Old National Bancorp

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 four. 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 longstanding 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 commitment by reviewing the ESG page on our website. Moving to slide five, we were pleased to close our merger with First Midwest on February 15th. 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 mock conversion over the weekend. We are planning two more mock 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 are already starting to realize some of those benefits. Brendan 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's strong energy and excitement amongst the team, and we've started to hire some top revenue-generating talent in the markets. Later, you will see that this energy and excitement translated to more robust results. Our expected growth and strong return profiles should lead us to above-peer performance as we realize more of the merger benefits. Moving to slide six, as we anticipated, we reported a gap loss for the first quarter of 13 cents 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 40 cents 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 Brendan for the further details.

Thanks, Jim. Turning to the quarter's results on slide seven. As anticipated, we reported a gap net loss of $30 million, or 13 cents 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 security schemes, are adjusted earnings for common share with 40 cents. 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 and 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 FMV transactional book. The balance of that transactional book was approximately $1.8 billion at core brand. 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 nine 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 CNI 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 and 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 of 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 million 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 rate sensitivity. The large cash position, high percentage of floating rate loans, and industry-leading deposit data should lead to an ad or above pure average NII benefit from future rate hikes. Slide 14 shows trends in adjusted noninterest 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. Price lines were strong at $688 million at the end of the quarter, but we expect to portfolio a higher percentage of mortgage production in the near term, which will help offset transactional book run-up. 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 energies and expect the majority of saves 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 pure results in all key credit metrics. Net charge-ups were a modest five basis points with the majority related to purchase credit deteriorated loans that had an allowance established at 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 2004. $79 million of PCD-related allowance was established as part of the acquisition, and $96 million of day-one allowance was established on non-PCD loans through provision expense. Higher reserves-related economic forecasts and portfolio assumption changes were offset by lower qualitative factors and not charge-ups 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-tightening 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 F&B's available sale investment portfolio than we initially modeled. The higher first-year 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 out of the gate in 2022. The integration activities remain on track. We had a strong commercial long growth quarter. Credit remains benign, and we are tracking ahead of our planned cost energies. Slide 20 includes thoughts on our outlook for 2022. We end 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 credit amortization for the remainder of the year, but 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.