Old National Bancorp (ONB) Q1 2021 Earnings Call Transcript

Old National Bancorp  (NASDAQ: ONB) Q1 2021 earnings call dated Apr. 19, 2021

Corporate Participants:

James C. Ryan — Chairman and Chief Executive Officer

Brendon B. Falconer — Chief Financial Officer

Daryl D. Moore — Chief Credit Officer

James A. Sandgren — President and Chief Operating Officer

Analysts:

Scott Siefers — Piper Sandler — Analyst

Terry McEvoy — Stephens — Analyst

Chris McGratty — KBW — Analyst

Jon Arfstrom — RBC Capital Markets — Analyst

Ben Gerlinger — Hovde Group — Analyst

Presentation:

Operator

Welcome to the Old National Bancorp First Quarter 2021 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for 12 months.

Management would like to remind everyone that, as noted on Slide 2, certain statements on today’s call may be forward-looking in nature and are subject to certain risks, uncertainties and other factors that could cause actual results to differ from those discussed. The Company’s risk factors are fully disclosed and discussed within the SEC 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 for these numbers are contained within the appendix of the presentation.

I’d now like to turn the call over to Jim Ryan for opening remarks. Mr. Ryan?

James C. Ryan — Chairman and Chief Executive Officer

Thank you, and good morning, everyone. Starting on Slide 3, we are pleased to share our first quarter results. Earnings per share were $0.52. Earnings per share were positively impacted by our reserve release. Brendon will fill you in on all the details. But despite the release, our earnings would have exceeded consensus estimates. Adjusted pre-tax pre-provision are up 18% year-over-year as a result of the implementation of the ONB Way. Adjusted operating leverage also improved over 900 basis points and our efficiency ratio was 54.3%.

Other highlights for the quarter include end of period commercial loans, excluding PPP, increased 2.6% annualized because of record first quarter commercial production of $718 million. End of period total deposits increased more than $800 million, which was 19% higher on an annualized basis and our loan to deposit ratio is now a very low 78%. Net interest income dollars were relatively unchanged, consistent with our guidance. Wealth management assets under management grew nicely, mortgage revenue was seasonally stronger than expected, and all expense categories were slightly better than we had planned.

During the quarter, we worked hard with our clients on the SBA forgiveness process for Round 1 PPP loans and originating new Round 2 loans. Our team helped the SBA fund almost 10,000 loans in the first round. 75% of those applications have been forgiven by the SBA already. Our focus on the forgiveness process have allowed our clients to achieve forgiveness faster than most. I’m also proud of the work we’ve done to support the second round. We have processed almost 6,000 applications totaling $578 million with an average loan size of $98,000. Most of our credit quality metrics improved during the quarter. With consistently better than economic forecast in the massive stimulus programs, we reduced reserves consistent with our modeling.

We still have approximately 30% of our reserves supported by qualitative adjustments given the higher-than-average level economic uncertainty that exists today. We continued to proactively downgrade our pandemic-impacted 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, diverse and greater [Phonetic] loan portfolios, and Midwest footprint should help us weather the impact better than most.

A quick update on hiring. We have added some excellent candidates during the quarter and we continue to have a good pipeline of opportunities. We have a fantastic story to tell and we have strong interest from people wanting to join our team. Lastly, despite the ongoing distractions, we have remained focused on serving our clients and communities, and I think our results are indicative of our efforts.

I’ll now turn the call over to Brendon.

Brendon B. Falconer — Chief Financial Officer

Thank you, Jim. Turning to Slide 4. Both our GAAP and adjusted earnings per share were $0.52. Adjusted earnings exclude $1.5 million in ONB Way related charges as well as $2 million in debt securities gains. Moving to Slide 5. We are pleased with our quarterly adjusted pre-tax pre-provision net revenue, which was 18% higher year-over-year. And despite accounting operating environment, we generated 919 basis points of positive operating leverage.

Slide 6 shows the trend in outstanding loans and earning asset mix. Total average loans, excluding PPP, grew $118 million or 3.7%. End of period commercial loans increased $59 million, driven by record first quarter commercial production of $718 million. Commercial activity remained strong throughout our footprint with production well balanced among our major markets. Commercial production yields increased quarter-over-quarter to 2.89%, 75% of which were floating rate.

Even with our seasonally strong production, our quarter-end pipeline increased 28% over prior quarter to $2.6 billion. We believe that current pipeline with over $600 million in the accepted category should lead to another strong quarter of production. The investment portfolio also increased in the quarter as deposit growth once again outpaced loan growth. We are taking a disciplined approach of putting excess liquidity to work in our investment portfolio with new money yields at 1.35% and a portfolio duration well within five years.

Moving to Slide 7. Period-end and average deposits increased during the quarter by [Indecipherable], respectively. This growth has largely come from higher business and personal savings rates that have resulted from changing spending patterns and added liquidity from the various government stimulus actions during the quarter. Turning to pricing. Our total cost of deposits was 7 basis points for the quarter, a 2 basis point improvement over Q4. In our continuing efforts to drive funding costs lower, we also reduced average borrowings this quarter by $181 million.

Next, on Slide 8, you will see details of our net interest income and margin. Net interest income declined $13 million quarter-over-quarter, largely due to the decrease of $10 million in PPP-related interest and fees. Excluding the impact of PPP, net interest income was in line with our expectations with the slight $3 million decline predominantly due to two fewer days in the quarter. Net interest margin declined 32 basis points this quarter to 2.94% due to lower PPP fees, fewer days and additional excess cash. Core margin, excluding accretion and PPP fell 14 basis points to 2.74%. Excess cash and fewer days accounted for 8 basis points of the decline, with the remainder due to new business rates on loans and investments.

Slide 9 shows trends in adjusted non-interest income. Adjusted noninterest income of $55 million in the first quarter was slightly lower than the $58 million we recorded in Q4. The $3 million decline was primarily driven by lower capital markets income. Mortgage revenues were better than expected with unseasonably strong first quarter production of $518 million and elevated gain on sale margins. We also saw a nice growth in our Wealth segment due to increases in assets under management and progress in our ONB Way related initiatives.

Next, Slide 10 shows the trend in adjusted non-interest expenses. Adjusting for ONB Way related charges and tax credit amortization, non-interest expense was $115 million. These results are slightly better than what we outlined in our fourth quarter call as they include a $1.3 million reversal, a provision for unfunded commitments, which runs through the other expense category. We do not anticipate additional material reductions in our unfunded reserve in the near term.

Included in our total expenses in Q1 were $1.5 million in charge [Indecipherable] ONB Way strategic plan. We have just completed the migration of our datacenter to an offsite location. Costs related to this migration will be reported in Q2 earnings, it should be immaterial. These second quarter charges should be the last of the ONB Way related cost to impact earnings.

Turning to PPP loans on Slide 11, you will see a roll forward of those balances, which stood at $1.1 billion at quarter end. We continue to assist Round 1 clients for forgiveness with approximately 75% formally through the SBA forgiveness process. We have seen stronger demand in Round 2 than we anticipated, having originated just under $500 million through March 31. As of late last week, Round 2 applicants — applications totaled $578 million with corresponding fees totaling approximately $26 million. This brings the total unamortized fees on PPP loans from Rounds 1 and 2 to $33 million. We would anticipate most Round 2 loans to be forgiven and the corresponding recognition of the fee income to occur late in 2021.

With that, I will turn it over to Daryl to discuss credit.

Daryl D. Moore — Chief Credit Officer

Thank you, Brendon. Slide 12 reflects the performance of our loan portfolio both on the current quarter and historical trend basis. Total 30-plus day delinquencies continued their downward trend for third consecutive quarter following a 12 basis points at the most recent quarter’s end. As our commercial delinquencies have historically been on the low side, the improvement we have seen over the past several quarters has been concentrated in the retail portfolio. Stimulus payments, higher levels of discretionary funds as a result of reduced spending during the pandemic, and seasonal income tax refunds are all likely contributing factors to the historically low retail delinquency rates. We will have to see what subsequent quarters may bring on the delinquency front, but the current level is, in all likelihood, unsustainable in the long term.

Net charge-offs were well contained with a very small net recovery posted in the quarter. The lack of charge-offs has certainly been a very pleasant surprise given where we feared we might be back in March of last year. Over the past several quarters, we have been of the mind that charge-offs associated with pandemic would be pushed out to the first and second quarters of this year. At this point in time, we are not seeing a strong potential for significant charge-offs in the portfolio, although they certainly could occur if we get a setback in the progress we are making on the pandemic front or the economy stalls for some reason.

Non-performing loans fell slightly in the quarter with both non-accrual and restructured loans reflecting modest decreases in the period. As you can see, the gap between Old National and its peers in this particular metric has favorably narrowed over the last several years. We continued to perform well in the net charge-offs to non-performing loan category. As you can see, over the past three years, our peers’ results have ranged from roughly 21% to 28% while we have reflected results in the 1% to 4% range. With the net recovery results in the current quarter, we’re off to a good start in this category for 2021.

The combination of swift vaccine rollout and generous government stimulus programs have certainly led to a more rapid economic recovery than many of us could have imagined 12 months ago. I believe we all acknowledge and understand how fortunate we are to have escaped the longer and more severe economic downturn than we experienced.

However, in our opinion, we need to take this opportunity to step back and see how we might change approaches to forward views of risk identification management. I think the industry does a relatively good job of understanding credit risk based on historical performance, but many of us had to scramble back in March of last year to try to figure out how an unprecedented event like a pandemic was going to impact our loan portfolios going forward. In retrospect, we were able to get the job done. But the way we accomplished this was not as efficient or as specifically forward risk-oriented as we might have wished. We have ongoing efforts in the bank attentive on learning from this experience and intend to take steps even in the near term to make ourselves better on this front.

With that, I’ll turn the call back over to Brendon.

Brendon B. Falconer — Chief Financial Officer

Thank you, Daryl. On Slide 13, you will see the details of our first quarter allowance of $114 million, which is a decline of $17 million from Q4. The improving economic outlook, including the impact of a successful vaccine rollout and most recent government stimulus, led to an $11 million decrease in reserve needs. The improving underlying quality of our loan portfolio led to an additional $7 million reduction.

As you recall, we were measured in our approach the reserve build at the onset of this crisis and will be similarly thoughtful as the economy improves. And although the economy is clearly strengthening, there remains an above average amount of uncertainty. As a result, we are holding a larger amount of qualitative reserve today than it’s typical, and we will continue to closely monitor our portfolio performance and make the appropriate adjustments to our reserve in future quarters. I would also like to remind you that we continue to carry $46 million in unamortized marks from our acquired portfolios. And while these marks will not directly offset charge-offs, any remaining mark will accrete through margin upon resolution.

As I wrap up my comments, here are some key takeaways. We are very pleased with the fundamental results of the quarter. Record first quarter commercial production and earning asset growth helped us deliver on the stable net interest income we guided to last quarter. Our fee businesses, particularly mortgage and wealth continued to perform well, and our credit quality metrics continued to exceed expectations.

Slide 14 includes thoughts on our outlook for 2021. We ended the quarter with a healthy $2.6 billion commercial pipeline, which included $623 million in the accepted category. Lower new businesses — lower new business and reinvestment rates will continue to put pressure on net interest margin, but we expect net interest income to remain stable through continued earning asset growth. The PPP loan forgiveness process continues for our Round 1 clients and Round 2 production is going well. We expect run off for Round 2 balances to occur in the latter half of 2021, and the recognition of most of the related $26 million in unamortized fees to occur at that time.

We expect our fee businesses to continue to perform well. We were encouraged by the momentum in our mortgage and wealth businesses, but performance will 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 lag historical levels with the receipt of additional stimulus further delaying the return of this revenue line to pre-pandemic levels. Other fee lines are expect to be stable in the near term.

Expenses should increase in 2Q with our annual merit increases that were effective in early April, and we do not anticipate any additional material recapture and reserve for unfunded commitments. We are generally comfortable with the current consensus estimates on expenses for the remainder of the year. Lastly, a brief update on taxes. We continue to 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 in tax credit amortization for the year with the 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 full team here, including Jim Sandgren.

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Scott Siefers with Piper Sandler. Your line is open.

James C. Ryan — Chairman and Chief Executive Officer

Scott, you are back.

Scott Siefers — Piper Sandler — Analyst

Good morning, guys. I know you remember.

James C. Ryan — Chairman and Chief Executive Officer

[Indecipherable]

Scott Siefers — Piper Sandler — Analyst

Didn’t need a repeat of last quarter, but I appreciate you remind [Phonetic]. So, hey, good morning. I hope you guys are doing well and appreciate the question — or you taking the question. Maybe first place to start off is just on sort of the nuance of the margin, the core margin ex PAA and PPP down to about 2.74%. Maybe sort of thoughts on kind of what’s going on there, and I guess more importantly, sort of order of magnitude of further pressure just as you see it?

Brendon B. Falconer — Chief Financial Officer

Yes, Scott. This is Brendon. I think it’s difficult for us to pinpoint where the margin is headed. Obviously, the excess liquidity in the system is putting pressure on margins, but our focus has been and will continue to be maintaining net interest income stable. We think we have the earning asset growth potential to do that and that’s where we’ll be focused.

Scott Siefers — Piper Sandler — Analyst

Okay, all right, perfect. And then just on the sort of the lending side, I mean, you guys are really sort of bucking the trend by showing any growth on the commercial side, which is good. Yes. I’m curious, Jim, to hear your thoughts on competition and the dynamic there. Now that we’re sort of more successfully reopening broadly speaking, are your competitors doing the same thing or is it still sort of an environment where you guys are just really well positioned to kind of continue to take market share, particularly in some of your newer markets?

James A. Sandgren — President and Chief Operating Officer

Yes, Scott. Jim Sandgren here. Yeah, we continue to be really opportunistic. I think as we’ve shared in the past calls, we’ve been out, we’re out calling, our leadership team has been out in the markets the last few months. And if clients and prospects are willing to see us, we’re out making calls. So, really like the frame of mind. I will tell you the competition is certainly starting to heat up, particularly on the commercial real estate side. We’re seeing some rate compression there, also extended interest-only periods on construction deals we’re seeing kind of longer-term fixed rates without swaps and without prepayment penalties.

Again, we’re maintaining discipline and we’re still winning. And so to see the growth that we had in the first quarter with commercial line utilization down and we’re starting to see the secondary market refinancing start picking up. But again, I think our frame of mind has been very opportunistic and we’ve been out calling, and I think other banks are starting to certainly pick up. So, competition is fierce, but I like our chances. We obviously built the pipeline up quite a bit in the quarter. We’ve finished the first quarter really strong with production and feel good about second quarter as well.

James C. Ryan — Chairman and Chief Executive Officer

Scott, this is Jim. I would also add that, I think you’re starting to see the fruits of all of our efforts regarding new hires start to impact us here. I can think of, we were just in Wisconsin and we’ve got some great new hires in Wisconsin that are really starting to get some traction at C&I space. And as we continue to fill out in key markets, new hires, I think we’ll continue to have opportunities to grow, particularly as their non-competes wear off and they could be active calling on their former clients in the marketplace. So, this is the way we’re driving new businesses, we’ve got it, incredibly focused effort. Jim and I are out calling regularly and we’re hiring new people to help augment some markets and some product licenses we continue to want to grow.

Scott Siefers — Piper Sandler — Analyst

Okay. Perfect. That all sounds great. So, thank you guys very much.

James C. Ryan — Chairman and Chief Executive Officer

Thanks, Scott. Great to hear from you.

Operator

Our next question comes from Terry McEvoy with Stephens. Your line is open.

James C. Ryan — Chairman and Chief Executive Officer

Good morning, Terry.

Terry McEvoy — Stephens — Analyst

Hi, good morning everyone.

Brendon B. Falconer — Chief Financial Officer

Good morning.

Terry McEvoy — Stephens — Analyst

Quick question. This last quarter, just looking at the releases, you kind of shifted from the allowance for loan losses to the allowance for credit losses. And I’m just wondering, do you have a reserve against securities or unfunded loan commitments just because the fourth quarter matches up with what was disclosed today? And then could you just repeat again what the unfunded loan commitment expense was in the first quarter and maybe what that was last year?

Brendon B. Falconer — Chief Financial Officer

So, Terry, the allowance for unfunded commitments is the credit losses, obviously, associated with any of those unfunded construction draws or revolvers and we’ve had that on the books for some time. We ended the quarter $1.3 million lower than we did last quarter. And that really runs through our CECL model and the same drivers that drive our allowance for credit losses are the drivers that drive our allowance for unfunded commitments.

Terry McEvoy — Stephens — Analyst

Okay, thanks for clearing that up. And then, Jim, just the last page of the investor deck, your 20 peer banks. I just noticed two announced in MOE last week, another one included in a deal this morning. I guess my question is, what does that say about mid-sized banks and what does that say for Old National?

James C. Ryan — Chairman and Chief Executive Officer

Well, I think it continues to be a difficult environment out there, right? I mean the operating environment is not getting any easier. There’s lots of competition, there’s lots of need to continue to invest in talent and technology. And I think revenue growth can be challenging for our industry. So, I think all those things are driving those types of conversations. As I have said previously, we are open to all those kinds of — any kind of transaction that will ultimately drive stakeholder value and we’ll just have to think, but anything in the MOE space, I think, requires a higher bar, right? And you got to be really focused on culture and strategy and fit in addition to the financials, because if you can’t get those things right, then the financials won’t come. So, obviously, open, anything that makes sense, our Board of Directors would have to take a look at those things, but at a slightly higher bar.

Terry McEvoy — Stephens — Analyst

Great. Thanks, Jim.

James C. Ryan — Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Chris McGratty with KBW. Your line is open.

James C. Ryan — Chairman and Chief Executive Officer

Good morning, Chris.

Chris McGratty — KBW — Analyst

Hey, guys, good morning. Jim, maybe a question on capital. You talked about the growth, the movers, the drivers of the growth this quarter. Can you speak to your appetite for buybacks. Obviously, I heard the comments about a little bit cautious on the uncertainty with the economy, but you guys have a ton of capital [Indecipherable] interested in kind of buyback priority?

James C. Ryan — Chairman and Chief Executive Officer

Yeah, definitely on the table for us to consider. We’re going to balance those out with kind of near-term outlook on any potential M&A partnerships and we’ll go through the trade-off. Clearly, as the economy gets a more stable footing, we get more comfortable. I think they become more viable option. But again, I think we want to look at how we could better deploy capital. What’s the better use of capital, a buyback or an M&A partnership opportunity.

Chris McGratty — KBW — Analyst

Okay. But I guess, I shouldn’t read into the lack of a buyback, meaning proximity to a deal.

James C. Ryan — Chairman and Chief Executive Officer

No, that’s been our stance the entire year. Yeah.

Chris McGratty — KBW — Analyst

Okay. And then maybe just on the reserve, obviously, your credit’s been spectacular over cycles. How do we think about just the absolute level of reserve today versus maybe fast forward a year when we fully emerge? Could you just remind us where the day one was and how you’re thinking about that bogey?

Brendon B. Falconer — Chief Financial Officer

Yeah, Chris. This is Brendon. Yeah. So we started day one CECL with a $96 million, we’re at $114 million today. A big chunk of that difference in our model say is the qualitative reserve, which we’re holding significantly more than we did at day one, just reflective of the uncertainty in the economy. So, that is that comparison. That said, we’re not sure what the economy is going to look like three quarters from now. We’re comfortable with where the reserve stands today, and we’ll be flexible and move it up or down accordingly.

Chris McGratty — KBW — Analyst

Okay. And then if I could just sneak one of the clarifying comment. The NII stability, was that excluding both PPP and accretion, or is that a GAAP number?

Brendon B. Falconer — Chief Financial Officer

No, core — yeah, core management accounting. Excluding PPP accretion.

Chris McGratty — KBW — Analyst

All right. Awesome. Thanks, Brendon.

Operator

Our next question comes from Jon Arfstrom with RBC Capital Markets. Your line is open.

James C. Ryan — Chairman and Chief Executive Officer

Good morning, Jon.

Jon Arfstrom — RBC Capital Markets — Analyst

Hey, good morning. Question for you, Brendon, just on the expense guide to clarify that. I see a consensus of about $485 million for the year. Is that the number you’re looking at? Or should we be looking at something else?

Brendon B. Falconer — Chief Financial Officer

Yeah. I’m thinking, Jon, that the second, third and fourth quarter numbers are reflective of our expectations. So, give ourselves credit for the $3 million beat relative to what the Street had. But yeah, rough and tough, that’s pretty close.

Jon Arfstrom — RBC Capital Markets — Analyst

Back on loan growth, any differences in recovery expectations across the footprint? And if you had to put your finger on what is really driving the commercial optimism, what would that be?

Brendon B. Falconer — Chief Financial Officer

Yeah. I’m going to start us off, Jon and then let let Jim jump in. Clearly, I think we’ve demonstrated our willingness to be out seeing clients, looking for opportunities. It was all driven by the comfort around our credit quality and our portfolios, right. We came in — we’re known to be that relatively conservative lender. So we came in feeling pretty good about our portfolios. We were quickly able to jump in and analyze the portfolios and confirm that we should continue to feel good about that. So it didn’t stop us where many of our peers took a pause there.

They took a pause for a couple of different reasons. They took a pause because they think they’re worried about their own portfolios. But they also took a pause because they had people at home, maybe not as proactive as our team members were. And so we continued to do that. Places like Michigan continued to have setbacks in terms of their COVID numbers. So, that will probably put maybe a little bit of pressure, at least on the psyche of some of those people up there. And so we’ll continue to watch that. But I don’t see a big change in our markets. It’s still a Midwest-focused organization, and they all seem to be recovering kind of an equal basis. But I do think it will — various competitors will come back in various ways. And as Jim said, we’ve seen it most acutely on the commercial real estate sector where that seems to be come back in a pretty significant way, but we’ll continue to be active.

James C. Ryan — Chairman and Chief Executive Officer

Yeah. The only thing I would add, our clients and prospects we’re talking to, certainly in the manufacturing space, some of the contracting spending, very, very optimistic. And the biggest challenge across the footprint is just finding skilled labor. And that’s the big thing that’s holding people back. And there’s been some supply chain challenges as well. But overall, I mean, it’s really an optimistic outlook, and they continue to deal with those other challenges fairly well. So, optimistic.

Jon Arfstrom — RBC Capital Markets — Analyst

Good. Just two more follow ups. Slide 12, the credit slide. The non-performing loans, they’re coming down and they’re gradually coming down. And I’m just curious if you could share with us the profile of what is in NPLs and maybe kind of the flows in and out in terms of what you’re seeing there?

Daryl D. Moore — Chief Credit Officer

Yes. Jon, let me start by saying what’s interesting in this environment is there are still what I would consider maybe probably smaller banks in Old National that are really aggressive in taking some of these clients. And so through any cycle, that has a big influence on your ability to manage non-performers or move non-performers out is kind of the liquidity in the market and who’s taking these loans. And so we never — I think maybe for a quarter, maybe two quarters, that slowed down a little bit, but really not like you might think it is. So that’s the first kind of ability for us to manage those.

On the non-performing, we had a little less than $10 million in actual paydowns out of that portfolio. So again, to the extent that they’re able to find other banks, they’re doing that. The profile on our non-performers is really across the board. We just really don’t have any industries that are concentrated in any of that. Really no C&I versus CRE. It is just individual borrowers throughout many different industries that have come on this list. And I think it’s to Jim’s comment earlier, it’s just the way we’ve underwritten coming into the cycle.

James C. Ryan — Chairman and Chief Executive Officer

And Jon, you know our history here, right, where we tend to call them very early. And I think if you look to the graph to the right, in terms of what our charge-off looks like relative to that portfolio because we’re early to call them and really decide whether this is a credit that we think we can stick with or this is a credit that we think we need to work out, I think that gives us an advantage when it comes to the actual loss experience that we have with those individual borrowers. And quite often, we’re able to rehabilitate them and they go back to the book. And we recapture that interest income that we didn’t take all the time they were in that bucket. But I think it’s just being proactive and with those situations and try to get as accurately as possible when we see weakness.

Jon Arfstrom — RBC Capital Markets — Analyst

Yeah, it’s interesting. If you look at that chart in the upper right, on Slide 12, and we look at it every quarter, but when you really look at it, it’s — you’re right on that it’s impressive.

And then I guess the last thing, Chris and Terry asked around it as well. But what is your appetite on M&A? And excluding the MOE piece of it, because I agree that’s rifle shot and sticky situations on a lot of that. But what is your appetite? And what are you seeing in terms of deal flow and attractiveness of potential sellers?

James C. Ryan — Chairman and Chief Executive Officer

Consistent with my previously — my previous comments on the quarter, we’re not seeing a lot of books being passed around in those smaller opportunities. As our appetite, I think it’s back. 2019, we were internally focused. 2020 was the year of the pandemic and executing our ONB way. And I think now we’re in a position, particularly as we get more comfortable with credit, that we could be in a position. And it doesn’t mean that I wasn’t active over those two-year period of time. I’d tell you, I was very active. I still continue to do that — a lot of that personally. And so absolutely are in a position to — if one comes along that’s attractive, that meets all of our hurdle rates, we would absolutely take a look at it in this kind of environment, particularly given our better ability to assess credit risk.

Jon Arfstrom — RBC Capital Markets — Analyst

Okay, all right, thank you.

Operator

Our next question comes from Ben Gerlinger with Hovde Group. Your line is open.

James C. Ryan — Chairman and Chief Executive Officer

Good to hear from you, Ben.

Ben Gerlinger — Hovde Group — Analyst

Thanks, good morning guys. Solid quarter at the start to the year. I just wanted to kind of follow up a little bit more kind of hypothetically on credit. If you look over the past couple of recessions, you see net charge-offs peaking in a bit of a bell curve manner about two or three quarters after the bottom from like a GDP perspective, I guess, you could say. So this recession and kind of recovery is a bit different, obviously, because of a lot of the stimulus and government programs intervening, preventing a lot of aspects through deferrals. So, I’m just kind of thinking hypothetically, there’s probably going to be a bit of a bell curve, but elongated and less of a peak at the top. So, as you guys kind of work through this year and your qualitative factors kind of holding it back, do you need to see continued improvement? Or is more time passing by before you feel more comfortable with that total allowance looking back down to that kind of low-90s million.

Brendon B. Falconer — Chief Financial Officer

Ben, I think you characterized it really well. I do think this recession is different, probably is. Could be elongated, maybe a lower peak. And I think time is what’s going to tell that story. And then in opening comments, we’re going to be thoughtful in about how our approach to reserving over the course of the year. Given the uncertainty, I think your comments are appropriate on how we’re thinking about it as well.

Ben Gerlinger — Hovde Group — Analyst

Okay, thanks. And then just kind of thinking about loan growth in general, a lot of the bigger banks, you guys all alluded to, pulled back and then most recently come back into the quarter. And some of the commentary, at least from last week on the really big regional banks, it seems as though the second half of the year is going to be the area where you see actual growth. Being that you guys have seen core loan growth late last year and early this year, do you feel as though that the competitive aspects are going to prevent you from growing at the pace that you were? Or is the end market is going to be recovering?

Like I’m just trying to figure out a sense of your core loan growth, is it a driver of you taking share? Or is that you’re just knowing your customer because you are competing for slightly smaller customers or from a more nuanced dynamic? Is there areas within lending whether it is C&I or CRE that you feel as though you can [Indecipherable] while the other people are still on the sidelines?

James C. Ryan — Chairman and Chief Executive Officer

Yeah, I will just add. It’s a little bit of both, right? I mean, we are taking share. We’re taking share because we’re just a little bit more nimble, little more focused. We’re taking share because we’re hiring new people and then we know our customers pretty darn well and we’re out making sure that we’re meeting their needs and their demands and working with them and looking forward. It’s really hard. Obviously, that’s why we try to provide the pipeline perspective. It’s really hard to look out two or three or four quarters out in terms of what growth might translate. We feel really good about. Obviously, we gave our pipeline numbers for the quarter in the accepted category. That gives us more comfort. It’s hard to know how competition is ultimately going to change those pipeline numbers, but what I will tell you is it won’t stop our focus, it won’t stop our efforts. We’re going out hustle everybody around us, we’re going to work really hard, we’ll continue to put attractive people on the team to go out and grow this business.

Ben Gerlinger — Hovde Group — Analyst

And then finally, my last question kind of looks at more of the fee income. Obviously, mortgage is a bit out of your control given the national dynamics of it, but are there any areas we continue to see some outsized growth? I know that wealth management had a good quarter. Service charges were down a little bit, but that’s probably a day count factor. Are there any areas within fee income where you can add in some talent that maybe the market isn’t looking at it correctly?

James C. Ryan — Chairman and Chief Executive Officer

Well, I will just say that wealth management space is an area we continue to grow and look for talent. And fundamentally, we’re changing our approach to that business. We’re really focused on holistic financial planning and less focused on individual transactions or to grow revenue. And so, I think those are probably, as we’ve always said, a little longer-term play that will translate into results, but I think the quarter you’re starting to see both, we benefited from obviously a better market by and large, but also continuing to hire people in that space, continuing to have a focus on that space. I’ve never felt better about that business than I do today for us to continue to drive better than our historic run growth profile.

I think, treasury management is an area too. We’re also investing a lot in, in terms of people and technology. We feel really good about that business. Again, that’s a little longer play and it’s not a biggest impact in the short run, but over the long term, I feel better about our ability to grow that business.

Ben Gerlinger — Hovde Group — Analyst

All right, great. I appreciate all the answers and the solid quarter. Hope you guys keep it up. Have a great year.

James C. Ryan — Chairman and Chief Executive Officer

Thanks, Ben.

Operator

[Operator instructions] Our next question comes from Scott Siefers with Piper Sandler. Your line is open.

James C. Ryan — Chairman and Chief Executive Officer

Hi, Scott.

Scott Siefers — Piper Sandler — Analyst

Hey, guys. Hey, just — don’t want to make you put too fine a point on the PPP outlook but — so most of what you’ve got left in fees is Round 2. Just as we sort of think about the cadence of things with most of the Round 1 forgiveness fees, does that come in the second quarter? And then how are you thinking about the Round 2 forgiveness in the second half of the year? Is that going to be sort of lumpier and geared towards the fourth quarter or kind of evenly split through the two quarters in the second half of the year? And then, at this point, would you say, I mean we’re pretty much done with originations in Round 2? In other words, what we — sort of what we see is what we get and this is a good base to go off up [Phonetic].

James A. Sandgren — President and Chief Operating Officer

Yeah, I would say a vast majority of the originations that we quoted. Brendon gave you the first quarter through the fourth quarter and then I quoted year-to-date, the $578 million, that’s more than likely the bulk of what we’re going to be doing for the year given the programs likely to run out of funds here very soon. That’s probably loaded towards the fourth quarter, that Round 2 numbers probably loaded towards the fourth quarter, and let’s just say 90% of that number probably is collected this year, it’s really hard to put a finer point on it than that. But I think you otherwise accurately understand the situation.

Scott Siefers — Piper Sandler — Analyst

Okay, terrific. All right. Thank you guys. Appreciate you taking the follow-up.

James A. Sandgren — President and Chief Operating Officer

Thanks, Scott.

Operator

There are no further questions in queue at this time. I will turn the call back over to Jim Ryan for closing comments.

James C. Ryan — Chairman and Chief Executive Officer

Thank you so much. We appreciate your participation. One thing that I want to make sure we pointed you towards. We just published our first ESG report. We’re awfully proud of the work we do, we’re awfully proud of our ability to tell that story. So hopefully, you had a chance to take a look at that report. We think it’s indicative of all our hard work and energy. In addition to the commercial and all the other things that we’re doing, I think it’s how we support our communities, how we support team members, the environment and things like our governance practices, I think, are all well captured within that report. And just want to thank you for your support. As always, Lynell Walton and Brendon are available for any phone calls, any follow-ups you have. Thanks so much.

Operator

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 with conference ID code 9135118. This replay will be available through May 3. If anyone has additional questions, please contact Lynell Walton at 812-464-1366.

[Operator Closing Remarks]