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Old National Bancorp (NASDAQ:ONB) Q2 2019 Earnings Conference Call July 22, 2019 8:00 AM ET
Jim Ryan - Chief Executive Officer
Brendon Falconer - Senior Executive Vice President and Chief Financial Officer
Daryl Moore - Senior Executive Vice President and Chief Credit Executive
Jim Sandgren - President and Chief Operating Officer
- Jim Ryan - 首席执行官
- Brendon Falconer - 高级执行副总裁兼首席财务官
- Daryl Moore - 高级执行副总裁兼首席信贷执行官
- Jim Sandgren - 总裁兼首席运营官
Scott Siefers - Sandler O’Neill
Chris McGratty - KBW
Terry McEvoy - Stephens Inc.
David Long - Raymond James
Jon Arfstrom - RBC Capital Markets
Kevin Reevey - D.A. Davidson
- Scott Siefers - Sandler O'Neill
- Chris McGratty - KBW
- 特里麦克沃伊 - 斯蒂芬斯公司
- 大卫龙 - 雷蒙德詹姆斯
- Jon Arfstrom - 加拿大皇家银行资本市场
- Kevin Reevey - D.A.戴维森
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 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 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 would now like to turn the call over to Jim Ryan for opening remarks. Mr. Ryan?
Thank you, Maria. Good morning all. I would characterize our second quarter results as consistent with our standard 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 are 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 client 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 am confident we aren’t losing clients or opportunities because we are 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 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 come to expect from us, given the global backdrop and the inconsistent economic data, we are also staying disciplined and continued 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 in deposits during previous second quarters. Loans to deposits were 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 fund 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 at 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 in provision on net charge-offs of $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 challenge our leadership team to reexamine ways we can raise our game, better serving our clients while improving on our execution and performance. I am excited about our discussions 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 remained focused on integration and execution. As we shared last quarter, Klein Systems converted smoothly. We have already realized cost savings during the quarter and our Minnesota operations continue 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.
关于并购的快速更新，我们的战略没有改变。 我们仍然是一个积极的观察者和有选择性的买家。 我们很耐心，继续等待完美的音调，同时专注于整合和执行。 正如我们上个季度分享的那样，Klein Systems顺利转型。 我们已经在本季度实现了成本节约，并且我们的明尼苏达州业务继续表现符合预期。 我们仍然非常热衷于关键市场的机会。
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 pre-tax pre-provision 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 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 remained 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 of pre-pay activity. Loan portfolio yields excluding accretion and interest collected on an 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 collected non-accrual 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 experienced 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, we will 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 non-accruals of 11 basis points and accretion income of 6 basis points from the first quarter. Normalizing for the higher than expected interest collected on non-accrual and accretion, the margin showed very modest compression. The work we have done in 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 non-interest 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 remained 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 the 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 non-interest expenses. Despite merit increases heading in the second quarter, personnel expense remained flat and we continued to be laser focused on expense management. We realized some of the Klein 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 non-performing and underperforming loans continue 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 toward completing our transition to CECL. Progress toward 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 have been completed. And activities in the third quarter will be focused on finalizing the assumptions and the governance framework. We anticipate providing an estimated range of the day one impact when we report third quarter results.
Slide 13 provides some key takeaways from our second quarter performance. We are 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 of non-performing 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 remained optimistic that 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 non-accrual 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, and Daryl Moore and John Moran.
有了这个，我们很乐意回答您可能遇到的任何问题，我们的团队其他成员与我们在一起，包括Jim Sandgren，Daryl Moore和John Moran。
[Operator Instructions] Our first question comes from Scott Siefers of Sandler O’Neill.
[操作员说明]我们的第一个问题来自Sandler O'Neill的Scott Siefers。
Good morning, guys.
Good morning, Scott.
Hey, let’s see. Maybe first place to start is on the margin. So, for the most part pretty stable, I think. I kind of estimated a like a 3.28%-ish run rate when you adjust for the PAAs and then some level of elevated non-accrual recoveries. So, if that’s the 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?
嘿，我们来看看。 也许第一个开始就是边缘。 所以，我认为，大多数情况下相当稳定。 当你调整PAA然后某种程度的非应计回收率时，我估计有一个类似于3.28％的运行率。 因此，如果这是起点，我们从第一季度开始下降约2个基点左右。 如果美联储确实减少了25个基点，那么这是一个很好的代表，那么每增加25个基点就是一样的。 你们怎么想这个动态？
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 margin that have similar compression to what we experienced Q1 over Q2. I think the one wild-card 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.
是的，斯科特。 这是布兰登。 是的，我认为你正在考虑这一点。 我们认为7月美联储减息通常会导致利润率与第二季度第一季度相比有所下降。 我认为我们可能会看到进入第四季度的一张外卡是存款成本开始下降，第三季度平稳并且可能在第四季度开始下降，可能会比 在19世纪后半叶。
Okay, that’s perfect. Thank you. 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 a 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, so that equates to $3.5 million, $4 million a quarter. Should we anticipate that expense has 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?
好的，那是完美的。 谢谢。 然后就在我看成本基数的时候，所以我认为我们的平均价格大约为1.235亿美元，我想我称之为每季度上半年的核心费用，我想如果我们采取的话。 大致预计为1500万美元，节省1550万美元的客户成本，因此相当于350万美元，每季度400万美元。 我们是否应该预计费用已经下降到每季度1.2亿美元的范围，或者这是一种公平的方式来考虑事情，还是只有一些自然构建可以抵消一点成本节约影响？
Scott, I think your rationale makes lots of sense. I think the run rate in Q4 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 had landed and I think what you’re outlining there seems in line.
斯科特，我认为你的理由很有道理。 我认为第二季度的运行率在第二季度减少了一些客户成本节省的后半部分，这个数字感觉非常接近。 我们通常对达成共识的地方非常满意，而且我认为你所概述的内容似乎符合要求。
Okay, alright. That’s perfect. Thank you guys very much.
好的，好的。 那很完美。 非常感谢你们。
Our next question comes from the line of Chris McGratty of KBW.
Good morning, Chris.
Hey, good morning everybody. 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?
嘿，大家早上好。 对于达里尔来说可能是一个问题，该版本引用了一些故意转出某种风险较高的信用。 我想知道你是否可以量化行业类型和你所看到的那种推动决策的程度？
Yes, Chris. Yes, it is 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 move out. The largest of those are the term actually sold where I have seen housing living facilities. So this is just another quarter of us working with clients and trying and as I said to get them upgraded work not to move them out, so it’s little higher this quarter, but it’s just a normal practice of what we do.
是的，克里斯。 是的，这是大约4000万美元，这些是我们已经确定了一段时间的贷款，并且一直与借款人合作，要么让他们升级，要么搬出去。 其中最大的是在我看到住房生活设施的地方实际出售的那个词。 所以这只是我们与客户合作的另外四分之一，并且正如我所说的那样让他们升级工作而不是将它们移出去，所以本季度它会更高，但这只是我们所做工作的正常做法。
Okay. And aside from these decisions, anything worth discussing kind of into the back half of the year, obviously ag is at focus, any kind of concerns in that portfolio or elsewhere in the commercial book?
I think you’ve hit the Ag piece of it and our portfolio really isn’t much different than any other banks that you think about in terms of commercial real estate and Ag and so there is nothing really that we see that would stand out.
Okay. Brendon, if you 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 thinking about growth in net interest income, like core net interest income. It seems like the headwind from payoffs will continue to some degree, you’ll get a little 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?
好的。 布伦登，如果你可以去或吉姆到净利息收入的顶线。 如果你排除增加收入和利率逆转，我们应该如何考虑净利息收入的增长，如核心净利息收入。 看起来收益的逆风将会持续到一定程度，由于我们所处的环境，你会对NIM产生一点下行压力。这是否是你认为可以在未来几个季度发展核心NII的情况 如果没有，也许你可以说费用可能是你可以识别的抵消？
Sure. I’ll start with that with the interest income, I think 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 and we expect to feel as asset yields would be under some pressure from long-end of the curve, offset largely by lower funding costs, but I really think NII is really going to be depended on growing earning assets in the back half.
当然。 我将从利息收入开始，我认为在很大程度上取决于我们增加盈利资产的能力。 我认为，随着贷款增长的实现，实际上显然会推动NII走高。 我们谈到实际的利润率压缩率，我们预计资产收益率将受到来自长期曲线的一些压力的影响，主要是由于融资成本降低所抵消，但我认为NII真的会依赖于 后半部分的收益增长。
And Chris I will just add, regardless of the direction of NII or other fee income, we are always going to be focused in on improving our operating leverage and then partially driven by the expense line. So we created a culture here as you know, continue 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 is going, we are going to be focused in on the expense line items too.
而克里斯，我只想补充一点，无论NII的方向或其他费用收入如何，我们总是会专注于提高我们的经营杠杆，然后部分由费用线驱动。 因此，我们在这里创建了一种文化，继续研究降低费用，提高效率，提高效率的方法，最终提出更好地为客户服务的想法。 因此，无论保证金在哪里，我们都将专注于费用项目。
Great, thanks. Thanks Jim. The last one on the buyback, is my math that you’ve got about 2.7 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.
十分感谢。 谢谢吉姆。 关于回购的最后一个，就是我的数学计算，你已经剩下大约270万股，而且有点你说你是机会主义者。 我们应该为你们寻找目标资本比率吗？ 显然，缺乏资产负债表增长本身就是建立资本，但任何帮助都会很好。
Yes. We don’t have a target PTE number out there. You can imagine, we’re at the high end of – I think we’re very comfortable with today and we would fully expect to finish an authorization by year-end.
是。 我们没有目标PTE号码。 你可以想象，我们处于高端 - 我认为我们今天非常舒服，我们完全有望在年底前完成授权。
And next question comes from the line of Terry McEvoy of Stephens.
Good morning, Terry.
Hi, good morning everyone. 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 at in the second half of this year, whether the pace should slow down and hopefully provide some balance sheet growth within the loan portfolio?
大家好，大家早上好。 让我们开始考虑贷款预付款的步伐。 整个第二季度都没有这么慢吗？ 我想你今年下半年的一般想法是什么，是否应该放慢速度并希望在贷款组合中提供一些资产负债表增长？
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 in the future directional 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 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.
不，第一季度有所提升，第二季度甚至超过了另外1亿美元。 所以Terry，很难知道未来定向预付款会发生什么。 我们所能做的就是专注于我们的生产，并确保我们做正确的事情来为我们的客户服务，我们必须继续发展我们的管道并增加该管道的公认类别。 这就是我们关注的重点。 对于我们期望下半年带来的预付款项，我们很难想出什么。
Thank you. And 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?
谢谢。 然后作为一个跟进，只是阅读演示文稿，特许经营演变增加规模。 我们看到调整后的效率比率为57.5％。 所以我想我的问题是，对于一家价值200亿美元的银行，我想在那里可以去哪里以及当你意识到规模的好处时，它应该向前发展在哪里？
I think we feel pretty good that we came through solidly through the 60% barrier. You know that was a hard barrier for us to cross and really as we got to the $20 billion mark, we started to see that. We’re not prepared to give any guidance as to where we think that future ratio is going to go. Just know it’s a focus in us. I don’t think there is many big 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.
我认为我们感觉非常好，我们通过60％的障碍坚定地完成了。 你知道这对我们来说是一个难以克服的障碍，当我们达到200亿美元大关时，我们开始看到这一点。 我们不准备就我们认为未来比率将会走向何方提供任何指导。 只知道它是我们关注的焦点。 我不认为有很多大型机构正在逐年实现700个基点的运营杠杆改进，因此它是我们的重点。 我们将继续推动支出线，无论行业收入在哪里，所以我现在不准备提供任何形式的指导，但这绝对是我们今天在墙内的对话。
Great. Thanks everyone.
[Operator Instructions] Our next question comes from David Long of Raymond James.
[操作员说明]我们的下一个问题来自Raymond James的David Long。
Good morning, David.
Good morning, everyone. Daryl, probably haven’t had these many questions in quite some time. We got clean credit quality you said, but just a couple of things there, just among the credits that you’ve mentioned, any consistency that you’ve seen across those whether it’s industry or anything among those that you can point out?
大家，早安。 达里尔，很可能在很长一段时间内都没有这么多问题。 我们获得了干净的信用质量，但只有几件事情，就在您提到的信用额中，您所看到的任何一致性，无论是行业还是其他任何您可以指出的内容？
David, it really isn’t dollars I talked about the senior living borrower, but that was just a larger loan. When we look down through that $40 million, there is no really trend or common denominator of industry in what we moved out.
David, I will just comment. I think this is pretty normal for us. This is proactive portfolio management toward 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.
大卫，我只是评论。 我认为这对我们来说非常正常。 这是一个积极的投资组合管理，走向一个周期的尾端，所以虽然它比我们在最后几个季度看到的稍微提升，但我们认为这是正确的做法，只是真正积极主动的管理，并尝试 与往常一样，我们试图在这些问题变成亏损或任何类型的冲销之前先处理这些问题。
Got it, okay. And then second question, is it relates to operating expenses and with your IT spending or investing in that space, how is the pace of that part of the expense line grown versus the rest of your overall expenses?
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 what 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 not a lot of conversations on how we continue to improve that technology line on, so maybe the line doesn’t grow all that materially, but we continue to get more efficient, more effective internally.
我没有在我面前的数学，但我会说，作为一个整体，我们花费更多的钱在更多的技术上，而不是我们过去。 话虽如此，我们对于我们的技术看起来非常好，因为它面向客户。 我们认为我们在管理内部流程和纸张流程方面还有一些改进的空间，但我们认为这将是自筹资金。 因此，任何减少开支的机会都会自行为那里的任何改进提供资金。 因此，关于我们如何继续改进该技术产品线的谈话并不是很多，所以也许这条线不会大幅增长，但我们会继续在内部提高效率和效率。
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 the spending has shifted more toward offense side or is it still on sort of just trying to become more efficient?
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 an ability to really quantify how much of it is kind of offense versus defense, but a vast majority of items today is really just how we run the organization.
Okay, got it. Thanks guys. Appreciate it.
好，知道了。 多谢你们。 欣赏它。
Our next question comes from the line of Jon Arfstrom of RBC Capital Markets.
Good morning, Jon.
Good morning, everyone. Daryl, we’re having fun Daryl.
Yes. Good morning Jon.
Some of your peers have had call it one-off or a couple of credit issues this quarter and you guys 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, but what would you say in terms of just the overall credit environment, why aren’t you seeing it and why do you think others are?
你们的一些同行本季度已经把它称之为一次性或几次信用问题，而你们显然在这里提出了一个非常干净的季度。 我只是好奇你对环境的评估。 从信用角度来看，你觉得情况会变得更糟吗？或者你可能难以表达的是什么，但就整体信贷环境而言，你会说什么呢？为什么你没有看到它，为什么你认为其他人是？
Yes. First of all, Jon, I don’t think we’re moving from that, right. So, in today’s environment, we could have one of every bank could. I think if you would ask me that question maybe two quarters ago, I would have told you that things were getting a little tired, 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 yeah, we could have those, every bank has probably a couple of those loans in portfolio, but right now I don’t see anything on the near-term horizon that would give us a real concern that the portfolios are going to start experiencing significant losses or deterioration.
是。 首先，Jon，我认为我们不会离开那个，对吧。 所以，在今天的环境中，我们可以拥有每家银行中的一家。 我想如果你能在两个季度之前问我这个问题，我会告诉你事情变得有点累了，把信用转出去更难。 我认为在过去的几个季度里，我们已经看到将信贷转出更容易了，这只是一种有趣的动态，但是，我们可以拥有这些，每家银行可能都有一些贷款投资组合 但是现在我没有看到任何近期的情况会让我们真正担心投资组合将开始经历重大损失或恶化。
Jon, I’d point you back to my comments earlier. We are 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’s ultimately we will translate it into better results and really the hallmark you know of our company.
乔恩，我早些时候会回到我的评论。 我们是勤奋的学生，我们尽早发现自己的弱点。 我想如果你看一下我们的一些批评和分类，你往往会看到这些数字中的一些笨拙。 那是因为我们正在积极管理投资组合。 我们不等待出现问题。 我们正在努力积极管理它，我认为最终我们会将其转化为更好的结果，真正成为您对我们公司的标志。
Yes. Okay, good, and getting back to Terry’s question a little bit on loan production, more of the commercial side of it. 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 the kind of the SME type borrowers, but still optimistic?
是。 好的，好的，回到Terry关于贷款生产的问题，更多的是商业方面。 看起来你们有很好的管道，就新产品来说可能是中等规模的贷款。 你在哪里看到一些力量和借款人语气的任何变化。 你仍然觉得你的借款人是那种中小企业型借款人，但仍然乐观吗？
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 regions. We did see balance sheet growth in Minnesota, Indianapolis, Evansville, so kind of across the board. I was up in Milwaukee recently, had dinner with clients’ trucking company, a manufacturer, commercial real estate developer and I got to tell you, they all felt really good about where the economy is, how their customers feels. So, we continued to be optimistic given our pipeline in 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.
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 costs 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?
好的。 然后可能有一个给你Brendon的存款费用。 你有点提到你可能有机会在今年晚些时候降低一些成本。 你有一个相当不错的季度，我的意思是你只有6个基点。 所以，我只是好奇美联储是25岁，然后又是25岁还是另外25岁，你到了什么时候才能达到你不能再降低存款成本的程度，以及在下半年的可能性方面 降低这些成本的条款？
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 would expect to pass the level-off in third quarter and then we’ll be able to start moving some rates down.
是。 乔恩，我认为这是一个公平的观点。 低β上升通常意味着低β下降，但我可以告诉你短期的2到3次减产的相关范围。 我认为我们有足够的空间来减少存款。 我不知道这是否会在第三季度突然发生，但预计将在第三季度通过平稳，然后我们将能够开始降低一些利率。
Okay, alright guys. Nice job.
[Operator Instructions] Our next question comes from Kevin Reevey of D.A. Davidson.
Good morning, Kevin.
Good morning. How are you?
We’re fantastic. How are you?
Excellent. Thank you. 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 giving the rate environment?
优秀。 谢谢。 所以我只是好奇，继续前进，具体来说，你打算如何保护你的保证金。 我知道存款成本是一个杠杆。 您是否可以为我们提供更多颜色，以确保您可以提供哪些杠杆，以便尽可能地保护利润率？
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 pulled 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 continue to help mitigate margin pressure going forward.
是。 凯文，这是布兰登。 去年这个时候我们已经开始非常主动地在资产负债表上工作，将其重新定位到我们对中性的利率敏感度，我们取消了所有杠杆，包括将一些固定利率预付款交换到浮动，放入一些项圈和地板 在他们有意义的地方，我们觉得我们已经在很大程度上将利率敏感性恢复到接近中性，我们有一些杠杆可以继续帮助缓解未来的利润率压力。
And Brendon, so what percent of your loans right now have floors?
Right now, we are at 12% of our loans with floors.
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?
Yes. So, really unchanged, we will remain patient. It’s in footprint looking for opportunities where that we can generate cost savings. That remains our key focus. You know those banks in that $2 billion to $4 billion range are kind of Plan A opportunities. We would 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 have said in the last quarter call, my desire would be to spend the rest of the year more inwardly focused, making sure we are working on execution and improving performance. So that’s why we have colored it around. If the perfect pitch comes along, we will definitely take a look, but absent that I would be rather – my desire will be more inwardly focused.
是。 所以，真的没改变，我们会保持耐心。 它的足迹正在寻找可以节省成本的机会。 这仍然是我们关注的焦点。 你知道那些20亿至40亿美元范围内的银行是计划A的机会。 我们显然会寻找比这更大的东西，但它通常在20亿到40亿美元左右。 我也会说，正如我在上一季度的电话会议上所说的那样，我希望在今年剩下的时间里更加注重内心，确保我们正在努力执行并提高绩效。 所以这就是我们为它着色的原因。 如果完美的音调出现，我们肯定会看一看，但缺席我宁愿 - 我的愿望将更加内向。
Great. Thank you very much.
[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.
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.
好的，谢谢大家今天上午参加。 像往常一样，如果您有更多的问题要跟进，团队就在这里。 我们感谢您的持续关注，并期待下个季度与您交谈。
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 1855-859-2056, 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.
谢谢。 这就是Old National的电话。 再次，重播以及演示幻灯片将在Old National的网站oldnational.com的投资者关系页面上提供12个月。 通过拨打1855-859-2056，会议ID码4869447也可以重播电话。此重播将于8月5日开始提供。如果有任何其他问题，请联系Lynell Walton，电话：812-464-1366。 感谢您参加今天的电话会议。
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