Good morning. Welcome to the Old National Bancorp First Quarter 2022 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for 12 months.

Management would like to remind everyone that 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 or outcomes to differ from those discussed.

The company refers you to its forward-looking statement legend in the earnings release and presentation slides. 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 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?.

Thank you, Amber. Good morning. We are pleased to discuss our first quarter results and update you on our transformational merger with First Midwest. Let's start on slide 4. First, I'd like to highlight our recently published ESG report, which you can find on our website.

Second, Old National was recently recognized for the 11th consecutive year by Ethisphere Institute as one of the world's most ethical companies.

Old National didn't just start thinking about corporate social responsibility recently, we have a long-standing practice of being ethical, demonstrating good corporate governance, supporting our communities, being equitable and inclusive, and being committed to sustainability.

I invite you to learn more about our commitments by reviewing the ESG page on our website. Moving to slide 5. We were pleased to close our merger with First Midwest on February 15. All reported results include the impact of the merger since closing.

Our systems conversion and branding changes will take place in July and we just completed our first successful MRQ [ph] conversion over the weekend. We are planning two more MRQ conversions, which should give us even more confidence as we head into July.

As outlined in our slide deck for this call, we are on track to achieve our model merger synergies of $109 million, and we're already starting to realize some of those benefits. Brendon will fill you in on the details.

I'm particularly pleased with our strong retention of client-facing talent and the growth of existing and new client relationships in the Chicago footprint. There is strong energy and excitement amongst the team, and we have started to hire some top revenue-generating talent in the market.

Later you will see that this energy and excitement translated to a more robust results. Our expected growth and strong return profile should lead us to above peer performance, as we realize more of the merger benefits. Moving to slide 6. As we anticipated, we reported a GAAP loss for the first quarter of $0.13 per share.

The first quarter included pre-tax charges of $96 million in the initial provision expense and $52 million in merger expenses. Excluding these charges from the quarter, adjusted EPS was $0.40 per common share.

We saw strong full quarter combined commercial loan growth over 8% during the quarter, excellent credit quality and our pipeline more than doubled to a record $5.4 billion. Our adjusted return on average tangible common equity was 15% and our adjusted efficiency ratio was approximately 58%.

We are pleased with the strong operating metrics and we expect them to improve further from the merger benefits and higher rates. An update on hiring more broadly. We had significant success in hiring 16 new commercial relationship managers, including three in Chicago, five in Minneapolis, and three in Indianapolis.

This is a quicker pace for new hires than we've previously seen. Our talent pipeline remains robust and we will continue to make these investments throughout the year. Lastly, based on recent visits, I'm excited to report that our two latest LPOs in St. Louis and Kansas City are off to solid starts.

I'll now turn the call over to Brendon for the further details..

Thanks Jim. Turning to the quarter's results on slide 7. As anticipated, we reported a GAAP net loss of $30 million, or $0.13 per common share. Reported earnings were impacted by $96 million in day one provisioning and $52 million in other merger-related charges.

Excluding these items as well as debt securities gains, our adjusted earnings per common share was $0.40. Slide 8 shows the trend in total loan growth on a full quarter historical combined basis excluding both PPP loans and purchase accounting adjustments.

Q1 represents our seventh consecutive quarter of organic loan growth with total loans increasing 6% on an annualized basis, driven by strong performance in commercial which grew $405 million or 8% annualized. Consumer loans were flat, as higher portfolio mortgage production offset $190 million of runoff from the legacy F&B transaction book.

The balance of that transaction book was approximately $1.8 billion at quarter end. The investment portfolio increased this quarter as a result of the merger with the overall mix remaining largely unchanged. Yields improved significantly to 2.14% with new money yields of 2.52%.

Portfolio duration was stable despite the dramatic shift in the yield curve with new money purchases focused on the shorter end. In addition, we did proactively move $2 billion in securities to HTM to mitigate future OCI impact. Slide 9 provides further details of our commercial loans and pipeline.

The strong fourth quarter growth was led by, C&I which grew 14% annualized. We're also pleased that in spite of the strong first quarter production our pipeline ended the quarter at a record $5.4 billion, 20% higher than the combined Q4 pipeline. Turning briefly to pricing, new money yields on C&I were 3.4%, which are now well above portfolio yields.

New CRE production yields were significantly higher quarter-over-quarter at 3.14% with 72% tied to short-term rates. The heavy floating rate production mix is welcomed as we enter this rising rate cycle. Slide 10 shows details of our Q1 commercial production by product end market.

The $1.5 billion production was well balanced across all products and major markets. We are particularly pleased with the results from our Chicago market. From day one our Chicago team understood the strategic logic of the merger and has remained focused and engaged taking care of both new and existing clients.

Moving to slide 11, deposits were stable quarter-over-quarter on a historical combined basis although, we did see some mix shift as an increase in consumer accounts were offset by seasonal declines in commercial and public.

Total cost of deposits for the quarter was unchanged at five basis points while other borrowing costs were down eight basis points quarter-over-quarter. Next on slide 12 you will see details of our net interest income and margin. Net interest income of $227 was consistent with expectations and supported by strong loan growth.

Net interest margin increased 11 basis points from prior quarter to 2.88%. Margin excluding accretion and PPP income increased six basis points to 2.65%. Note this increase was largely due to the higher asset yield from SMB's legacy loan book, with the impact of the March rate hike still to come.

Slide 13 provides additional details on our asset liability position and asset sensitivity. The large cash position, high percentage of floating rate loans and industry-leading deposit betas should lead to an ad or above peer average NII benefit from future rate hikes.

Slide 14 shows trends in adjusted non-interest income which was $65 million for the quarter again this was largely in line with expectations. Mortgage production on a full quarter combined basis was on plan at $634 million. However, normalizing gain-on-sale margins and a higher percentage of portfolio production did impact revenues this quarter.

Pipelines were strong at $688 million at the end of the quarter but we expect the portfolio a high percentage of mortgage production in the near term which will help offset transactional book runoff.

Also, we did see a $4 million increase in the value of our MSR that is not reflected in mortgage revenue, as we account for our MSR on a lower cost or market basis rather than fair value. Next slide 15 shows the trend in adjusted non-interest expenses.

Adjusting for merger charges and tax credit amortization non-interest expense was $173 million and our adjusted efficiency ratio was 57.7%. We are now running slightly ahead of our planned cost synergies and expect the majority of sales to be realized in the back half of the year.

Merger charges are also tracking in line with our diligence estimates with approximately $100 million remaining. Slide 16 provides further details on our path to achieving the cost savings of $109 million we previously announced.

With our July systems conversion on track, we expect to realize 85% of the cost synergies on an annualized basis by the fourth quarter and the remainder in early 2023. Slide 17 shows our credit trends of both historical Old National and First Midwest.

Credit conditions continue to be benign and our commercial and consumer portfolios continue to perform exceptionally well. We ended the quarter with better-than-peer results in all key credit metrics.

Net charge-offs were a modest five basis points with the majority related to purchased credit deteriorated loans that have an allowance established that acquisition. On slide 18, you will see the details of our first quarter allowance which stands at $281 million up from $107 million at the end of Q4.

$79 million of PCD related allowance was established as part of the acquisition and $96 million of day one allowance is established on non-PCD loans through provision expense. Higher reserves related economic forecast and portfolio assumption changes were offset by lower qualitative factors and net charge-offs in the quarter.

While our outlook on credit remains optimistic, we are maintaining elevated levels of qualitative reserves given the geopolitical unrest and potential economic hard landing following this rate striking cycle.

In addition to the $281 million in total reserves, we also carry $162 million in credit marks, $132 million of which is related to our F&B merger. Slide 19 provides details on our capital position at quarter end. As expected regulatory capital ratios declined due to merger-related items, asset growth and share repurchase activity.

Goodwill came in slightly higher than we anticipated driven by larger unrealized losses on SMB's available sale and investment portfolio than we initially modeled. The higher purchase accounting discount will flow through earnings and allow us to build back capital quickly. Overall our capital position remains strong with a CET1 ratio of 10%.

As I wrap up my comments here are some key takeaways. We are very pleased with our first quarter performance as we get in 2022. The integration activities remain on track. We had strong commercial loan growth quarter. Credit remains benign and we are tracking ahead of our planned cost synergies. Slide 20 includes thoughts on our outlook for 2022.

We ended the quarter with a record commercial pipeline which supports our favorable outlook on loan growth. NII and margin will benefit from continued loan growth and Fed rate increases consistent with the asset sensitivity we outlined earlier. We expect our fee businesses to continue to perform well despite headwinds.

We expect solid organic growth in our wealth business, but AUM will be under pressure from market fluctuations in both equities and fixed income. Mortgage is following industry patterns with fee revenue under pressure from normalizing gain-on-sale margins as well as a higher percentage of portfolio production.

Strong commercial activity should support higher capital markets revenues. And lastly, we expect pressure on deposit service charges consistent with industry trends. A brief update on taxes. Our income tax benefit was $4.9 million in the first quarter resulting in a 15.2% FTE tax rate.

The first quarter included $2.1 million in benefits related to the vesting of share-based payments and post-merger remeasurement of deferred tax assets.

We're expecting approximately $8 million in tax rate and amortization for the remainder of the year with a corresponding full year effective tax rate of approximately 21% to 22% on an FTE basis and 18% to 19% on a GAAP basis. For some final comments, I will turn the call back over to Jim Ryan. .

Thank you, Brendon. As we wrap up on slide 2, I would like to share a few closing thoughts as we look forward. Brendon shared our 2022 outlook, but I would also like to highlight a few key differentiators and the deep discount relative to peers and more broadly the KRX.

As indicated throughout our call this morning, the combination of Old National and First Midwest is going very well and is progressing according to our plan. We ended the quarter with strong commercial production momentum as illustrated by a record commercial pipeline reflecting strong client retention and growth of new client relationships.

We have a tremendous recruiting story for top revenue-producing talent as evidenced by our 16 new hires and we will continue to hire more. With our industry-leading historical betas and our well-positioned balance sheet, our ability to benefit from rising rates is better than most.

We have a strong track record of meeting or exceeding our model merger synergies and expect timely brand and systems conversions like in previous mergers. We will be disciplined in our underwriting and maintain adequate loan loss reserves and capital.

When you combine the allowance for loan losses and the credit marks we have 156 basis points of coverage with historically lower level of net charge-offs. We know transformational mergers take time to recover the discount inherent in the uncertainty of any combination.

Still we have more tailwind than most and a strong track record of successful executions. I am very excited and optimistic about our future and my money is on us. Lastly, despite potential distractions from our transformational merger, we remain highly focused on serving our clients and communities.

I think our results for the quarter illustrate the success of those efforts. I'm also great for the hundreds of our team members engage in the systems and branding conversion along with the less that are laser focused on serving our clients and communities each day.

With that said, Brendon, Mark Sander, Jim Sandgren, John Moran and I are all here to answer any questions. .

Thank you. We will now begin the Q&A session. [Operator Instructions] Our first question comes from Scott Siefers with Piper Sandler. Scott, your line is now open..

Good morning, Scott..

Good morning guys..

Congratulations. Way to return back to your core position..

Thank you. I'm tired of me and I'm embarrassed by my slow trigger for here. So I appreciate the acknowledgment. I appreciate you guys taking the questions. I wanted to ask Brendon maybe first for you, so if we pull out the PPP and the PAAs, so the underlying margin is running around 2.65% or so.

Would you say that's an appropriate launching point for the combined company? In other words, does it accurately reflect the combined balance sheet, or is there just a bit more upside simply based on we'll have a full quarter of FMBI in there?.

Yes. I think if you actually -- if you pull out accretion PPP and add back 45 days FMBI, I think your launch rate is a little higher than that 2.65% closer to 2.72%. I think that's the right way to think about the asset sensitivity we talked about. So 6% annualized based on the forward curve. That's the right place to grow that from..

Okay. Good. Thank you.

And then along those lines so with 6% asset sensitivity, maybe a thought on sort of how the margin trajects at the beginning of the cycle versus later on? In other words, how do your assumptions change, first 100 basis points or so of Fed fund rate hikes versus a little later in the cycle?.

Yes, good question. It should grow a little faster early and slowed down consistent with the path of the rate hikes expected to get. We get a 50 basis point rate hike here in May. I mentioned a slowdown over the rest of the next 12 months. It's a little early..

Perfect. Got it. All right, perfect. Thank you guys very much..

Thanks, Scott..

Thank you, Scott. Our next question comes from Ben Gerlinger with Hovde Group. Ben, your line is now open..

Good morning, Ben..

Good morning everyone. I was curious, if we could kind of talk about the hiring front to some degree. I know Jim, you laid out a few numbers there and Chicago was positive which I think is beneficent to the entire story and definitely shows the continuation with no real hiccups you hear from the combined entity.

But when you think about hires going forward across the footprint, is there any areas you're looking to grow more than the others? And then kind of juxtapose against that, with raising inflation expectations for wages kind of how do you balance the two?.

Good question Ben. I'd like to think about it this way. There's always room for top revenue-generating talent, right? We have an unending appetite for that type of talent. And it's at market rates, whatever market rates are at those times. So, even if what we're paying is on the higher end because we are literally hiring the best in the market.

And that comes at a cost, we will continue to make those investments. I believe we -- it's a great opportunity right now. We have a great story to tell. There's plenty of unhappy people out there. And so we need to take advantage of that and continue to hire. And it will be primarily in the commercial and wealth management spaces.

Those were our conversations continue. And again, it doesn't mean that we aren't looking for top talent in the IT space and some other key support areas, but we will continue to be really focused in on -- particularly in our major metropolitan markets, where I think we have the biggest opportunity and probably the most talent to go after..

Well -- Ben, it's Mark. I just would add like we have gaps to fill. We're just opportunistic and frankly strategically opportunistic. Meaning again, as Jim said, good revenue producers pay for themselves quickly, so we want our folks in the market talking to top talent all the time..

Got you. Okay. And then kind of bigger picture here. When you think about shareholder value through tangible book, historically Old National is kind of done a deal a year roughly like pre-pandemic. And then this one is obviously much larger, and I'm sure it will take a little bit more time to digest.

So when you think about tangible book value longer term, should we think about a deal a year, obviously, with a bigger balance sheet, it takes a little bit more to move the needle, or is the plan to grow earnings, tangible opportunistic repurchases? Just kind of how your sense of how you're managing that capital intangible going forward?.

Yeah, great question. Strategically, I believe we're going to do fewer deals probably more meaningful deals, mostly, because we have to do a more meaningful deal than we've done historically just in order to have the impact to accretion. But I would suggest any fewer. And it won't be because we have a lack of opportunities.

I think there's going to be plenty of opportunities for us. We'll continue to be disciplined in how we approach that, particularly as it relates to any kind of tangible book value dilution but fewer deals going forward but maybe more meaningful ones..

Okay. That's great. Great start to the year. Congrats..

Thanks, Ben. Appreciate your support..

Thank you, Ben. Our next question comes from Terry McEvoy with Stephens. Terry, your line is now open..

Thanks. Good morning, everyone..

Hi. Jim, maybe a question for you. I just wanted to understand – understand the message on the bottom of page 6 correctly, where it says merger benefits are ahead of plan.

Is that connected to the expenses and achieving 85% by the fourth quarter, or is that along the lines of recruiting and some of the revenue growth initiatives that you've talked about?.

Yes, and yes, and yes. Yes. I think the message to take away today is everything is going according to plan. We feel really good about our combination. We had a rally for our commercial RM's recently. And the energy in the room was just palpable.

And I think you can see from the results we saw excellent results across every single – one of our markets against all of the commercial portfolios. And so I would say, it's going according to plan. We're starting to realize the synergies, like we expected. Our systems and branding conversions are going well. Client retention has been strong.

Team member retention has been strong. So to sum it up, I think we couldn't be more happy with where we stand today with the current set of results..

And then a question on just the rate sensitivity that 6% is a static kind of balance sheet.

How should we think about loan growth deposit growth from here? And – is there any plans for portfolio runoff like we had in the first quarter?.

Yeah. So that transactional book. I'll answer the last part first. Transactional loan book, we will likely have that around with us for a while, opportunities to do anything or dispose of that given the right environment will be difficult. So that $190 million runoff likely to continue.

That said, we're going to continue to portfolio, a significant amount of mortgages to help offset some of that headwind. But we're still very optimistic about loan growth. Loan growth will help us expand NII going forward. And when it comes to deposits, I think, it's anybody's best guess.

I can tell you that, we have a pretty rate insensitive deposit franchise. And I'd bet on us that ours will stick around longer than most others..

Okay. And maybe just one last one for Mark, and feel free to push back on the question.

How is your team in Chicago handling a more conservative underwriting philosophy?.

Well, I think it's – I think the underwriting philosophies are more slower than you think Terry. I don't think there really is a pushback there. I think we kind of speak each other's language a little bit frankly. Again, speaks to the cultural fit we thought about from this all along. I think the credit cultures are actually quite similar.

So, there's a couple of portfolios where perhaps we took a little more risk in some of the consumer stuff we did. But, by and large, the credit cultures are very similar..

Terry, I would just second that. There are a few areas as we went through the policies that quite frankly, we were a little bit more -- had more risk in and there were some areas they have a little more risk in. And so, we're just taking the best of both those policies. It's really worked out really nicely as the credit teams come together.

I think more importantly is, the teams are energized. Our lending teams are out there energized and growing relationships. And they see a pathway forward to do that regardless of the underwriting standards that are in front of them. So, I think there's general excitement about our ability to do that.

And I think the results and the pipeline kind of speak to that pretty well..

And you look at what we did in Q1, the loan growth was -- a lot of it came out of the Chicago team with the combined credit culture..

Absolutely..

I appreciate it. Thanks everyone..

Thanks, Terry..

Thank you, Terry. Our next question comes from Chris McGratty with KBW. Chris, your line is now open..

Great. Good morning..

Good morning, Chris..

Hey, good morning. Historically Old National has gotten a lot of their rate sensitivity from the deposit base and FMBI as well too.

Can you just remind us what the mix of retail and commercial deposits are proforma?.

It's about --- Chris, it's John Moran. 53% retail, about 40% of the balance is public funds..

Okay 53% retail. Okay, great. Thanks. And in terms of the operating leverage, you talked about the efficiency ratio in the quarter and we can plug in the math for the savings.

But, kind of at a high-level thoughts on kind of where you think the efficiency ratio can go given inflationary pressures but also cost saves?.

I think we have room to definitely move that down lower. As you said, you can do the math, but we're definitely on a really good right path, and there's still opportunities in the back as we get into 2023 to continue to make our back office more efficient.

And there's plenty of opportunities to drive revenue down to help that numerator as well denominator..

Okay, great. And then maybe Brendon while have you.

The comment on the MSR, can you just repeat the comment on the write-up in the quarter?.

Yeah. The MSR value actually increased $4 million, but we did not -- that did not flow through revenue, Chris. We account for that at a lower cost to market. So, I know some others account for that in fair value and that was helpful to their mortgage revenue and that's why that didn't show up in our revenue line..

Okay. Thank you very much..

Thanks, Chris..

Thank you, Chris. [Operator Instructions] Our next question comes from Jon Arfstrom with RBC Capital Markets. John, your line is now open..

Thanks. Good morning, everyone..

Good morning, Jon..

Hey, good morning..

[indiscernible].

Thank you. Can you talk a little bit more about the pipeline? I think prepared comments you guys talked about being up 20% on a combined basis.

And curious what you'd attribute that to? And do you feel like loan growth is accelerating at this point above the kind of the pace you saw this past quarter?.

Yes. Hey, Jon it's Mark. I'll take a stab and then maybe Jim Sandgren, you want to add a little bit to it. I'd attribute it to the teams in business as usual and externally focused. And as simple as that sounds I think that is it. We really have not missed a beat. The pipeline is up 20%.

It's across all categories across all the teams from about 4.5% at the end of the year to 5.4%.

So -- Jim anything you would add?.

Yes. And just -- the clients are doing really well right now in spite of labor challenges, supply chain I think they'd be doing even better if they could find labor, but there's still a lot of demand. They're still willing to invest and we're really optimistic about 2Q and the second half of the year at this point.

So until things change our team is laser-focused on taking care of clients and they've done a great job. .

Okay. Good. And then Brendon maybe for you. You guys highlighted your cash balances that you have on the balance sheet.

And talk a little bit about your plan for putting that to work and then give us an idea of what you guys transferred to held to maturity kind of the profile of that?.

Yes. Again we transferred really longer-dated munis to HTM so $2 billion of that. And in terms of putting new money to work we have about $1.5 billion in cash. We're going to continue to put that to work over time. So I would expect that cash balance to continue to slowly come down over the next quarter or two. .

Okay. And then -- it seems like the revenue environment, I mean, we've talked about that quite a bit and it seems pretty positive.

And I guess maybe a simple question but your guidance on expenses are you just telling us it's as simple a same $223 million is what you expect for fourth quarter expenses, or is there -- are there any other puts and takes you want us to be aware of?.

Yes, that's what trying to get – 90 days if you access -- that's the right. .

Okay. Good. That's what I wanted to -- you never know right? But that's helpful. .

Yes. No we appreciate the clarification. .

Yes. Thanks. That’s all I had..

Okay..

Thank you, Jon. 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 866-813-9403, access code 729800.

This replay will be available May 10 -- through May 10. If anyone has additional questions please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call..