Welcome to the Old National Bancorp Second Quarter 2017 earnings conference call. This call is being recorded and has been made accessible to the public in accordance with SEC’s Regulation FD. The call, along with corresponding presentation slides, will be archived for 12 months on the investor relations page at oldnational.com. A replay of the call will also be available beginning at 1.00 PM Central time on July 25 through August 8. To access the replay, dial 1-855-859-2056. The conference ID code: 49543317. Those participating today will be analysts and members of the financial community. At this time all participants are in a listen only mode. Following management’s prepared remarks, we will hold a question-and-answer session. At this time, the call will be turned over to Lynell Walton for opening remarks. Ms. Walton?

Thank you, Dorothy, and good morning everyone. Welcome to Old National Bancorp's conference call to discuss our second quarter 2017 earnings. Joining me are Bob Jones, Jim Sandgren, Jim Ryan, Daryl Moore and Mike Woods. Before I begin the discussion of our second quarter results, I would like to remind you that some comments today may contain forward looking statements that are subject to certain risks, uncertainties and other factors that could cause the company’s actual future results to differ materially from those discussed. Please refer to the forward looking statements disclosure contained on slide 3 of this presentation, as well as Old National's SEC filings for a full discussion of the company's risk factors. As referenced on slide 4 certain non-GAAP financial measures will be discussed on this call. Non-GAAP measures are only provided to assist you in understanding Old National's results and performance trends and should not be relied upon as a financial measure of actual results. Reconciliation for these non-GAAP measures to the most directly comparable GAAP financial measure are appropriately referenced and included within the presentation. I'll begin the review of our strong second quarter performance on slide 5. This morning we reported second quarter net income of $38.9 million or $0.28 per share. This net income represents an 8% increase over the first quarter of 2017. Our investment in the higher growth markets continues to yield positive results as our portfolio of commercial and commercial real estate loans grew 10% on an annualized basis during the second quarter. While our total loan portfolio grew over 5% on an annualized basis. In addition, our fee income grew almost, 15% quarter-over-quarter with gains in almost every line item. Our credit cost remain low and our expenses were well controlled. We're also pleased with the continued effort trend in our tangible book value, which increased 7.5% from the year ago. To provide additional detail, I'll now turn the call over to Jim Sandgren.

Thank you, Lynell. And good morning everyone, with the definition of a good quarter's executing your stated strategy and this was a very good quarter for Old National. The growth market strategy we have detailed for you over the past several quarters led to meaningful commercial loan and fee based business revenue growth in Q2. Starting with slide 7, you can see that our $110.4 million in total loan growth for the quarter was primarily driven by a 10% annualized commercial loan growth. We also experienced small growth and see lot balances, while our indirect portfolio declined. The $128.2 million in commercial growth for the quarter was comprised of $91.1 million of C&I growth or 71% and the remaining $37.1 million or 29% was of the CRE variety. This was a major deviation from the first quarter when all of our commercial growth was in the CRE category. While we enjoyed excellent commercial balance sheet growth in a number of markets, a few that, I'd like to draw special attention to our Evansville, South Bend, Elkhart, Ann Arbor, Indianapolis and Milwaukee, which was a nice mix of our new and legacy markets. Turning to slide 8, the graph on the left illustrates a strong quarter for new commercial production. The $563.6 million were generated represents a 23.7% increase over the first quarter and a 41.7% increase year-over-year. The middle graph that picks our production yield which ticked up slightly as a result of higher short-term rates. Its also notable that 68% of our second quarter commercial loans were variable rate loans, which bodes well should interest rates continue to rise. The final graph on Slide 8, shows another record quarter for our commercial loan pipeline. With the total balance exceeding $1.8 billion on June 30, our pipeline includes almost $800…

Thank you, Jim. Starting on Slide 12, I'm pleased to report that adjusted pretax, pre-provision income grew by 5.8% quarter-over-quarter and 17.8% year-over-year as a result of strong underlying fundamentals in our banking business, our focus on expense reductions and the contribution from our acquired markets in Wisconsin. We are pleased that the results are growing adjusted pretax, pre-provision income as we remain focused on improving the operating leverage of the company. Slide 13 details the major components of total revenue. As a remainder, both the sale of our insurance business and our partnership with Anchor Bank closed in the second quarter of 2016, when you exclude the $7.1 million that we reported in insurance commissions in the second quarter of 2016. Our fee income grew 11% year-over-year. Moving to Slide 14, you will see the trend of our net interest margin and a new graph depicting the portion of the margin attributable to accretion income. The decline in our reported net interest margin was attributable to the decline in accretion income in the quarter. This change in disclosure which we believe you will begin seeing on [additional] [ph] wide basis is now preferred by the SEC. The current quarter margin did benefit from our continued strong loan growth and the last interest rate increase. Excluding changes in accretion income, loan coupons should continue to trend higher from recent increases in short-term interest rates and the improved mix. Interest bearing core deposit cost is one basis point higher during the quarter at 23 basis points. Currently we do not anticipate any significant repricing of our core deposits. Further margin improvement could come with the steepening of the yield curve. Shifting to non-interest expenses on Slide 15, operational expenses is defined on the slide totaled $101.1 million in the second quarter…

Thank you, Jim. We are pleased to report that strong performance in a number of asset quality categories continued in the most recently ended quarter. In this regard as we move to Slide 19, we laid-off for you net charge-off and provision results comparing the current quarter's net charge-offs and provision expense to both the prior quarter as well as to the second quarter of 2016. For the current quarter, we recognize provision expense of $1.4 million compared to provision expense to $300,000 last quarter and $1.3 million to the second quarter of 2016. The provision expense in the quarter was mainly driven by losses and additional impairment requirements in our acquired portfolios. The need for increased provision associated with new loan growth was largely offset by a decrease in estimated incurred loss rates in most portfolio segments. With respect to net charge-offs, we posted net losses of $200,000 representing 1 basis point of average loans in the current quarter compared to $300,000 in net losses last quarter and net charge-offs at $200,000 in the second quarter of 2016 both also representing 1 basis point of average loans in the respective periods. Our gross charge-offs in the quarter were again relatively controlled, we benefited greatly from recoveries of $3.2 million, which were 94% of gross charge-off amount of $3.4 million. While the ending allowance for loan losses was $1.2 million higher than the beginning balance, the allowance to total end of period loans remained at 55 basis points given the loan growth in the quarter. However, the allowance to non-performing loans declined from 38% -- 37% in the period due to an increase in non-performing loans which I will review shortly. As I remind you each quarter it is important remember that we also have marks on acquired loans which…

Great. Thank you, Daryl, and good morning, everyone. As always we appreciate your participation in our calls. I want to begin my closing comments with my usual perspective on our quarter, which in the spirit of the references and have listed on the slide, I wanted to label moving up to charts, but Lynell viewed my idea as being too corny as if most of comments are corny enough already. The quarter continued the positive trends that we have seen for some time. Strong loan growth funded by low cost core deposits along with robust pipelines, by growing fee income and anchored by continuing strong credit performance all which is reflective of the transformation of our franchise in the stronger markets and our focus on execution. Our focus on expenses remains a key priority and when you adjust for certain items that maybe non-recurring, I feel good about the progress we have made in the platform for sustainable improvement in future quarters. This quarter is indicative of our overall strategy of consistent quality earning and one that further strengthens our ability for high performance. Our confidence is bolstered by what we are hearing from our clients in the so called soft measures that have been reported. For the most part, our clients can look past the noise coming out of Washington and they do believe that over time there wouldn't be a more business friendly platform, but they don't do this as the sole contributor of the growth for their businesses. Their horizon maybe longer, but their optimism remains. For the most part, we have seen many of the traditional hard measures improved in all of our markets. Unemployment is at very low levels, our GDP is growing at a slightly better rate and sales volumes and pipelines for many…

[Operator Instructions] Your first question comes from the line of Scott Siefers with Sandler O'Neill.

I'm shocked Scott you got on first.

Man, I don't know, when you dial in at 7 AM, its great thing to happen.

You already got a life buddy.

I know its, you're not the first person to tell me that. Good morning, hope you guys are doing well.

Good morning.

I had a couple of quick questions, so first the 1 million of charges related to the client experience improvement initiative, can you just explain a little on, exactly what you are doing there and it sounds like there will be another roughly $2.5 to $3 million of charges for the remainder of the year, just kind of, just a little more thought on what you are doing there and what you intent to accomplish?

Scott as we come together, over the years with multiple integrations and partnerships you develop complexity and its good to brand folks from the outside they can look at an organization and process flows. It's really across the company review of how we can approach things differently, serve our clients better and at the same time reduce some other complexity built for our internal and external clients. We've hired an outside group those charges really are for their consulting fees, which are helping us analyze the processes that we do have. And we expect for the full year of about $3.7 million, we expect that the return will be far in excess of that, as many of you know I'm not a big fan of putting acute name on a program and we would prefer that we do not make a commitment in terms of savings, just realize it, our goal is to deliver and to over commit and under promise.

Okay, prefect. And then, I guess just in the vein of the cost base overall, I think in the key you guys have been so just in sort of the $405 million to $410 million expense base through the full year. Is that something you are still comfortable with?

Yes.

Okay, perfect. Then maybe if I seek one last one in, so the indirect portfolio declining, but the yields going up sets all, kind of steady issue goes in terms of what you guys said had articulated. Would you anticipate further declines here which your quarters, their point were that hits kind of a steady state just in terms of balances?

I don't think we've hit steady state, yes Scott, I think there is still some opportunities to increase the yield and, volume will decrease correspondingly. That's a very competitive business and we think there is more opportunities on our balance sheet on the C&I and CRE side. I would say that Chris is doing a great job, driving up yield though.

Definitely, definitely that works away from the numbers. So, alright perfect thank you guys very much.

Thank you, Scott.

Your next question comes from the line Chris McGratty from KBW.

Good morning Chris.

Hey good morning Bob, good morning everybody. If I could follow-up on Scott's question about growth and the remix of the indirect portfolio, if we're thinking kind of buyback a few quarters, is that the right time arising to think kind of stability in that portfolio and the yields getting to where they need to be. So, I think you've talked about the mid-single digit consolidated loan growth near-term, is that, I guess wouldn't acceleration of loan growth if the commercial trends continue with fair [indiscernible]?

No, I think that's fair, Chris what we really ideally like to do is get to a platform as we look to 18 that, we're through the balance sheet change and have ability to grow from there. So, I think that's a fair very fair analysis.

Okay. Maybe the second, you referenced anchor few times on the credit side, I'm wondering how that portfolio broadly has performed relative to expectation and then also the pipeline of recoveries that you are continuing to recognize? Thanks.

Yes, Chris. I don't think the portfolio is not performing any different than we thought it would, as you know when we go into banks and you get a year or 18 months as you begin to get new financial information and, to apply our standards to it, sometimes that we confirm where we were other times, we'll look at borrowers and just say, okay are there some weakness this year. And we always have in this organization our number one application to credit area is to make the asset quality rating call right. And so, we're just applying what we have in other acquisitions, so I don't, there is nothing that it really creates issues for us. So, I don't think that we - we are concerned of all about look at that portfolio is. And second question recoveries. Those recoveries are so lumpy and its just so hard to tell our guys have done a great job getting those, but it would just simply be a guess to tell you where we were, because they just they come as they come, so.

Understood, and if I could kick in, Bob on commented M&A obviously there was a transaction in Wisconsin earlier or late last week in any kind of capacity you said how much you like this market given the success with anchor. Is that something you might have looked at or the pricing just wasn't right for you or is there other kind of initiatives that would have preferred you from considering at it? Thanks.

Obviously we can't comment on a specific transaction until everything is filed, but we think associated to it, is a great competitor, good deal for them and we wish him the best and we continue to love Wisconsin.

Okay, thanks.

Your next question comes from the line of Terry McEvoy with Stephens.

Good morning, Terry.

Hi, good morning everyone. First question, the commercial growth, the complexion changed a bit more C&I versus last quarter and not as much CRE. On the C&I side is that more seasonality or Bob some of your comments were actually really hearing in seeing the outlook for organic growth is stronger? And then the follow-up on CRE Daryl you mentioned multi-family retail, would you expect that business to grow in the second half of this year and maybe what areas of the market are you comfortable growing, obviously its not multi-family or those connected to retail?

Yes. Terry this is Jim and I'll first address the C&I growth in the quarter. I think certainly part of it was with seasonality we did see line balances drive up, but then we did have a real nice kind of cross-section of growth within C&I, obviously we're in a lot of college terms. We had some opportunities with some of the public and private universities within our footprint. We saw some nice growth in our manufacturing sector, some non-profit growth. So it was just a really a strong quarter from a C&I perspective, still had some nice production on the CRE side. Our pipelines today are about 50-50, with non-owner occupied investment real estate about 50%, the balance owner occupied and C&I. Strong quarter for the second quarter and look forward to additional growth in the coming quarters.

I would just add Terry, there is optimism amongst the clients, so I think in addition to the normal seasonality, we are seeing folks expand inventory, making capital commitments. Unemployment rates less than 3 people, we're looking for ways to expand in some of that revolves technology, just to process improvements.

And Terry with respect to the commercial real estate, the multi-family its really interesting, we talked to our guys last week about this whole segment and one of the first comments they made was, the borrowers themselves are really retracting with respect to loan request. So that's going to be that kind of first part as that, we are just not going to have as many request to look at. We do still have some very strong borrowers especially in our Wisconsin market, with some submarkets that we got some things in the pipeline. So we might be putting on some additional multi-family. The other aspect to this is, there is a lot of steps going out the back door, as these multi-family developers are refinancing, non-recourse in the secondary market. So there is a couple of dynamics there. With respect to retail, its just hard to do a lot of retail projects today, right I mean if you just look at dynamics and where that industry is going to go its just, its very difficult to take a look at lease expirations and the strength of some of the tenants and get complete those projects. So, I just think its not just that's across the industry that's going to slow down quite a bit until and if that stabilizes. I think the one segment that we are seeing some growth and feel pretty strongly about is the industrial warehouse segment. We have a couple of markets where because the transportation in and out of those markets that segment is growing, it's strong, the performance are strong. So, that would be one segment that I think that you might see some growth in as we move forward.

Thank you. And then, just a question on deposits. Could you just talk about attrition at some of the branch closures? And then, are you seeing any differences in deposit pricing expectations paid us between your legacy Indiana markets versus your newer growth markets?

Yes, Terry. Let me first address your question on the closures that we have had in January. I think due to the continued investment in our mobile and online, attrition continues to run at a lower level than really expected. A lot of those banking centers, we had other locations in close proximity. So, that continues to be a good opportunity for us to kind of right-size our footprint. So attrition, I think has been minimal. As far as deposit pricing across the footprint, knock on wood, we haven't had to move our pricing at this point. Every now and then, you see some unique pricing out there, or aggressive pricing, but really not too bad. Certainly in our legacy markets where we have strong market share really hadn't felt the impact at all. It's the newer growth markets where you might see a little bit more aggressive pricing. But again, to-date have not seen huge pressures on the deposit pricing.

Terry, I might just add, the beauty of our franchises, we were able to fund our own balance sheet through these markets, so called legacy or where we have significant share and we kind of have the grill in those markets. So, we have since been saying for eight plus years, it's going to come today when there is a value on our deposit franchise and as rates continue to move up, we think that comes closer to the reality. So, we look forward, we continue to be able to fund ourselves and use the variety of markets we have to be able to do that.

Great. I appreciate that. Thank you.

Thanks Terry.

Our next question comes from the line of David Long with Raymond James.

Good morning, David.

Good morning guys. Hope all is well. Want to follow-up with Scott's question on the operating expense number, the 4.5 to 4.10. Does that include the tax credit investment driven impairment charges and also the client experience charges?

Yes.

Yes.

Okay. So, we would be looking in the back half of the year, we are at almost 205, for the first half we would be looking at -- so, the worst case then sort of matching that back of the year even including those charges, right?

Yes.

Okay. Okay, great. And then, secondly, I think you guys in the past have talked about the mid-40 million dollar range for fee-based revenue and we are obviously higher than that may be led by the securities gains. Is that still the right way to think about non-interest income?

Yes.

Yes. We were comfortable that mid-40 depending on what Chris does in capital markets, we might get a little bit above that, we are seeing some seasonality in the mortgage -- we are seeing an awful lot of clients using the derivative product today and Chris is building a foreign exchange product that some of our larger markets is being very well received.

All right. Great. My other questions have already been answered. Thanks guys. Appreciate it.

Great. Thanks David.

Your next question comes from the line of Andy Stapp with Hilliard Lyons.

Good morning.

Good morning, Andy.

All my questions had been answered except for one remaining question. And that's just loan to deposit service charges, they are down year-over-year despite having full quarters of fees associated with Anchor. Any thoughts as to when this might stabilize?

Yes. I ask that same question to Jim every quarter. Obviously, you are seeing customer behavior change. We are trying to be much more relationship driven and how we look at pricing. I would say we are getting close to stability. And obviously, quite frankly, I will be honest and say that while it's frustrating to see that number come down, I think it's the right thing that happened. So, I've said in the past that we as a company and maybe as an industry maybe got addicted a little too much to service charges. And I think we need to be a little more consumer pro-friendly. So, I think we are close to the bottom and we will continue to build from here.

Okay, great. Thank you.

Thanks Andy.

And you have a follow-up question from the line of Chris McGratty with KBW.

Hi, Chris.

I'm all set. My question was under the one-time charges. I'm all set. Thanks.

Come on, Chris. Come up with something. You got this line, you got to have something you want to ask?

I'm all set. Thanks.

All right.

[Operator Instructions] Your next question comes from the line of Peyton Green with Piper Jaffray.

Good morning, Peyton. How are you doing?

Good morning. Doing great. Thanks for taking my question.

I thought the guys down there. How is our guys doing for you?

He is doing great. He is off to a great start.

All right.

A question for you though Bob. How do you balance at this point for the fair amount of hard work and repositioning the franchise in an environment where M&A pricing has gone up. How do you balance the attractiveness of your own stock via -- may be a stock repurchase relative to and just really buying more of ONB at a relative discount versus maybe franchises for sale in the public market at a premium.

It's a great question, Peyton. And I think it's a question we discussed with our Board every quarter. To your point, we feel that there is opportunity and the upside in our stock we think as you look at strength of our balance sheet, the consistency of our earnings and remove any discussion on accretion, we think that we are undervalued against our peers. That's a discussion we have. We will also tell you that we think there a lot of interesting transactions that has been floating around. And I think over time, we have shown ourselves to be an excellent integrator, one that kind of over -- under committed and over promised or may be -- excuse me, under promised and over committed on terms of our ability. So, again, we have the discussion every quarter, probably all aware of our finance committee also spends a lot of time on M&A and best use of capital. So, with the financial we should be doing right. And we will have those discussions every quarter. We depend a lot on you guys, to give us better report so our stock price goes up.

Maybe a follow-up to that Bob. I mean in thinking about historically a lot of the emphasis over the last five years has been extending the footprint into more growth oriented markets, larger metropolitan markets. How were the strategy look going forward? I mean is that still the emphasis or would you be looking for more in-market rationalization opportunities?

A lot of it is driven by the return we give to our shareholders. So, the overall strategy won't change. We still think there is an opportunity in the Midwest to be a consolidator along with a few other excellently well-positioned franchises. Obviously, end markets you can get quite a quick term, then you got to get the right pricing and you got to make sure that they are the right markets. Our opinion as you don't just do an end market for the fact of ripping out a bunch of cost, you want to build something you can grow from. So, we really are driven by what we think is right for shareholder value. And for us to continue to improve the top-line as well as be able to reduce cost. And again, even in our out of franchise or non-end market transactions, we have been able to get over 30% cost saves. So, I think as you look at that even against some of the larger end markets, it's a pretty good number and we can get to a place where we can get double-digit growth, somewhat of what we are getting in Wisconsin. I think it's a pretty good return for our shareholder.

Okay, great. Thank you for taking my questions.

Thanks Peyton.

There are no further questions at this time.

Great. As always if you have any follow-ups let Lynell know. We appreciate your interest.

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 web site oldnational.com. A replay of the call will also be available by dialing 1-855-859-2056. The conference ID code: 49543317. This replay will be available through August 8. If anyone has additional questions please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call.