Welcome to the Old National Bancorp Second Quarter 2018 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. Before turning the call over, management would like to remind everyone that as noted on Slide 3 certain statements on today’s call maybe forward-looking in nature and are subject to certain risks, uncertainties and other factors that could cause actual results to differ from those discussed. The company’s risk factors are fully disclosed and discussed within its SEC filings. In addition, certain slides contain non-GAAP measures which management believes provides more appropriate comparisons. These non-GAAP measures are intended to assist investors understanding of performance trends. Reconciliation for these numbers, are contained within the appendix of the presentation. I’d now like to turn the call over to Bob Jones for opening remarks. Mr. Jones.

Great. Thank you, Dorothy. And obviously, last quarter I didn’t do as good a job with those statements as you did and John Moran passed the buck to you. So I appreciate that. So good morning everybody and thank you for joining us. Slide 4 provides an overview of our second quarter, which by all accounts was very good and consistent with our guidance in prior quarters. We did see very strong C&I growth of more than 21% driven by a record quarter production of almost $600 million. Our reported total loan growth was slightly muted by the sale of almost $65 million in student loans that we have acquired via our Wisconsin partnership and we also did see the continuation of our balance sheet remix strategy with the decline in indirect loans. Our commercial real estate outstandings were flat for the quarter driven in large part by pay-downs of over $100 million in loans that went to the secondary market, which is an abnormally high quarter of activity for us. As you know, the secondary market has become very aggressive for quality commercial real estate. I might add a bit of a cautionary statement here. Commercial real estate remains a very good asset class for us and we are comfortable with the quality of the portfolio we have built over the last few years. While we still have capacity to increase our outstandings and remain committed to lending within our risk tolerance, we are beginning to see aggressive competition in the commercial real estate markets both in terms of structure and in pricing and that may impact our growth in commercial real estate going forward. We did experience our normal seasonal decline in our end-of-period deposits. Deposit pricing has become a much more aggressive particularly from those banks, who…

Thank you, Bob. Starting on Slide 5, I will reiterate a few items that we think are important to our strong second quarter results. Adjusted earnings per share were $0.29. The most significant distinction between the second quarter and first quarter was the $11.9 million in tax credit amortization. Adjusted earnings per share for the second quarter excludes $2.5 million of merger charges, $2.2 million of student loan sale gains, $1.6 million of branch closure charges and $1.5 million of securities gains. Overall, we are very pleased with the results this quarter as we continued to execute our strategic initiatives. Moving to Slide 6, adjusted pre-tax pre-provision net revenue was almost 20% 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. Next on Slide 7, as Bob highlighted we had record commercial production during the quarter of almost $600 million. This translated into more than 8% commercial growth despite a large number of commercial real estate deals being refinanced in the secondary market. Despite the strong pull-through we experienced in the quarter, our commercial pipeline still stands at $1.7 billion. Our loan yields increased 15 basis points, primarily aided by the increase in short-term rates during the quarter and an improved mix. We should also note that our indirect portfolio was down 7% and we sold our entire student loan portfolio during the quarter. We inherited this book from our Wisconsin acquisition and opportunistically exited this portfolio. Slide 8 demonstrates our year-over-year change in earning assets. Again this is very consistent with our stated strategy and ongoing remix objectives. As a percentage of total earning assets commercial loans are up almost 8%, less productive earning assets including indirect lending of securities were…

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

So, Scott, you get up at 3 in the morning just to get on the line, so you can be number one.

Well, I am fortunate to have people who do that for me actually.

Well, you have got people. I need people.

So, thanks. Good morning, guys. Two I guess rate-based questions. So, one, Jim, maybe if you can just discuss the margin in a little more detail, the core exclusive of the PAAs came little well, not a little, but better than I would have anticipated. So, maybe as you look forward, if you could sort of discuss the biggest puts and takes as you see them. I might have guessed it would have been the yield curve as the biggest pressure, but it looks like it might be deposit betas lagging as the biggest benefit perhaps? And then as sort of a segue if you might just spend a little more time discussing deposit pricing by market, Bob as you noted you have got some places where it’s kind of you guys and almost nobody else, but then some in your places, so just if you can bifurcate those? That would be great.

Yes. So, Scott, we are pleased with the performance from our margin and a lot of it on my opinion was driven by the fact that we are able to lag some of the deposit rate pricing. The guidance we give to a stable to slightly increasing kind of includes trend line increases we are seeing. And as Jim will talk about, we are being defensive and being selective in where we are raising rates, but that will continue to I think either drive or not drive, positive changes in the margin, certainly the flat yield curve does not help our ability. We have a lot of medium to longer term assets in our investment portfolio and residential portfolio, so to the extent that that 10-year stays stubbornly below 3% that will be a challenge to the margin growth going forward. With respect to deposit pricing, Jim can answer?

Yes, Scott. So, obviously as Bob mentioned, in the markets where we have over 20% market share we are really driving the deposit pricing and really haven’t had to move off of our current [start] [ph] rates, I think where you are seeing more movement is strictly the newer markets where we had less than 5% market share, so being a little bit defensive as Jim pointed, but it’s nice to have that mix and to have that legacy deposit franchise has been very, very helpful through the cycle.

Yes. Okay, that’s perfect. Thank you guys very much.

Great. Thanks Scott.

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

Yes. I need to what…

You need to get people so you can get on the call before Siefers.

My people are on, so that I hope they are taking notes on that Bob. Little bit on your loan growth targets, on one hand I think you are saying commercial was strong, but commercial real estate was a little bit tougher, just talk a little bit about what you are seeing in commercial and then give us an idea of kind of where and what is better and what’s tougher in commercial real estate?

Yes. I think we continue to benefit from a strong economy in the five states market. We are seeing a lot of expansion in manufacturing inventory expansion, a lot of opportunities for folks as they think about what they are doing with their tax benefits. On the other side as I mentioned briefly, we still don’t quite know the impact that tariffs will have, right now I think it’s more of a conversation with folks other than just in the Ag sector Jon. In commercial real estate I don’t want to - while we see, we are starting to see structure and pricing challenges I think the pipeline still remain strong. The quality of the projects we are seeing other than a few sectors remains good, we are very cautious towards real estate – excuse me, retail obviously. Multifamily is an area we have a little bit of angst and then senior housing would be another one that we are just seeing a lot of issues around. But the traditional warehouse office development continues to remain strong, continue to have really strong growth in the Wisconsin market. We are starting to get good growth out in Minnesota and in even some of our legacy markets.

Okay. And where would you like to see that loan mix go, you have referenced the loan and deposit mix a couple of times, but you are approaching 50% on commercial real estate, is that enough or do you want to go higher?

I think we have got room to go a little bit higher. Obviously, the trick and the key for us all is to fund that low cost deposits and to the extent we can continue to do that, I think we can allow that to drift a little bit higher.

It’s a better yielding asset, Jon, on the C&I side as we continue to wind down the indirect book. And really the indirect book as we have talked about before is less of an issue of quality of credit. It’s really an issue of yield is at such a hypercompetitive market. And we just – with the markets we have entered in with the quality of the program that Jim Sandgren’s built, we just feel C&I and to a degree CRE gives us a good replacement asset.

Okay, good. And then just one follow-up on Scott’s question on deposits, that 6 basis point increase was better than we have seen from most of your peers. Is there more to come there, some other competitors have had more of a step up that quarter, would you just say that that’s due to your deposit mix and you don’t see any unusual pressures there other than kind of just tracking up from here?

I think Jim said it well with a lot of that depends on the shape of the yield curve, but at this stage we are not feeling there is a significant amount of pressure. Again that just reinforces the beauty of the franchise that we have built that we can fund it with low cost deposits and what was our legacy markets and then be selective in any rate increases, but deposits Chris Wolking go back 10 years ago we kept on by the quality of the deposit franchise and it’s finally becoming true and folks that have the ability to raise and retain deposits at low cost are going to be the winners in this cycle. And we think we are clearly there.

Okay. Thank you.

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

Good morning Terry.

Hi, good morning. Maybe the first question, for the last couple of years, you have talked a lot about the deposit base and there was more community markets and the low betas, what’s going on the loan demand side, is there any kind of economic activity that’s bringing growth or is that maybe more in runoff fees?

Actually, Terry one of our better growth markets this last quarter was Southern Indiana which again is not exactly the hypercompetitive economic market, but I think again what Jim has built and with that gorilla theory, we are getting every at bat we can in those markets. And we have seen good growth out of Jasper, Indiana for instance which is a market that as you well know, we have got a very strong competitor. And so we continue to get at bats. And again the benefit of the stronger economy in the states we serve I think even and would not be considered growth markets are still very good.

Thanks Bob. And then just a follow-up, Page 16 the outlook where you talked about commercial and CRE growth of approximately 10%, it sounds like the back half of this year it’s going to be heavily weighted towards the C&I side and I guess based on CRE slowing down, do you see that growth rate of loans in the back half of the year slowing down just given the CRE commentary where it’s just not going to be as high as what we have seen at least through the first two quarters of this year?

I think we are very comfortable with the guidance which should be consistent with the first two quarters. CRE it all depends on the secondary market, we had over $100 million which is an abnormally high market. But we have got a record pipeline. There is a good balance between C&I and CRE and it’s the CRE and those types that we are comfortable with plus we got some undrawn commitments shared on the CRE side and strong credits as well, so comfortable with the guidance, the mix. I don’t think the first half is going to be all that different - the second half shouldn’t be all that different than the first half.

And then just lastly you doubled your presence in the Twin Cities, obviously you felt the scale was going to be necessary and the opportunities were there, as you look across your franchises, are there any other markets that really stand out where you see opportunities and would like just the larger scale to make sure you can capitalize on those growth opportunities?

Sure Michigan, you think about how strong Grand Rapids is, it’s a terrific market Ann Arbor is a great market, even Kalamazoo has got a lot of good activity going on. So that triangle that we have established there clearly we’d like bigger scale. Louisville continues to be a market where we have just had great success on the C&I side and it would be nice to build a lot of franchise there. We continue to look at Northern Indiana, so everybody is aware is the second quarter there was a transaction in Northern Indiana that just trust didn’t make financial sense, but we will continue look at the right opportunity at the right price.

Alright. Thank you.

Thanks.

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

Good morning Chris.

Hi, Bob. Good morning everybody. Maybe just a question on the balance sheet, obviously the quarter was impacted by some seasonal deposit flows, but can you remind us the target on the loan to deposit, do you still have some flexibility to peers, but were you right around 90%?

Yes. We have never really come out with a target. I think each time we get of above 100, we would have to think a bit of a look at it, but with client coming on, they have got such a low deposit – loan to deposit ratio. We are comfortable, but even with the growth we are seeing we are going to be well under that as we go forward.

Okay, great. So a little bit more of a remix of the balance sheet, Bob is kind of the securities portfolio trending flat, down?

Yes. Flat to slightly down. Again, I think if you bring up Chris Wolking is kind of historian, but for years Chris talked about getting our investments done at 25% in the infamous barbell and we are finally at 25%. So we would like obviously the yield on that, particularly as you look at reinvesting in the long-term is not really what we want to focus on. And it still generates a lot of good cash flow.

Great. And if I can, just one clarification on the fee income guidance, is that guidance relative to the reported 49 or the adjusted extra gains in the securities in the branch?

Yes. The adjusted numbers, yes.

So 45, 46 is kind of the starting point for next quarter?

Yes.

Great. Thank you.

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

Hi guys, good morning.

How are you?

Thanks. Jim my question on interest rate sensitivity, could you just remind us how – or the percentage of the dollar – amount of loans, are tied to either prime or LIBOR on the short end there?

Yes. Very consistent what we have done in the past. About the commercial side, it’s roughly just over 50% is really variable rate in total. And then the total loan portfolio, I think it’s probably closer to 43% when you throw in all the mortgages and some of the other indirect auto, so on the commercial side just slightly over 50% and just slightly over 40% when you look at the total loan portfolio.

Got it. And I imagine that will stay relatively flat with Klein coming on later this year?

It will. And then – but the nice benefit of doing more C&I lending and having that growth is that tends to be a little shorter and a little bit more variable. So just generally speaking, we are going to like to see that, client’s asset sensitivity is pretty similar to ours, you are slightly asset sensitive. So, it will kind of maintain our current asset sensitivity position.

Okay, got it. Changing gears a little bit in thinking about credit quality, the reserve build that we saw this quarter has been a little larger than we have seen in the past, so just curious if this type of run-rate is a good number to use going forward obviously charge-offs fairly benign this quarter and little more scientific in that, but just any thoughts on the reserve build from here assuming loan growth continues at the pace we saw?

I think for modeling purposes I’d look at the year-to-date number is a way to really think about the back half of the year, because you get movement in both positive and negative in the loan grades, obviously a large portion of the larger provision was because of the growth we had in C&I. But as I mentioned, we did have a large credit that moved, but I think for the back half of the year, I’d use the first half of the year as a good forecast.

Understood. I appreciate all the color guys. Thanks.

Great. Thank you.

And there are no further questions at this time.

Great. Thank you so much. Obviously, Lynell and John are available for any follow-on questions and appreciate your support.

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 6293046. This replay will be available through August 7. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today’s conference call.