Q4 2020 Old National Bancorp Earnings Call
[music].
This call is being recorded it has been made accessible to the public and coordinate with the SEC regulation FD.
Corresponding presentation slides can be found on the Investor relations page at old National Dot Com and will be archived there for 12 months.
Management would like to remind everyone that as noted on slide two 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 these 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 comparison. These.
These non-GAAP measures are intended to assist investors understanding of performance trends that.
A reconciliation 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.
Good morning, and happy new year.
This call finds all of you on your family's safe and healthy.
We are really pleased with our fourth quarter and full year 2020 results.
Despite all the challenges that came our way. This last year, we stayed focused on the health and safety of our team members. We successfully executed the old would be weight transformation and we remain dedicated to serving our clients and communities.
We also continued to invest in new talent and further strengthen our client experience as a technology.
I'm pleased to say that we've delivered on the run rate savings, we promise from the old way.
As a result of the only way Ftes and branches are lower by 16% each and we were able to reduce other overhead cost.
We were also able to achieve better than trend line growth from our commercial segment in 2020, and we plan to execute additional ideas in 2021 to drive higher revenue.
Starting on slide three.
Our 2020 highlights include earnings per share of $1 36, when adjusted for the only be weight charges earnings per share were $1 50.
Adjusted return on average tangible common equity was 14, 6% adjusted operating leverage improved by 460 basis points and our adjusted efficiency ratio was 55, 6%.
We also set several new records during 2002 on including the following record commercial loan production record mortgage production record capital markets revenue and obviously, we had strong efficiency and core deposit growth.
Next on slide four our fourth quarter earnings per share was <unk> 44 per share adjusted EPS was <unk> 46.
I was particularly pleased with our quality loan production of $1 $2 billion end of period commercial loans, excluding PPP loans increased 22% on an annualized basis.
The loan growth was split equally between C&I and CRE.
Growing our loan portfolio and improving our earning asset mix will help us preserve net interest income.
End of period core deposits increased by 11% driven by checking and savings account growth.
We did have a small net recovery this quarter, but maintain the overall reserve.
We continue to do is qualitative factors to offset improvements in the economic data, believing that there is still a fair amount of uncertainty with the economy and the pandemic.
Net interest income, excluding PPP increased because of the loan growth and better mix.
Noninterest income was down slightly due to seasonal declines in mortgage but held up better than previous fourth quarters.
Most of our reported credit quality metrics were relatively benign during the quarter, but as we have previously stated we expect the credit metrics could worsen and losses will ultimately materialize after any stimulus in deferral programs run their course.
We continue to proactively downgrade some of the most pandemic exposed loans into the watch asset quality ratings and are still meeting weekly to review credit quality loan by loan.
We continue to believe that our historically strong and consistent underwriting practices are diverse and granular loan portfolios and our Midwest footprint should help us weather the impact better than most.
I'm really excited about the team members of higher during 2020, we continue to have a good pipeline of opportunities too.
We have a great story to tell and we have strong interest from people wanting to join our team.
We have hired and expect a higher mortgage and wealth management private banking commercial Treasury management and key support team members as.
As we disclosed last quarter. These hires will cost us approximately $5 million year over year, but should ultimately lead to higher revenue from these growth initiatives.
A quick thought about capital.
We plan to maintain our buyback authorization throughout the year, we will balance the benefits of buybacks versus M&A opportunities.
I suspect there will be M&A opportunities that will present themselves. During the year, we are getting more comfortable that we could put a credit mark on somebody else's low portfolio, but we will continue to be an active looker and a selective buyer.
With those remarks, I will now turn the call over to Brendan Thank.
Thank you Jim.
Turning to the quarter on slide five our GAAP earnings per share was <unk> 44.
And our adjusted earnings per share was <unk> 46.
Just had earnings excludes $3 $6 million and be way related charges.
Moving to slide six we are pleased with our full year adjusted pre tax pre provision net revenue, which was 10% higher year over year.
Despite the challenging 2020 operating environment, we generated 460 basis points of positive operating leverage.
Slide seven shows the trend in outstanding loans, and earning asset mix and the period loans decreased slightly quarter over quarter, driven by payoffs of $536 million in PPP loans exclude.
Excluding the impact of PPP end of period commercial loans increased $473 million driven by record commercial production of $1 2 billion the strong.
<unk> growth this quarter was aided by higher than average pull through rate and funding levels.
We're also pleased with our loan growth makes this quarter, which is well balanced between C&I and CRE.
Production yields were slightly lower quarter over quarter, which was the result of a few larger high credit quality clients with relatively low coupons with strong risk adjusted returns.
The $2 1 billion quarter end pipeline reflects typical seasonal declines as well as the unusually high pull through rates of our record third quarter pipeline.
We believe the current pipeline with over $560 million in the accepted category should lead to another good quarter of production.
The investment portfolio also increased in the quarter as deposit growth outpaced loan growth.
We are taking a disciplined approach to putting excess liquidity to work, including adding some protection if rates were to rise.
Lower rates on new purchases continue to impact our total portfolio yield, which is down 14 basis points to 231%.
Moving to slide eight period end and average deposits increased during the quarter by 9% from 13% respectively.
Growth was largely concentrated on our existing personal checking accounts, but we were also continuing to win new deposit relationships in the business and public segments and added meaningfully to this quarter's growth.
Turning to pricing our total cost of deposits declined from 13 basis points in the fourth quarter to nine basis points in Q4, both time deposits and borrowing costs were meaningfully lower in the quarter and we will continue to fall, but at a moderated pace.
Overall, we are pleased with our deposit repricing efforts that have resulted in a significant reduction in deposit costs, while maintaining our core client base.
Next on slide nine you will see details of our net interest income and margin net interest income increased $16 million quarter over quarter, largely due to an increase of $14 million on PPP related interest and fees from the forgiveness of approximately $500 million on loans excluding.
Excluding the impact on PPP net interest income increased $2 million quarter over quarter due to strong commercial loan growth and active management of our funding costs.
The net interest margin also benefited from PTP fees, adding an additional 31 basis points over prior quarter core margin, excluding accretion and PPP was 288% from the fourth quarter compared to $2, 96% in Q3. This.
This eight basis point decline was in line with our expectations and was partly the result of a lower new business rates I referenced earlier. However, we also experienced a significant uptick in liquidity and that while neutral to net interest income has put additional pressure on net interest margin.
PPP pay offs, coupled with stable deposit balances could amplify this impact in 2021.
Despite these pressures on margin, we expect earning asset growth to help stabilize net interest income.
Slide 10 shows trends in adjusted noninterest income.
Adjusted noninterest income of $58 million in the fourth quarter was slightly lower than the $60 million, we reported in Q3 the.
$2 million decline was primarily driven by seasonal factors in our mortgage business. Despite the slight decline mortgage revenue outperformed our expectations with a record fourth quarter production of $531 million and a record and up your pipeline of $361 million that is more than double the year end 2019 level.
Our capital markets also had another strong quarter posting $7 million in revenue, a 2 million dollar increase over prior quarter.
Next slide 11 shows the trend in adjusted noninterest expenses adjusting.
Adjusting for <unk> way related charges and tax credit amortization noninterest expense was $129 million the increase.
<unk> expenses was largely driven by incentive accruals that reflects the outstanding 2020 financial performance on.
Also impacting this quarter's expenses when the timing of miscellaneous professional fees and community investments.
Several smaller items make up the remainder of the quarter over quarter variance and are not expected to recur.
Given the number of moving parts. This quarter, we thought it would be helpful to provide additional detail on our Q1 expense expectations reductions and incentives and other expenses along with the typical adjustments for seasonal payroll taxes should result in non interest expense of approximately $118 million on the first quarter.
Increases will go into effect in April and will not impact expenses until Q2.
We also want to provide a brief recap on the cost saves we outlined as part of our own D wave strategic plan, we have delivered on the $36 million on annualized expense saves, we promised in 2020, including including $26 million on personnel costs and $6 million in branch and facility expenses.
We're also beginning to see the results of our revenue initiatives, particularly in the recent above trend growth in commercial loans and capital markets revenues.
Additional revenue initiatives on our wealth and Treasury management management segments are well underway and we look forward to discussing the results of these projects as they progress.
As I wrap up my comments here are some key takeaways.
We're very pleased with the results of the quarter and the full year record commercial loan production led to significant earning asset growth our mortgage and capital markets business is finished a record breaking year with a strong fourth quarter and we delivered on the promised on the way expense savings.
That I will turn it over to Darryl to discuss credit.
Thank you Brendan first update I would like to provide this morning is likely our last update around the first round of our client relief programs as they continue to wind down.
With respect to deferrals, we have previously reported that we granted some type of deferral on slightly less than $1 3 billion in loans, which represented approximately 10% of the portfolio.
At the end of this most recent quarter the dollar amount of loans still in deferral mode had dropped to $64 million, which.
Presents roughly one half of 1% of the total portfolio.
We are still receiving deferral request on the consumer side, we don't feel they are outsized given the current environment from a request on the commercial side has slowed to a trickle, especially after the announcement of the new stimulus package.
As you know we were very successful in securing round one PPP funds for our clients having originated just short of 10000 loans with balances in excess of $1 $5 billion as of year end, we had roughly 6100 PPP loans with a balance of $960 million remaining on the books from round one of the program.
As of late last week, we had submitted over 5800 PPP loans for forgiveness, representing slightly more than $1 billion on balances.
Those 5800 submissions roughly 5300 of them totaling $636 million have been approved and paid by the SBA.
In addition to upper 5800 forgiveness submissions 73 of those represented loans greater than $2 million in total we originated only 116 of these higher dollar loans and it is encouraging to note that we did receive our first approval for forgiveness for this particular set of loans last week.
Remaining fees on PPP loans, not yet taken into income totaled $17 million.
Slide 13 lays out trends in the most significant credit quality indicator categories. The <unk>.
<unk> fell on a quarter to 15 basis points of the total portfolio.
Creases in both our C&I and residential mortgage portfolios were noted in the quarter, while we continue to see it somewhat increasing trend in our indirect auto portfolio delinquencies.
With respect to charge offs, we posted a net recovery in the quarter of three basis points, resulting in a full year of 2020 charge off rate of two basis points non.
Nonperforming loans increased in the quarter as well as expected increases in this category continue to come in great part from the downgrade of relationships that had shown weaknesses prior to the pandemic.
Put it another way aside from loans that had reflected weakness prior to the onset of the pandemic and other than our relatively small hotel exposure, we have not yet seen any meaningful migration of other credit relationships into our nonperforming category.
First round of stimulus payments certainly helped in this regard and we expect the second round to also provide assistance I do want to be clear, though that we are obviously seeing the migration of credits that were not in a significantly we can position coming into the year into the special mention and substandard accruing categories. As a result of the current economic challenges.
But this might lead us to summarize at the rate of future inflows of credits into the nonperforming category may likely be highly dependent on both the ability of the U S to rollout vaccinations in an efficient and timely manner as well as to the length of time, it will take us consumers return to their pre pandemic spending routines, obviously the law.
Where it takes to get back to pre pandemic state more room, our borrowers will have an experienced financial difficulties. We believe that in the near term are continuing to increase in risk assets is certainly a possibility.
Slide 14 sets out those industries, we have identified as deserving an extra level of attention in this current economic environment Theres been nominal change and our exposure to these industries, which remains at roughly 7% of total loans.
As we mentioned last quarter, while there is merit and acknowledging that these industries as a whole may be suffering disproportionately in the current environment. It is important to note that we will originate new credits in these categories to the right borrowers and for the appropriate purposes.
Start at the bottom of slide 14 shows the breakout of our consumer portfolio, along with corresponding cycle average FICO scores. This portfolio has shown little change as well since our last presentation to you.
We do continue to watch our consumer portfolio closely we will persist in our endeavors to work with borrowers who have lost their jobs during the pandemic and we believe that the new round of financial stimulus should help us on that regard.
As a final comment I think it is fair to admit that the results, which we posted over the last few quarters are not what we had feared they might be back in March.
First of all our expectations were that we would have seen a much more significant down we're migration of loans into the nonperforming category.
I think that the combination of government stimulus programs cost cutting efforts by our borrowers and creative retooling by many of our clients.
Key to keeping more borrowers from financial default, while the impacts of the pandemic are lasting longer than any of US may have initially anticipated. We are hopeful that the second round of stimulus will go a long way to bridging our borrowers through to the end of the pandemic.
When when losses manifest themselves in 2021 remains very uncertain, we expect that loss rates will be higher in 2021, but the magnitude of those increases again as much to do with how quickly we can return to economic recovery.
Second the level of 2020 growth has exceeded our expectations as well.
That's some of that growth may have to do with the quality of our loan book going into the recession, which allowed us to not have to solely focus on the immediate crisis at hand, but take a longer view with respect to working with clients, both existing and new <unk>.
The nature of this downturn and the likelihood that the recovery will be speedy wants to vaccines. Our vaccines have taken hold as permitted us to work with borrowers with an eye on post recovery prospects. If we had had to have been more inwardly focused on cleaning up a big share of our book at the outset of the downturn I suspect that our success levels in generating new loans would have been.
Much diminished I.
I believe that in 2020, we continue to underwrite loans in a prudent fashion and that we did not take on extraordinary risk in order to generate loans loan growth, we have posted with that I'll turn the call back over to Brendan.
Thank you Darryl.
On Slide 15, you will see the details of our fourth quarter allowance of $131 million, which was unchanged from Q3.
Improving economic forecast derived from Moody's baseline led to a $19 million decrease in reserve.
We added a similar operating amount from a qualitative reserves that reflect the ongoing uncertainty of the economy and the charge off timing.
Although the economic outlook continues to improve we believe it's prudent to maintain a reserve level until we have more clarity on the path of the virus vaccination rollout on the efficacy at the latest stimulus package.
Excluding PPP balances our allowance on loan ratio was 102 basis points and.
And as an appropriately conservative estimate of the credit risk on our portfolio today.
I'd also like to remind you that we continue to carry $51 million on unamortized marks from a required portfolios. While these marks will not directly offset charge offs any remaining mark will accrete through margin upon resolution.
Slide 16 includes thoughts on our outlook for 2021.
We ended the quarter with a healthy, albeit seasonally lower $2 billion commercial pipeline, which includes $560 million in the accepted category.
Expected core, earning asset growth and reduced funding costs should lead to stable net interest income on net interest margin could come under pressure from additional excess liquidity.
The PPP loan forgiveness process continues to go well and we expect runoff and the recognition of the related $17 million in unamortized fees will be concentrated in the first half of 2021.
We expect our fee business is to continue to perform well we are encouraged by the great momentum in mortgage evidenced by the strong year end pipeline, but performance will still be subject to industry trends.
The strong commercial activity and rate environment should help maintain the high level of performance in our capital markets business.
Deposit service charges continue to book continue to lag historical levels and the promise of additional stimulus could further delay the return on this revenue.
Other fee lines are expected to be stable in the near term as our OMB way revenue initiatives in wealth and Treasury management takes shape later in the year.
We provided guidance on Q1 expenses of $118 million, which includes the investments in talent, we discussed last quarter in our wealth and commercial segments as well as some additional marketing and technology spend.
Lastly, a brief update on taxes.
As we previously reported a couple of large historic tax credit projects were placed in service in Q4. These projects accounted for most of the increase in tax credit amortization in the quarter with a net income benefit of approximately $1 million.
Regarding 2021, we expect a reduction in the volatility caused by our tax credits as we worked through the last of the remaining one year historical tax credit commitments. In total we are expecting approximately $5 million from tax credit amortization for the year with a corresponding full year effective tax rate of approximately 20%.
With that we're happy to answer any questions that you may have and we do have the 14 here, including Jim Sandgren.
I'll quickly on the CFO.
Justin on your question you may do for small questions. Paul on the number one on your telephone keypad, we'll pause for just a moment.
The first question will come from the line of Paul.
Gerringer net.
Okay.
Hey, good morning, guys.
Morning, Ben how are you doing well you guys seem to have a pretty solid.
20th so congratulations on that.
Was wondering if you guys could take a step back and look a little bit of a bigger picture on the OMB way.
On the 20th was largely focus on expense management and you guys did a lot of heavy lifting throughout the year.
And then 2021.
<unk>.
On.
Scheduled to have a lot more of that revenue growth granted when you guys released the plan.
A lot of events have taken place since then around the world. So I was wondering if you guys could just talk around central timing on when things could come to fruition in terms of revenue and any opportunities that you might see now that there has been some disruption in the market that you guys currently have your footprint.
I think those are all good observation has been.
Many of the commercial treasury and wealth management initiatives or just kind of full steam ahead, it's really about putting the right talent in place to go on execute those and there are some technology improvements and particularly on our Treasury management business will continue to work on throughout the year and we knew it was going to take the better part of 2021 to really implement those initiatives get those people on board higher.
<unk> and trained up.
And there are some initiatives around small business and some consumer initiatives that quite frankly, we're not quite ready to put in place, but we continue to build the technology to support those initiatives. So those are a little bit longer runway than we anticipated. If we had a more normal economy would would've anticipated executing those this year on having said that a big bulk of the treasury manager.
Commercial wealth is just on on pace and scheduled to happen throughout 2021.
Okay, Great. That's helpful. And then my other question Jim came too.
The capital you said I know that your stock's up call it 45% or so since the lows on like September October.
Honestly on your prepared remarks, you said that M&A is much more of an opportunity and like obviously, the math does work better with a better currency.
So I was curious on if you had any potential remarks book something going forward I know youre past three acquisitions have been.
<unk> 2 billion or so and they've been drifting towards the northwest, Wisconsin, Minnesota on the Minnesota.
I was wondering if you had any other.
On any geographies you might be looking into potential size. If it differs from about $2 billion. Mark on then finally have you thought about just the loan portfolio itself on debt acquired banks is there any concentration that you might want to bulk up or is it.
Hello agnostic too.
Their loan portfolio.
And I think we just continue to gravitate towards banks that have a similar business mix a model that we have.
You know we continue to be very comfortable in the Midwest obviously.
And in terms of size.
Those planning opportunities continue to be that kind of 10% to 20% of assets, but as we've always said, we're willing to think about other things if it strikes the right balance between shareholder accretion strengthening our company further I think all of those things are going to be important to us and I will just say you know we're not looking at a book today and again.
Ready to announce a transaction anytime soon it's just some middle part of last year was pretty hard to imagine that you could put a credit mark on somebody else's balance sheet, we're just getting more comfortable that you.
You can define the scope of what you think the loss content might be in and probably closing the gap between the bid ask today than it was maybe six months ago. So we just think you are going to be opportunities that are going to present themselves throughout the year, we're going to be in a position to take advantage of those opportunities and continue to do deals like we've done in the past that we think makes sense.
For our shareholders. It makes sense to continue to further strengthen our company.
Got you. Thanks, that's all from me I appreciate the time and congrats on a solid quarter and year.
Thank you I appreciate it.
The next question will come from Lorraine its Scott.
Mr. <unk> you were a little short this morning here you got paid out.
I don't know what happened there I mean, if you're asking am I I feel humiliated because on the dividend.
Yeah.
So but that.
That is a little bit younger and you know as Ive just had the edge on you. This morning.
He's a he's.
Coming into a zone I passed my T. It gets us add day for me.
Yeah.
I'll try to be less disappointing next quarter.
I appreciate you guys, taking the question on.
I had to just get some updated thoughts on loan growth you know we.
Back out the P. P P and it's just I mean, it's extraordinarily strong relative to what we're seeing on the H eight data a lot of competitors et cetera, just curious Jim for your updated thoughts on how much of that is.
Just your customers on organic demand and how much of it is market share opportunities, where youre seeing most of that come from like geographically as well.
I'll give you my two seconds on it and I'll, let Jim you'd be follow up on it.
A lot of the growth we saw on the fourth quarter is really all of the hard work reported on the middle part of the year again as Daryl said on his remarks on Jim will rig kitchen to reiterate we stayed focused in on calling in.
And Jim and I went on a lot of client calls this summer and some of those were opportunities that we're able to steal away from larger organizations that quite frankly, you know made some policy changes are caught up some of their best clients and so we walked through those doors and some real long term clients and alive was just from some existing opportunities that we have with clients and then some of them.
New I mean, it was really a mixture of all but I'll, let Jim kind of follow up but we were really pleased that we really stay focused throughout the whole year on those clients and because I think of our historically strong underwriting practices. We weren't scared that we were going to have some big mess to deal with we were able to real estate focused on keep that keep our underwriting going.
Yes, I think that's well said.
I think the the commitment through the old way to commit to segments and to really align our skill sets with what our customers need certainly helped out as well.
Really it from a production standpoint.
Geographically, Minnesota again led the way, we're really pleased with the continued efforts of our Minnesota, RMS and then continue to see strong growth from Louisville, and Indianapolis among others. So again a lot of the a lot of the growth was throughout the footprint, but kind of concentrated in those two areas and.
And while the pipeline is down a little bit seasonally and obviously huge production in the fourth quarter feel good about.
First quarter, I think our accepted categories about $200 million higher than it was.
This time last year, plus we do have a number of commercial construction advances over 800 million net are still left to be advanced on so feel like we have some tailwind, but certainly our RMS are committed to grow on that pipeline as we typically do at this time so.
Optimistic.
Perfect. Okay. Good. Thank you for that color and then separately I know, we're still very early in this new around the PPP program, but just curious what kind of on demand are you guys seeing for it.
What what role do you expect you guys will play et cetera, I guess any top level thoughts I'd just be curious.
Yes, Scott right now.
We're really seeing some nice demand. So we did a soft opening with our portal on Friday Oh.
Already we have seen over 600 applications average loan size of about $150000.
<unk> are doing a lot of very proactive outreach to our round one clients that took advantage. We're also doing a lot of focus on minority and women owned businesses nonprofit so we.
The fate of lot of demand, obviously, a smaller pool you have to show that 25% reduction in revenues.
<unk> 2019 that being said I think we're going to see a lot of opportunities not only to help our customers but to.
Bringing some new clients to the bank. So so far pretty good start it is Scott on.
On average, we expect loan balances to be relatively small I mean, it is capped at $3 million and so the total impact to our organization will be much smaller than the initial round.
But as Jim said in terms of sheer numbers of loans I think there'll be a fair amount of numbers of loans, but the dollar size of those loans will be relatively small in the overall income impact will be much much smaller in 2021 than it was in 2020.
Yep.
Alright, perfect. Thank you guys very much appreciate it thanks, Scott Scott better credit a lot next time.
Thank you again and again I'm sorry.
On it.
The next question will come from the line of Chris Mcgratty with Covid, Debbie Good morning, Chris Hey, Good morning, everybody.
So Brennan, let me clarify.
Question on the net interest income guide.
Is that excluding <unk> can you just help me that excluding bolsa accretion in the PBT impact or is that one of the other day.
Chris if you're referencing the 288% that I talked about in my opening comments, yes. It excludes both PPE, all PPP related interest and fees and accretion.
Okay, and so the the outlook comment that suggested on the pressure on margin, but stable net interest income is that.
Kind of the core core excluding both accretion.
<unk> capital.
And on on on that you've got.
Really low loan deposit ratio.
A lot of success with deposit growth.
How do I think about the borrowings that are on your balance sheet debt.
Need to keep them on the balance sheet this year.
Balancing the loan to deposit against the loan growth outlook.
Yeah, Chris Great question, we are looking for opportunities to continue to optimize the funding side of our balance sheet.
There are some levers we can pull but I would not expect that number to change materially over the next several quarters.
Okay.
Okay.
And then.
Jim just going back to your M&A.
<unk> and comments before you talked about plant AAV intends to 'twenty I think in the past you've talked about pre pandemic.
Willingness to do kind of a transformational deal or more openness does that does that put it in.
I guess play out potential I'm only if the stars aligned.
And then the board would consider.
Okay.
Look we have to do our fiduciary job if it makes sense for the shareholders and we think we can create long term value out of it we will absolutely consider it.
We need to be open to those things, but we know how difficult they are and theyre going to have a higher bar.
For US you know give.
On the execution risk around that but the board and management absolutely consider if it was the right thing to do.
Okay, Great and then just a couple of housekeeping.
Can you just provide the remaining one timers related to the OMB way. If there are any and then the $17 million of P. P. P fees is that just the fees and then we should add on the 1% coupon or is that all in brightness.
Chris This is Brendan yes, so the PPP fees are Jim the $70 million is just the fees did.
It does not include the interest impact for whatever is left in Q on Q2.
Regarding on the way we are wrapping up with most of the work around OMB way there could be some some de minimis amounts coming through in Q1, and Q2, but relatively small at this point.
Okay awesome. Thank you.
Thanks, Chris.
Yes.
The next question will come from the line of coal volume was stable.
Good morning, Terry Good morning, everyone I'm used to coming after Scott So nothing new on my end this morning.
Yes.
But.
Thanks for taking my questions first of all I just wanted to make sure I understand the expense commentary I mean pretty straightforward the $118 million for the first quarter.
So I guess my question is how much of that $5 million a year over year increase from the new hires is in that one <unk> and if it's not on there how should we think about growing that number and then.
And same question for the day kind of the annual Merit increase in the second quarter I think last call you maybe quantify that if you could just remind me the best way to think about that starting in <unk>. Thanks.
Yeah, we talked about $5 million impact for all of the investments and so about a quarter of that is represented in your in your Q1 number for the remainder of that will happen over the course of the year.
And in terms of marriage, it's about one point to one point.
$5 million per quarter, beginning in Q2.
And then just my follow up here, if I look at the reserve ratio at the end.
And then the first quarter it was call. It 86 basis points now over 1% ex PPP loans. Once you have a little bit more clarity and certainty about the economic outlook and just felt more comfortable there do you think that ratio goes back to where it was call. It day, one or it was after the first quarter ended.
Yes, Terry I don't think it goes back to day, one I think the economic outlook that we'll experience at the end of this crisis will probably not be as rosy as it was.
Back in January 1st when we put it together. So my guess is we ended a level higher than day, one, but probably not meaningfully lower than we are today.
And then just one last question I know this came up earlier given the acquisition that is occurring in some of your core markets and some of the cost savings numbers that are publicly been talked about.
Would you be interested maybe in at the end of this year and really ramping up some of your hiring maybe in excess of what you were thinking about before that news happened.
If so maybe what markets do you think present, the best opportunity for that.
Thank you.
Yes, we will continue to be an opportunistic.
Place to hire folks for and we have feelers out and all of our markets trying to look for the best possible talent, you know theres still a fair amount of disruption from our largest banks on our footprint.
And it's sometimes it's difficult to serve your clients with some of those organizations and so we'll continue to look for that and so while we know we've kind of quantified. This this initial round of higher really supporting you won't be way initiatives, we really continue to be an opportunistic higher on I don't expect that those that hiring would have a material impact on our overall expense number so.
And so we'll continue to look for those great opportunities, Minnesota continues to upgrade opportunities for US Michigan continues to represent great opportunities for us Louisville places like that continue to represent great opportunities. So we're absolutely willing to go off on higher in excess of our original plans. If it makes sense for long term growth of the company.
That's great. Thanks again, thanks, Eric.
Yeah.
The next question will come from the line of John Austin with RBC capital market morning, John Hey, Good morning, Good morning.
Brian maybe a question for you on mortgage banking, you talked about the pipeline being.
Twice of what it was a year ago, but whats the message you're sending on some of the near term mortgage trends.
Can you keep pace with the kinds of numbers you put up on the fourth quarter would you expect that to fade a bit.
Yes, John No no real clear message other than to say we ended the year really great. So I think typically we should be able to outperform the Q1 of last year, just given the year end.
Pipeline, but we will we will not be immune to that.
The headwinds and tailwind on the mortgage business in aggregate I think our mortgage business will continue to follow those industry trends, but I think we'll be off to a good strong start in Q1.
I think we are finishing up last year I mean, there was a fair amount of uncertainty can 2021 to be as robust as 2020 and I think many of the models out there had a really strong 2021 in terms of mortgage fee income.
The MBA forecast showed you know maybe down 20% and at one point in time, So I think theyre, just kind of a balance there I mean it'd be truthful, we're not quite sure what what mortgage volumes will look like we were anticipating a down year, but we've been calling that down year for the last few years to be honest with you. So you know.
It's hard to know we were just really pleased on our fourth quarter ended really strong and hopefully we'll maintain some of the momentum going into the first quarter.
Okay, that's fair enough and then.
The back on the reserve just a follow up the qualitative piece of it.
Curious if you could help us think through that what are maybe the top couple.
Qualitative factors that maybe you can't get your arms around the clause that qualitative increase.
I think I think I think Jim Darrell and I all mentioned it it's really the path of this virus the vaccination rollout.
And maybe more importantly, the timing of charge offs and the delayed recognition.
And until we have some clarity around that it's challenging for us at this point to release reserves in a meaningful way.
Okay, that's kind of at least from my my last one here the follow up.
You talk a little bit about indirect auto delinquencies up a little bit and I guess, that's maybe understandable with the kind of the stimulus pause, but you've seen any other new problems or anything unexpected and I understand the qualitative piece of it.
Anything new or surprising that you're seeing or is it just generally things are getting better.
Yeah, John Daryl here really.
There really isn't anything in the portfolio you know, we've got that slight increase in delinquencies.
Delinquencies in the indirect if I had to search and search the only thing that is remotely surprising to us in our consumer portfolio is.
The defaults related to deaths.
I don't think it's COVID-19 related necessarily but we've tracked that over the last several years and at least in our portfolio. We have some defaults related to that but as we look through the rest of the portfolio. So it really is not anything at this point in time that is surprising to us which may in itself be surprises.
Okay.
Okay, Okay and in the general view is the new stimulus.
Generally helps to push out losses.
Do you think there'll but.
All the stimulus from what we're seeing and what Youre thinking right now, but all the stimulus that we have and it's probably you have to come flattens the losses.
Yeah, maybe on it a little different camp, if the vaccinations can't take hold.
I think this next round of paint how big it is could not only just push out losses. It could also serve to reduce to a certain extent the loss content that we have on our portfolio.
So I'm a little more bullish on that.
Which you know its pretty rare per barrel.
I'm shocked but.
I mean, you can't but I think it's Uh huh.
I think it's positive so okay. Thanks for all the help I appreciate it thanks John.
Yeah.
As a reminder, you may ask can have on your question by pressing star one.
Next question will come from the line of David long with Raymond James.
Good morning, David.
Good morning, everyone. Thanks for taking my question.
As it relates to commercial real estate curious if youre, what youre hearing from your customers about.
How much how.
How much space, they will need going forward as we come out of this pandemic and not talking about the next three to six months, but just over the course of the next couple of years, if youre getting any insights as to.
<unk> needing to expand to create space or are they going to be look to be cutting space because more people are going to be working at home just curious on anything you're picking up on your discussions with your customers right now.
Yes, I think I think it's David This is Jim Sandra This I think it's a little early to tell.
You know that whole kind of work from home in an office.
We don't have a huge exposure to office and we've been very cautious about that as we go into it but continue.
Continue to keep a close eye on retail.
Multifamily we've had a lot of growth there I think we're being very opportunistic making sure. We're doing the right deals on the right markets with the rate borrowers but.
We continue to have those conversations, but I think it's I think it's still too early to tell exactly what that trend is going to be for businesses and work from home and how much office space Youre going to need. We've also heard the the other side. If a lot of people are working from home people May say, hey, we still need office space, but we may need more office space for less people.
So again, a lot of a lot of things going on right. Now, we're just kind of wait and see how that all plays out David I would just share anecdotal conversations I've had with Ceos across our footprint and while everybody was talking about the virtues of working from home last year I think as the year started closing out there was a lot of Ceos they had some fatigue.
<unk> the work from home in.
The productivity around the work from home and maybe while it worked really early on it's been more challenging here as of late and just the desire for people are social by nature to get together and they'd be more collaborative so I think theres balance from the conversation today.
Free with Jim it's too early to tell about what happens to our portfolio.
But I don't think that the virtues that everybody's going to working from home and anywhere they want to work maybe.
Maybe in the Midwest, maybe different than maybe other parts of the country, but I don't think that that will mean, a big impact on old National's portfolio.
Got it thanks, guys I appreciate the color that's all on I had thanks David.
As a final reminder, you may ask on audio question ballpark from Star one.
With that we are showing no further audio questions Robert.
On the speakers for any closing remarks, well Nicole. Thank you for your hosting today and thanks to everybody for joining us as always we are here on available to take further follow up questions happy new year and thanks for everybody for joining us today.
This concludes old nationals 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 <unk>.
National Dot com.
A replay of the call will also be available by dialing 1855.
592, 056 conference I'd code 6389837, this replay will be available per February 2nd.
If anyone has any additional questions. Please contact.
Let me on Walton eight one to 461366. Thank you for your presentation participation on today's conference call.
[music].