. Moving to slide eight, both period end and average deposit balances increased nicely from Q2 levels, with most of the growth coming from business clients in the non-interest-bearing demand category. Total cost of deposits for the quarter was unchanged at six basis points, while total interest-bearing liabilities declined one basis point from Q2. Next, on slide 9, you will see details of our net interest income and margins. Net interest income increased $1.7 million quarter over quarter. Excluding the impact of PPP, net interest income increased $1.3 million, which is the third consecutive quarter we have outperformed our stated objective of holding NII stable through earning asset growth. Interest margin increased one basis point to 2.92% from prior quarter, and core margin, excluding accretion and PPP, declined just two basis points to 2.7%. Slide 10 shows trends in adjusted non-interest income. Adjusted non-interest income of $53 million in Q3 was $2 million higher than the second quarter. Our wealth line of business continues to be a bright spot and is on pace for a record year. Our capital markets business had another strong quarter, and mortgage revenues rebounded nicely following the pipeline valuation decrease in Q2. While mortgage production was down slightly in the quarter, an increase in the size of the pipeline and stabilizing value resulted in a $5.4 million increase in revenue. This increase was partially offset by a $2 million decrease in gain-on-sale income as margins continued to normalize. Next, slide 11 shows the trend in adjusted non-interest expenses. adjusting for merger charges and tax credit amortization, non-interest expense was $118 million. The quarter-over-quarter improvement was driven by an accrual adjustment to incentives as well as a reduction in real estate taxes. Both of these items are not expected to recur. Turning to PPP loans on slide 12, you will see a rollboard of those balances, which stood at $355 million at quarter ends. We continue to assist clients with forgiveness and approximately 95% of round one and 51% of round two loans are now formally through the SBA forgiveness process. Unamortized fees on the remaining loans total $14 million. We anticipate half of the remaining loans will be forgiven and the related fees recognized in the fourth quarter of 2021. Slide 13 shows our credit trends. The quarter proved to be another good one from a credit performance perspective. 30-plus delinquencies picked up one basis point but remained at a near cycle low of 10 basis points. With respect to charge-offs, we were fortunate again this quarter to be able to post a net recovery, mostly due to the resolution and full recovery of our previously written down senior living credit. The non-performing loans to total loan ratio has once again hit a new cycle low at 94 basis points. While this metric remains higher than PEERS, the net charge-off to NPL ratio is significantly better than PEERS. We believe our approach to identifying troubled credits early and our patient approach to work out results in better outcomes for our clients and ultimately lower costs for the bank. On slide 14, you will see the details of our third quarter allowance, which stands at $108 million, a decline of $1.5 million from Q2. The improving economic outlook and the positive trends in credit quality support a modestly lower reserve level. And while our outlook on credit remains optimistic, we recognize the economy has not fully recovered and have made the decision to maintain our higher level of qualitative reserves, which should at $35 million at quarter end. As a reminder, we also continue to carry $38 million in unamortized marks from our acquired portfolios. As I wrap up my comments, here are some key takeaways. We are very pleased with the fundamental results of the quarter. Strong commercial loan growth led to higher core net interest income despite interest rate headwinds. Our fee-based businesses led by wealth, mortgage, and capital markets continue to perform well and in line with expectations. Expenses remain well controlled, and our strong credit quality continues to keep credit costs low. Slide 15 includes thoughts on our outlook for 2021. We ended the quarter with a healthy $2.7 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 clients. We expect the runoff of approximately half of the round two balances to occur in the fourth quarter with the recognition of the related unimmortized fees to occur at that time. We expect our fee businesses to continue to form wealth. 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. Mortgage revenue should follow industry trends and be seasonally lower in the fourth quarter. Our other fee lines are expected to be stable in the near term. We would expect to see a $3 million increase in non-interest expenses in the fourth quarter, given the non-recurring items impacting our third quarter performance. Lastly, a brief update on taxes. We continue to expect a reduction in the volatility caused by our tax credits as we work through the last of the remaining one-year historical tax credit commitments. In total, we're expecting approximately $6 million in tax credit amortization for the year with a corresponding full-year effective tax rate of approximately 22%. With that, we are happy to answer any questions that you may have, and we do have the full team here, including Jim Sangren, Daryl Moore, and John Moran.