First Midwest Bancorp, Inc.

Welcome to the Old National Bank Corp fourth quarter and full year 2021 earnings conference call. This call is being recorded and has been 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 and 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 the 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?

Good morning and Happy New Year. We are pleased to host our call to discuss our 2021 results and update on our pending partnership with First Midwest Bank. Let's start on slide four. We are pleased to share our full year 2021 results. I would categorize this year's results as better than planned. 2021 EPS was $1.67. Adjusted EPS was $1.73, with an adjusted net income of more than $286 million. Our adjusted return on average tangible common equity was north of 15%, and our adjusted efficiency ratio was approximately 57%. Highlights include 7% commercial loan growth driven by record commercial production of $3.9 billion, coupled with net recoveries of $4.8 million for the year. We also saw record wealth management revenues in 2021. I'm particularly pleased that commercial loans are now up 20% in total from 2019 levels, excluding the impact of PPP. That's significant growth amid a global pandemic, and we've maintained a consistently strong credit profile in the process. We've opportunistically leaned in when several of our competitors rose, and we continue to benefit from that stance, taking share by doing what we do best, consistent quality growth. Moving to slide five, our fourth quarter EPS was $0.34. Adjusted EPS was $0.37. We saw strong commercial loan production of $1.1 billion during the quarter and excellent credit quality. Our pipeline ended the year at a robust $2.5 billion. A quick update on hiring. We opportunistically added significant talent during the quarter, especially on our commercial and wealth management teams. Building upon our recent success in St. Louis, we have hired two industry veterans to start an LPO in Kansas City, which should be operating at full strength later in the quarter. We've also begun recruiting talent in Chicago, anticipating that Chicago and Minneapolis will be a significant focus in 2022. In summary, our talent pipeline remains strong, I am personally active in recruiting key team members, and we will continue to make these vital investments throughout the year. Moving to slide six, which contains a quick refresher on some of our accomplishments and next steps with our partnership with First Midwest. As you know, both companies have tremendous integration history and experience, and as a result, our work is going very well. We have decision and communicated the organizational structure and leadership positions for all client segments and support areas. We've also settled on our core processing system and supporting applications. Our team member engagement and excitement remains strong, and as a result, we've seen minimal attrition in our client-facing roles. Our combined leadership teams continue to meet and build a collective long-term strategy and develop tactics to accelerate our combined growth. While we're still waiting on Federal Reserve approval, we continue to have frequent and constructive dialogue with Fed staff who assure us our application is complete and ready for review at the Board level. We expect we will hear positive news this quarter. As soon as we hear, we will move expeditiously towards the close. With a more elongated than expected regulatory approval and the global pandemic-related issues affecting the availability of labor and IT equipment, we now expect our systems conversion to occur in July. Given the delayed systems conversion, we expect to achieve closer to 50% of the run rate savings we modeled in 2022. We still expect to achieve 100% of the original model savings of $109 million in 2023. Lastly, despite potential distractions from the lingering pandemic-related issues and our transformational merger, we remain highly focused on serving our clients and communities. I think our results for the quarter and the year illustrate the success of those efforts. Our success would not have been possible without one of the strongest teams in the industry. I'm also grateful for the hundreds of team members who are focused on the successful integration of the combined companies. Thank you, and I'll now turn the call over to Brendan.

Thank you, Jim. Turning to slide seven, our GAAP earnings per share was $0.34, and our adjusted earnings per share was $0.37. Adjusted earnings exclude $6.7 million in merger-related charges, as well as $400,000 in debt securities gains. Slide 8 shows the trend in commercial loans and the related pipeline and production trends, all excluding the impact of PPP loans. Q4 represents our sixth consecutive quarter of organic loan growth, with 2021 commercial upstandings increasing over 7%, with both CRE and CNI showing solid growth. Strong commercial production of $1.1 billion was well balanced across all our major markets. We're also pleased that the strong fourth quarter production did not have a significant impact on our pipeline, which ended the year at $2.5 billion, the highest year on level on record. The size and quality of the pipeline that includes almost $500 million in the accepted category supports our optimistic outlook on loan growth heading into 2022. Turning briefly to pricing, new money yields on CNI were 3.39%, which are now well above portfolio yields. New CRE production yields were slightly lower for the quarter at 2.59%. More than 80% of that production is indexed to short-term rates, with good spreads but relatively low absolute coupons. While this puts some pressure on margin in the near term, it does position us well for a rising rate environment. The investment portfolio increased this quarter as deposit growth once again outpaced total loan growth. We continue to put much of the excess liquidity to work in our investment portfolio. New money yields on investments improved 18 basis points quarter over quarter to 1.8%, with portfolio duration shorter by a quarter year. Moving to slide nine, we again saw meaningful increases in both period end and average deposit balances. Quarterly growth came largely from our retail clients, with business clients throwing down on non-interest-bearing accounts. Total cost of deposits for the quarter was five basis points, while total interest-bearing liabilities was 28 basis points, both down one basis point from Q3. Next, on slide 10, you will see details of our net interest income and margin. Net interest income, excluding PPP, decreased just $300,000 which was consistent with both our expectations and goal of maintaining stable NII throughout this challenging rate environment. Non-interest margin decreased 15 basis points from prior quarter to 2.77%, and core margin, excluding accretion and PPP, declined 11 basis points to 2.59%. Access liquidity and interest collected on non-accrual loans accounted for six basis points of the decline. Slide 11 shows trends in adjusted non-interest income. Adjusted non-interest income for the quarter at $51 million was $2 million lower than Q3, largely due to seasonal declines in mortgage. Our wealth line of business finished with a strong fourth quarter, which resulted in record revenue for the year. Our capital markets business had another strong quarter. It finished the year just shy of last year's record revenue. Mortgage production was up slightly in the quarter, but a seasonal decline in the size of the pipeline resulted in a $3.9 million decrease in revenue. Next, slide 12 shows the trend in adjusted non-interest expenses. adjusting for merger charges and tax credit amortization, non-interest expense was $123 million. The quarter-over-quarter increase was driven by additional lending incentives related to strong commercial and mortgage production. Additionally, increases in marketing and professional fees categories were related to investments in Minnesota marketing efforts and the establishment of a new brand for a high net worth wealth division that we discussed last quarter. Turning to PPP loans on slide 13, you will see a roll forward of those balances, which stood at just $169 million at quarter end. Unamortized fees on the remaining loans total $6.4 million. We anticipate most of the remaining loans will be forgiven in the first half of 2022 and the related fees recognized accordingly. Slide 14 shows our credit trends. Credit conditions continue to be benign and our commercial and consumer portfolios continue to perform exceptionally well. Delinquencies picked up one basis point to end the quarter at a very low 11 basis points. We were pleased to post a sixth consecutive quarter in a net recovery position, resulting in full-year net recoveries of $4.8 million. The not-performing loans to total loan ratio once again hit a new cycle low at 92 basis points. And while this metric remains higher than peers, the net charge-off to NPL ratio is significantly better than peers. We believe our approach to downgrading troubled credits early and a patient approach to work out results in better outcomes for our clients and ultimately lower costs for the bank. On slide 15, you will see the details of our fourth quarter allowance, which stands at $107 million, a slight decline from Q3. Credit loss expectations showed a slight improvement quarter over quarter, but the related reserve release was largely offset by additional reserves for loan growth. While our outlook on credit remains optimistic, we believe it is still prudent to maintain above average levels of qualitative reserves, which stood at $37 million at quarter end. As a reminder, we also continue to carry $34 million in unamortized marks from our required portfolios. As I wrap up my comments, here are some key takeaways. We are very pleased with the fundamental results of the quarter and year. Strong commercial loan growth led to stable core net interest income despite interest rate headwinds. Our fee-based businesses led by wealth, mortgage, and capital markets continue to perform well and provide a great launching point for 2022. Expenses remain well-controlled, and our strong credit quality continues to keep credit costs low. Slide 16 includes thoughts on our outlook for 2022. We ended the quarter with a healthy $2.5 billion commercial pipeline, which supports our favorable outlook on loan growth. This historically low interest rate environment will continue to put pressure on net interest income, which should be mitigated through continued earning asset growth. Rising short-term rates will have a positive impact on earnings as we have gradually repositioned the balance sheet to a more asset-sensitive position. The PPP loan forgiveness process continues for our clients. We expect runoff of most of the remaining balances and related fee recognition to occur in the first half of 2022. We expect our fee businesses to continue to perform well. We are encouraged by the momentum in our wealth business, and the strong commercial activity should help maintain the high level of performance in our capital markets business. Mortgage revenue should follow industry trends and be seasonally lower in the first quarter. Our other fee lines are expected to be stable in the near term. OMB standalone expenses are expected to rise 2% to 3% in 2022 and should follow typical seasonal patterns. The estimate includes an expectation of slightly higher merit increases related to inflation and continued strategic investments in both revenue, talent, and technology. A brief update on taxes. We continue to expect a reduction in the volatility caused by our tax credits as we work through the last of the remaining one-year historical tax credit commitments. In total, we are expecting approximately $12 million in tax credit amortization for the year with a corresponding OMB standalone full-year effective tax rate of approximately 17% to 18%. The pro forma range for the combined company would be in the range of 21% to 22%. In light of the delayed close of our merger with FMB, we wanted to provide an update on the combined company expense expectations. Our June 1st announcement assumed 75% of the annualized cost synergies would be realized in 2022. The first quarter close of the deal and the corresponding July conversion date is now expected to reduce the 2022 impact to approximately 50% of the total synergies, with the majority realized in the second half of the year. That said, we are still confident we will realize 100% of the $109 million in targeted savings which will help us deliver meaningful, positive operating leverage. In other words, the magnitude of the sales has unchanged, but the timing is now elongated by 90 days. With that, we are happy to answer any questions that you may have, and we do have the full team here, including Jim Sandrin, Daryl Moore, and John Moran. Also joining us this morning is Mark Sander, President and COO of First Midwest Bank.