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Edited Transcript of ONB earnings conference call or presentation 22-Jul-19 12:00pm GMT

Q2 2019 Old National Bancorp Earnings Call

EVANSVILLE Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Old National Bancorp earnings conference call or presentation Monday, July 22, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendon B. Falconer

Old National Bancorp - CFO, Senior VP & Treasurer

* Daryl D. Moore

Old National Bancorp - Senior EVP & Chief Credit Executive

* James A. Sandgren

Old National Bancorp - President & COO

* James C. Ryan

Old National Bancorp - CEO & Director

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Conference Call Participants

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* Christopher Edward McGratty

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* David Joseph Long

Raymond James & Associates, Inc., Research Division - Senior Analyst

* Jon Glenn Arfstrom

RBC Capital Markets, LLC, Research Division - Analyst

* Kevin Kennedy Reevey

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Robert Scott Siefers

Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research

* Terence James McEvoy

Stephens Inc., Research Division - MD and Research Analyst

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Presentation

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Operator [1]

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Welcome to the Old National Bancorp Second Quarter 2019 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 Investors Relation page at oldnational.com and will be archived there for 12 months. Before turning the call over, management would like to remind everyone that as noted on Slide 2, 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 the SEC's 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 of 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?

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James C. Ryan, Old National Bancorp - CEO & Director [2]

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Thank you, Maria. Good morning all. I would characterize our second quarter results as consistent with our stated strategy and in line with our expectations.

Net income was $63 million and earnings per share were $0.36. When adjusted for merger charges and debt securities gains, net income was $64.5 million and earnings per share were $0.37. We're pleased that adjusted EPS was up more than 27% from a year ago.

Despite record commercial loan production, total loans were essentially flat from the first quarter due to continued elevated levels of commercial clients selling their businesses, refinances in the secondary market for stabilized commercial real estate projects and intentional exit of a handful of higher-risk credits. I'm confident we aren't losing clients or opportunities because we aren't competitive. In fact, our markets remain strong and our clients continue to be optimistic as evidenced by our record production. Today, our commercial pipeline remains a strong $1.9 billion (sic) [$1.7 billion] up from where it stood at quarter end. More importantly, our accepted loan category today is meaningfully above the first quarter that led to record quarterly production.

As you've come to expect from us, given the global backdrop and the inconsistent economic data, we are also staying disciplined and continue to focus on lending in our footprint. We don't believe this is the right time to get too aggressive on new commercial credit.

Total deposits were essentially flat from the first quarter, despite our historical trend of seasonal outflows and deposits during previous second quarters. Loan to deposits are also a strong 84%, and we remain a low-cost, core deposit funded bank. Regardless of the interest rate environment of the day, we believe the key to long-term success is a low-cost core deposit funded institution.

We remain focused on improving our operating leverage, which improved 724 basis points year-over-year, and our adjusted efficiency ratio was a low 57.5%. Exceptional credit quality remains a hallmark of our company with our in-house, lower limits, diversified mix and granular loan portfolio. Our average new commercial credit was only $700,000 during the quarter despite record production. We recorded $1 million of provision on net charge-offs of only $300,000. As those that have followed us for a while can appreciate, we are very quick to identify weakness in credits. We are hard graders and we work through issues in a very timely fashion. As a result, our NPAs fell to 1.34%, and we saw meaningful declines in criticized, classified and non-accruals.

On the capital front, we repurchased 1.8 million shares at an average price of approximately $16.37 this quarter. Despite the repurchases, tangible book value per share grew by 4.4% and tangible common equity to assets was up 26 basis points to 8.92%. We expect to be opportunistic with the remaining authorization as we have been year-to-date.

During my interview with the Board, I told them that my focus was going to be on strategy, people and performance. While change is inevitable for our industry, one thing that won't change is our need to soundly manage the basics: How we invest our capital, what we spend and the need to manage credit cost. Our basic bank strategy remains the same. A combination of our basic bank strategy and our disciplined acquisitions has served us well with significantly improved performance over the last few years. Just because our strategy remains the same, it doesn't mean that we don't need to sharpen our company's strategic focus. I challenged our leadership team to reexamine ways we can raise our game, better serving our clients while improving on our execution and performance.

I'm excited about our discussions and working collectively to build a better platform for growth that will carry us far into the future. Banks that have a distinctive strategic position will continue to be rewarded.

A quick update on M&A. Our strategy hasn't changed. We remain an active looker and a selective buyer. We are patient and continue to wait for the perfect pitch while remaining focused on integration and execution. As we shared last quarter, client systems converted smoothly. We've already realized cost savings during the quarter, and our Minnesota operation continued to perform in line with expectations. We remain very enthusiastic around the opportunities in that key market.

Next, Brendon is going to walk you through this quarter's details.

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Brendon B. Falconer, Old National Bancorp - CFO, Senior VP & Treasurer [3]

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Thank you, Jim. Turning to the quarter on Slide 4, GAAP earnings per share were $0.36 and our adjusted earnings per share were $0.37. Adjusted earnings per share excludes $3.2 million in merger-related charges as well as debt securities gains.

Moving to Slide 5, adjusted pretax, preprovision net revenue was 28% higher year-over-year. This result was driven by increased scale from our recent partnerships, maintaining our strong low-cost deposit base and a continued focus on expense management. We also improved operating leverage by 724 basis points year-over-year.

Slide 6 shows the trend in outstanding loans. As Jim referenced, our commercial loan production of $628 million was the largest in our company's history and represents a $200 million increase over prior quarter. Our period end pipeline remains strong at $1.7 billion and has continued to build into the third quarter.

The record production did not diminish the quality of our pipeline as we have successfully refilled the accepted category to the same level we ended first quarter. Despite our record loan production, loans fell slightly in the quarter due to increased levels or prepay activity. Loan portfolio yields excluding accretion and interest collected on accrual increased 3 basis points and new production yields were in line with core portfolio yields.

Slide 7 shows year-over-year change in loan mix as well as our earning asset mix for the second quarter. We have continued to remix the loan portfolio towards more productive commercial and commercial real estate loans and out of indirect and other loans. Earning asset yields excluding accretion and interest collected on nonaccrual were unchanged despite the challenging interest rate environment.

The investment portfolio yield was down 5 basis points quarter-over-quarter, with 4 basis points of the decline resulting from higher premium amortization. New money yields for the quarter were 3.13% compared to the total portfolio yield of 2.98%.

Moving to Slide 8. Average deposits were up quarter-over-quarter despite the seasonal declines we typically experience in Q2. Our stable low-cost core funding base has served us remarkably well through this rate cycle with a total cost of deposits of only 52 basis points.

Deposit costs were up 6 basis points over prior quarter, but pricing pressures have begun to moderate. The future direction of deposit costs will largely depend on the path of short-term rates and market competition, but we are prepared to reduce funding costs in response to future Fed actions.

Next, on Slide 9, you'll see the detailed changes in our first quarter net interest income and corresponding margin. We are pleased with the performance of the margin given the challenges presented by the interest rate environment. Net interest margin excluding accretion was 3.39% compared to 3.3% last quarter. The margin benefited from an increase in interest collected on nonaccruals of 11 basis points and accretion income of 6 basis points from the first quarter. Normalizing for the higher-than-expected interest collected on nonaccrual and accretion, the margin showed very modest compression. The work we've done on the balance sheet over the past several quarters has allowed us to defend our margin well and should help mitigate the challenging yield curve dynamics ahead.

Slide 10 shows trends in adjusted noninterest income. Mortgage Banking and Capital Markets experienced nice revenue growth over the prior quarter, with the usual seasonal uptick in Wealth Management revenues.

Other fee categories remain relatively stable. We ended the quarter with the largest mortgage pipeline in recent years and continued momentum in this line of business heading into the third quarter. Also included on this slide is our purchase versus refi percentage for the mortgage business. Purchases accounted for 75% of our second quarter volume, with only a modest increase in refi activity.

Next, slide 11 shows the trend in adjusted noninterest expenses. Despite merit increases hitting in the second quarter, personnel expense remained flat and we continued to be laser-focused on expense management. We've realized some of the client partnership cost savings following the April systems conversion and are on track to capture the remainder in the back half of 2019.

Our adjusted efficiency ratio for the first quarter was 57.52%, a 416 basis point improvement from the second quarter of 2018. Expense discipline is an important part of our culture, and we remain committed to generating positive operating leverage.

Slide 12 has our credit metrics. Credit conditions remained benign as we experienced positive migration during the quarter and nonperforming and underperforming loans continued to hover near cycle lows. We recorded $1 million in provision expense during the second quarter while posting net charge-offs of $300,000. With 61 basis points of reserves against organic loans and 336 basis points in loan marked against the acquired loans, we believe we have adequate reserve coverage.

Before we turn away from credit, we want to continue to keep you updated on our progress towards completing our transition to CECL. Progress towards complying with the new standard remains on schedule with all credit models now validated and implemented on our technology platform. Preliminary sensitivity analysis on all key assumptions has been completed, and activities in the third quarter will be focused on finalizing assumptions and the governance framework.

We anticipate providing an estimated range of the day 1 impact when we report third quarter results.

Slide 13 provides some key takeaways from our second quarter performance. We're pleased with our results driven by good execution against our stated strategy. We continue to have a disciplined approach to credit risk management, resulting in net charge-offs of just 1 basis point and near cycle low nonperforming loans. We are driving positive operating leverage, improving our efficiency ratio and increasing profitability metrics. While loan growth was lower than our expectation, production reached a record high and we remain optimistic about our ability to produce quality loans without compromising on credit discipline.

And finally, we are pleased with the stability in our margin, which was down just 2 basis points quarter-over-quarter, excluding accretion income and interest collected on nonaccrual loans.

Slide 14 includes thoughts on our outlook for 2019 and 2Q '19 starting points. We expect commercial loan production to remain strong based on both the size and quality of our pipeline. We expect core net interest margin to be under some pressure from the shape of the yield curve heading into the second half of the year. Asset yields are expected to decrease, but the impact to margin should be largely mitigated by lower funding costs and prior balance sheet structuring and derivative actions.

As the slide suggests, fees and expenses should follow normal seasonal patterns and we remain very focused on continuing to drive positive operating leverage.

Our full year tax rate is now expected to be slightly lower than we had originally projected at approximately 23% on an FTE basis and approximately 20% on a GAAP basis. We continue to expect tax credit amortization to be de minimis in 2019.

Lastly, we remain very optimistic about our opportunities in Minnesota, and our cost saves remain on track.

With that, we're happy to answer any questions that you may have, and we do have the rest of the team here with us including Jim Sandgren, Daryl Moore and John Moran.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Scott Siefers of Sandler O'Neill.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [2]

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Let's see. Maybe first place to start is on the margin. So for the most part pretty stable. I think I would -- I kind of estimate it as like a 328-ish run rate when you adjust for the PAAs and then some level of elevated nonaccrual recoveries. So if that is a starting point, we're down about 2 basis points or so from the first quarter. Is that a good proxy for what to expect? Should the Fed indeed cut by 25 basis points? And then is that the same for each additional 25 basis points? How are you guys thinking about that dynamic?

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Brendon B. Falconer, Old National Bancorp - CFO, Senior VP & Treasurer [3]

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Yes, Scott. This is Brendon. Yes, I think you're thinking about that exactly right. We think a Fed cut in July would generally result in a margin that has similar compression to what we experienced Q1 over Q2. I think the one wildcard there is an upside that we might see going into fourth quarter is deposit costs starting to come down -- level off in Q3 and starting to maybe come down in Q4. Might be able to do a little better than that in the back half of '19.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [4]

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Okay. That's perfect. And then just as I look at the cost base, so I think we're, on average, about $123.5 million in, I guess, what I would call like core expenses for the first half of the year per quarter. And I guess if we were to take the roughly anticipated $15 million, $15.5 million of client cost savings, that equates to $3.5, $4 million a quarter. Should we anticipate that expenses come down into like the $120 million range per quarter? Or is that a fair way to think about things? Or would there be just some natural build that would offset a little of the cost savings impact?

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Brendon B. Falconer, Old National Bancorp - CFO, Senior VP & Treasurer [5]

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Scott, I think your rationale makes a lot of sense. I think the run rate in Q4 -- the run rate in Q2 less some client cost saves in the back half, that number feels pretty close. We're generally pretty comfortable with where consensus has landed and I think what you're outlining there seems in line.

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Operator [6]

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Our next question comes from Chris McGratty of KBW.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [7]

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Maybe a question for Daryl. The release cited some intentional move out of some kind of riskier credits. I'm wondering if you could quantify how much in industry type and kind of what you saw that drove the decision?

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Daryl D. Moore, Old National Bancorp - Senior EVP & Chief Credit Executive [8]

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Yes, Chris. Yes, it was about $40 million, and these are loans that we had identified for some time and had been working with the borrowers to either get them upgraded or moved out. The largest of those are the firm actually sold their senior housing living facilities. So this is just another quarter of us working with clients and trying, as I said, to get them upgraded or if not to move them out. So a little higher this quarter, but it's just the normal practice of what we do.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [9]

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Okay. And aside from these decisions, anything worth discussing kind of into the back half of the year? Obviously, ag is a focus. Any kind of concerns in that portfolio or elsewhere in the commercial book?

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Daryl D. Moore, Old National Bancorp - Senior EVP & Chief Credit Executive [10]

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No, I think you've hit the ag piece of it. And we're -- our portfolio really isn't much different than any of the banks that you think about in terms of commercial real estate and ag, and so there's nothing really that we see that would stand out.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [11]

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Okay. Brendon, if we could go to -- or Jim, to the top line to net interest income. If you kind of exclude the accretion income and the interest reversals, how should we be thinking about growth in net interest income, like core net interest income? It seems like the headwind from payoffs will continue to some degree. We've got a little bit downward pressure on NIM because of the environment we're in. Is this a situation where you think you can grow core NII in the next few quarters? And if not, maybe could you speak to the expense, maybe offsets that you might be able to identify?

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Brendon B. Falconer, Old National Bancorp - CFO, Senior VP & Treasurer [12]

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Sure. I'll start with that, with the net interest income. I think it largely depends on our ability to grow earning assets. I think as loan growth materializes, that will actually -- will obviously drive the NII higher. We kind of spoke to the actual margin percent compression that we expect to feel as asset yields will be under some pressure from the long end of the curve, offset largely by lower funding costs. But I really think NII is really going to be dependent on growing earning assets in the back half.

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James C. Ryan, Old National Bancorp - CEO & Director [13]

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And Chris, I would just add, regardless of the direction of NII or other fee income, we're always going to be focused in on improving our operating leverage and that -- and partially driven by the expense line. So we've created a culture here, as you know of continuing to look at ways to drive lower expenses, get more efficient, more effective and ultimately, with the idea of serving our clients better. So regardless of where margin's going, we are going to be focused in on the expense line items too.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [14]

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Great. The last one on the buyback. Is my math that you've got about 3.7 million shares left and kind of you said you'd be opportunistic. Is there a target capital ratio that we should be looking at for you guys? Obviously, the lack of balance sheet growth is building capital by itself, but any help there would be great.

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James C. Ryan, Old National Bancorp - CEO & Director [15]

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Yes. We don't have a target PCE number out there. You can imagine we're at the high end of, I think what we're very comfortable with today. And we'd fully expect to finish that authorization by year-end.

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Operator [16]

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Our next question comes from line of Terry McEvoy of Stephens.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [17]

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Let's just start, I guess, with the pace of loan prepayments. Did that slow at all throughout the second quarter? And I guess what's your general thoughts looking out into the second half of this year? Whether the pace should slow down and hopefully provide some balance sheet growth within the loan portfolio?

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James C. Ryan, Old National Bancorp - CEO & Director [18]

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No. The first quarter was elevated and the second quarter was even beyond that by approximately another $100 million. So Terry, it's hard to know what's going to happen to the future direction of those prepayments. All that we can do is focus on our production and make sure we're doing the right thing to serve our clients. And we've got to continue to grow our pipeline and grow the accepted category of that pipeline. So that's what we're focused in on. It's really hard to give any thoughts as to what we expect the second half of the year to bring in terms of those prepayments.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [19]

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Then as a follow up, just reading the presentation, franchise evolution, increased scale, we're seeing that in the adjusted efficiency ratio of 57.5%. So I guess my question is for a $20 billion bank, I guess where can that go and where should that go going forward as you realize the benefits of the scale?

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James C. Ryan, Old National Bancorp - CEO & Director [20]

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I think we feel pretty good that we came through solidly through the 60% barrier. That was a hard barrier for us to cross. And really as you -- as we go out to the $20 billion mark, we started to see that. We're not prepared to give any guidance that as to where we think that future ratio is going to go. Just know it's a focus in on us. I don't think there's many institutions that are turning 700 basis points year-over-year operating leverage improvement. And so it's a focus of ours. We'll continue to drive the expense line regardless of where revenue goes in the industry. And so I'm just not prepared to give any kind of guidance now but it is definitely a conversation we're having today inside the walls here.

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Operator [21]

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(Operator Instructions) Our next question comes from David Long of Raymond James.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [22]

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Daryl, probably haven't had this many questions in quite some time with the -- with how clean credit quality has been. But just a couple of things there, just amongst the credits that you've mentioned exiting, any consistency that you've seen across those, whether it's industry or anything amongst those that you can point out?

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Daryl D. Moore, Old National Bancorp - Senior EVP & Chief Credit Executive [23]

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No, David, there really isn't. Dollars I talked about that senior living borrower, but that was just a larger loan. Now when we look down through that $40 million, there is no really trend or common denominator of industry in what we've moved out.

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James C. Ryan, Old National Bancorp - CEO & Director [24]

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Good. David, I'd just comment. I think this is pretty normal for us. This is proactive portfolio management towards the tail end of a cycle. And so while it is a little bit elevated from what we've seen in the last handful of quarters, we believe it's the right thing to do and just really proactive management and try to -- as always, we try to get ahead of those issues before they turn into losses or any kind of charge-offs.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [25]

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Got it. Okay. And then second question is -- relates to operating expenses. And with your IT spending or investing in the -- in that space, how has the pace of that part of the expense line grown versus the rest of your overall expenses?

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James C. Ryan, Old National Bancorp - CEO & Director [26]

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I don't have the math in front of me, but I would say, as a whole, we are spending more money on more technology than we have in the past. Having said that, we feel pretty good about where our technology looks like as it faces externally to our clients. We think we have some room for improvement on how we manage internal processes and paper flow. But we would look to be -- that would be self-funding. So any opportunities to reduce expenses would self-fund any kind of improvements there. So we're having lots of conversations on how we continue to improve that technology line item. So maybe the line doesn't grow all that materially, but we continue to get more efficient, more effective internally.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [27]

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Got it. And have you thought about your IT spending breaking out between that side of it, the defensive side versus the offensive side? And maybe can you talk about where -- if the spending has shifted more towards offense yet? Or is it still sort of just trying to become more efficient?

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Brendon B. Falconer, Old National Bancorp - CFO, Senior VP & Treasurer [28]

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I mean, I think a vast majority of our stuff is the run rate items that we spend in that technology line item to keep the lights on, regulatory changes, routine process improvements. I don't think we have a -- an ability to really quantify how much of it's kind of offense versus defense. But a vast majority of the line item today is really just how we run the organization.

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Operator [29]

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Our next question comes from the line of Jon Arfstrom of RBC Capital Markets.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [30]

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Daryl, we're having fun, Daryl, asking you all kinds of questions but some of your peers have had, call it, one-off or a couple of credit issues this quarter, and you guys have obviously put up a pretty clean quarter here. I'm just curious of your assessment of the environment. Do you feel like things are getting any worse from a credit perspective? Or what would you maybe -- hard to articulate it, but what would you say in terms of just the overall credit environment? And why aren't you seeing it and why do you think others are?

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Daryl D. Moore, Old National Bancorp - Senior EVP & Chief Credit Executive [31]

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Yes. I -- first of all, Jon, I don't think we're immune from that, right? So in today's environment, we could have one of those, every bank could. I think if you had asked me that question maybe 2 quarters ago, I would have told you that things were getting a little tighter and it's harder to move credits out. I think over the last couple of quarters, we've seen it a little easier to move credits out, which is just an interesting kind of dynamic. But yes, we could have those. Every bank has probably a couple of those loans in the portfolio. But right now I don't see anything on the near-term horizon that would give us real concern that the portfolios are going to start to experiencing significant losses or deterioration.

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James C. Ryan, Old National Bancorp - CEO & Director [32]

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Jon, I'd point you back to my comments earlier. We're hard graders, and we try to identify weakness early. I think if you look at some of our criticized and classified, you tend to see some lumpiness in those numbers. That's because we're actively managing the portfolio. We don't wait for problems to arise. We're trying to actively manage it. And I think that ultimately will translate into better results and really the hallmark, you know, of our company.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [33]

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Yes, yes, okay. Good. And back to Terry's question, a little bit on loan production, more of the commercial side of it. Looks like you guys have good pipelines, maybe moderate-sized loans in terms of the new production. Where are you seeing some of that strength? And any change in the tone of the borrower, are you still feeling like your borrowers in kind of the SME-type borrowers still optimistic?

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James A. Sandgren, Old National Bancorp - President & COO [34]

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Yes, Jon. This is Jim Sandgren. I would say that, in the second quarter, really production was led by our Minnesota team by far. Almost 30% of our commercial production in the quarter was driven by our Minnesota team. So things are going very, very well there. And then it was kind of split across the region. We did see balance sheet growth in Minnesota, Indianapolis, Evansville, so kind of across the board. I was up in Milwaukee recently, had a dinner with clients, a trucking company, a manufacturer, a commercial real estate developer.

And I got to tell you they all felt really good about where the economy is, how their customers feel. So we continue to be optimistic given our pipeline, the accepted categories and where we're going toward the second half of the year. It's just that X factor of payoffs and private equity money chasing deals. So again, as Jim pointed out earlier, I think we just need to worry about what we can control and taking care of our customers and deepening relationships.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [35]

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Okay. Good. And then maybe one for you, Brendon, on the deposit costs. You kind of alluded to the fact that you might have an opportunity to maybe lower some cost later in the year. You had a pretty good quarter. I mean, you're only up 6 basis points. So I'm just curious if the Fed goes 25 and then another 25 and another 25, at what point do you get to a point where you just can't lower deposit costs anymore? And in terms of, maybe what's possible in the second half in terms of lowering these costs?

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Brendon B. Falconer, Old National Bancorp - CFO, Senior VP & Treasurer [36]

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Yes, Jon. I think that's a fair point. Having a low beta up generally means a low beta down. But I can tell you in the short term, kind of relevant ranges of 2 to 3 cuts, I think we have plenty of room to move deposits down. I don't know if that will happen right out of the gate in the third quarter, but we would expect deposits to level off in third quarter and then we'll be able to start moving some rates down.

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Operator [37]

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(Operator Instructions) Our next question comes from Kevin Reevey of D.A. Davidson.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [38]

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So I was just curious going forward specifically, how do you intend to protect your margin? I know deposit cost is one lever. Can you give us more color as to what levers you intend to pull in order to protect the margin as best as you can, given the rate environment?

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Brendon B. Falconer, Old National Bancorp - CFO, Senior VP & Treasurer [39]

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Yes, Kevin. This is Brendon. We've started working very proactively on the balance sheet, really around this time last year, to reposition it to -- our interest rate sensitivity to neutral. And we pull every lever at our disposal, including swapping some fixed-rate advances to float, putting in some collars and floors where they made sense. And we feel like we have largely brought that interest rate sensitivity back to near neutral. And we have some levers that we can pull that will to continue to help mitigate margin pressure going forward.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [40]

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And Brendon, so what percent of your loans right now have floors?

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Brendon B. Falconer, Old National Bancorp - CFO, Senior VP & Treasurer [41]

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Right now we have 12% of our loans with floors.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [42]

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Great. And then lastly, with Klein kind of done, kind of if you can give us some color on your M&A focus, regionally and size-wise?

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James C. Ryan, Old National Bancorp - CEO & Director [43]

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Yes. So really unchanged. We remain patient. It's in footprint, looking for opportunities where we can generate cost savings, and that remains our key focus. That was banks in that $2 billion to $4 billion range are kind of plan A opportunities. We'd obviously look for something bigger than that as well, but it's generally around that $2 billion to $4 billion. I would also say, as I said in the last quarter call, my desire would be to spend the rest of the year more inwardly focused, making sure we're working on execution and improving performance. So that's why we colored it around. If the perfect pitch comes along, we'll definitely take a look. But absent that, I would be rather -- my desire would be more inwardly focused.

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Operator [44]

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(Operator Instructions) There appears to be no further questions at this time. I would like to turn the floor back over to management for any additional or closing remarks.

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James C. Ryan, Old National Bancorp - CEO & Director [45]

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Well, thank you all for attending this morning. As usual, the team is here if you have more questions to follow up. We appreciate your continued interest, and look forward to talking to you next quarter.

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Operator [46]

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Thank you. 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, oldnational.com. A replay of the call will also be available by dialing 1 (855) 859-2056, conference ID code 4869447. This replay will be available through August 5. If anyone has additional questions, please contact Lynell Walton at (812) 464-1366. Thank you for your participation in today's conference call.