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 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 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 investors' 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 reserves 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.

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 loans over the 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 continue to be impacted by the low-rate environment and a high percentage of floating rate versus fixed rate production. 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 the 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 a $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.

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 quarter's 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 the 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 below 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 continue 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 maintain 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 costs 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 at 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.

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 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?

Yes, this is Jim Sandgren. I don't think there's any specific secret to our success. We're a strong relationship bank, and we have been actively engaging with our customers for the last year. While many banks shifted to remote work, we seized the opportunity to serve our clients better and attracted many new prospects. I believe we capitalized on opportunities as other banks adjusted their credit approaches. It's all about consistently being present and assisting our customers when they need help. This approach has been vital throughout the year and has significantly benefited us as we started the first half of this year. Our pipeline looks promising for the latter half of the year. I wouldn't say there's a secret formula; however, restructuring through the ONB Way and aligning our relationship managers’ skills with our clients' needs has played an essential role. Ultimately, it comes down to building strong relationships and being proactive in establishing new connections.

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, calling on clients. So it's all hands on deck. We're all locked arms and we continue to believe we're building quality relationships for the long-term health and success of our company. 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 it's very low cost, I was wondering how you weigh continued growth against the net interest margin, as 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 steady throughout this rate cycle. 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 we'll continue to put on loans 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 are 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 things I'm just thankful that I dialed the right phone number. Thanks for taking the question. I wanted to follow up on the environment for commercial lending. I feel like last year you all capitalized very well while some of your larger competitors were particularly shutting down for the year. To what extent have you noticed that the larger companies are coming back into the market more significantly? And how is that affecting 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 structures, 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 are 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.

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-à-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 will 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 1.53% that you gave in the quarter? Thanks.

We will continue to fully grow that investment as long as we have excess liquidity that we cannot allocate to the loan portfolio. New business rates have likely decreased slightly from the average for the quarter, but not significantly. At this stage, we will maintain discipline, and we hope to continue growing loans at our current pace. As we mentioned, the growth of end-of-period deposits has moderated somewhat, so we aim to improve our earning asset mix during the latter 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. I have one final question for Daryl. Looking at your slide on the reserve, I'm trying to understand where reserves might bottom out considering the improvement. I recognize that you believe about 30% of your reserve remains qualitative, but will we cross the CECL threshold this year if the economy continues to improve at this rate?

Hey, Chris, this is Brendon. 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 Indianapolis. 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 mention 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 while 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 maybe 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. 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 do 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, approximately $1 million to $2 million.

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 our control, largely driven by stimulus. I know Jim and the team are still after that gathering deposits, 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 maybe pulled through in terms of loan growth, or is it just the stimulus slowdown?

Yeah. Like I said, so core deposits 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 to 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.

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 National's website. 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.