Welcome to the Old National Bancorp First Quarter 2023 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 certain statements on today's call may be forward-looking in the 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 to you to its forward-looking statement legend in the earnings release, presentation slides. The company's risk factors are fully disclosed and discussed within its SEC filings. In addition, certain slide contain non-GAAP measures, which management believes provide more appropriate comparisons. These non-GAAP measures are intended to insist investors, understanding of performance trends. Reconciliations for these numbers are contained within the appendix of the presentation. I would now like to turn the call over to Old National CEO, Jim Ryan, for remarks. Mr. Ryan?

Good morning. On the morning of April 10, our Old National family was blindsided by unthinkable tragedy. In the span of minutes, 5 of our team members were lost forever. While other team members and 2 Louisville Metro Police officers suffered injuries, all Old National team members are out of the hospital and on the road to recovery. One Louisville officer remains in the hospital. In the aftermath of this tragedy, many heroes emerged, including members of law enforcement, city and state officials, the amazing Louisville medical community and some of our own team members who are there on the scene. To all of you, thank you from the bottom of our hearts. On behalf of everyone at Old National, I also want to thank the entire community of Louisville for your unconditional love, prayers and support. I also want to acknowledge the overwhelming outreach from individuals and organizations throughout the country. Your outpouring of love and care has helped strengthen us, and we are so grateful. Turning to the quarter. We reported strong first quarter earnings despite a rapid shift in the operating environment for all banks. Old National, it was business as usual even throughout March and the strength of our franchise remains evident in the results outlined on Slide 4. Adjusted EPS was $0.54 per common share with adjusted ROA and ROATCE of 1.4% and 23.4%, respectively. Our adjusted efficiency ratio remained under 50%. Obviously, deposits, liquidity and credit are in focus today. As you can see, deposit balances were stable during the quarter despite the normal first quarter seasonal patterns and public fund balances. Our total cost of deposits at 72 basis points is well below peers, and we maintained our deposit pricing discipline with a low 15% total deposit beta cycle to date. Granularity is…

Thanks, James. Turning to the quarter's results on Slide 5. We reported GAAP net income applicable to common shares of $143 million or $0.49 per share. Reported earnings include $15 million in pretax merger-related charges, $1 million in pretax property optimization charges as well as $5 million in debt securities losses. Excluding these items, our adjusted earnings per share was $0.54. Slide 6 provides our quarter end balance sheet. Total asset growth of $1.1 billion in the quarter was driven by disciplined loan growth and higher cash balances funded through stable deposits and higher borrowings. Moving to Slide 7. Total deposits were stable quarter-over-quarter despite public fund outflows. Q1 is typically our seasonal low point for public funds, and we anticipate net inflows in Q2. Our trend in average deposits reflect mix shifts away from noninterest-bearing accounts into money market and CDs, which is typical for this point in the rate cycle. Market conditions continue to put upward pressure on deposit rates with total deposit costs up 38 basis points quarter-over-quarter to a still very low 72 basis points, which equates to a total deposit cost beta of 15%. Interest-bearing deposit costs increased 57 basis points to 1.09%, resulting in an interest-bearing deposit beta of 23%. although the terminal beta is difficult to estimate, we have a strong track record of managing deposit costs and are confident we can maintain our funding advantage throughout the remainder of the rate cycle. We are actively defending deposit balances through competitive rack rates and limited pricing exceptions in addition to playing offense through various deposit specials. We are pleased with the execution of this strategy to date as we have been able to generate new deposits sufficient to maintain stable overall balances. Slide 8 provides additional details and granularity of our deposit base.…

[Operator Instructions]. The first question comes from the line of Scott Siefers with Piper Sandler.

Condolences regarding the events of the last couple of weeks. We could start maybe on the -- sort of thoughts on deposit mix. What would be your best guess as to where noninterest-bearing levels go as a percent of total deposits. It's maybe a little historical perspective and why whatever number you think might be the best one where you sort of think things will settle.

Yes, Scott, this is Brendon. Yes, we look back, I think the 28% kind of pre-COVID level is probably a decent [indiscernible] in terms of where [indiscernible] how long it takes to get there at this pace. I'm not sure, but that's probably a good place to think about where it may settle.

Okay. Perfect. And then when you made some comments about having worked aggressively on some PCD stuff from the merger. And it sounds like we'll continue to see some charge-offs there, albeit not ones that will require provisioning since you already have the PCD reserve. But maybe just some thoughts on what kind of stuff you are working through, how long it might take to work through the remainder of where you see issues, et cetera?

So we still have -- Scott, it's Mark. We still have $54 million of PCD reserves on our books. And so I think that will work through over the next 18 to 24 months, we would say, and I don't think it will be a linear type of thing. So there'll be some lumpiness in there. But as you indicated and as Brendon said, we think we're fully reserved on all those loans.

The next question comes from the line of Ben Gerlinger with Hovde Group.

I just want to take a moment. You guys did a fantastic job as both a management team and -- it's a franchise to support the community and the last thing I know is -- the last thing you guys want to do is it about yourself, but I think it's applauded a tragedy. So you guys did a great job stepping up being a community bank in supporting the community far beyond loans and deposits.

We appreciate you support.

Yes, absolutely. In terms of just kind of growth going forward, I think it makes sense that it's a little bit softer. I mean, obviously, economic outlook isn't great. But when you guys think of kind of new loans, any sort of subcategories within lending or within the loan portfolio that you guys are kind of targeting is like this is an area that we could still see some growth or positive risk-adjusted returns in any sort of geographies that might entail?

I wouldn't specify any geographies, Ben, but C&I remains relatively strong, I would say. We've seen a lot of C&I clients over the last quarter. And they remain positive, slightly more muted than a few quarters ago given rates and noise relative to recession. But still positive outlook overall in C&I, generally speaking, strong operating performance, and they're still looking to invest. So I think the C&I space still looks solid, albeit at a lower level than we saw in '22. In CRE, certainly, volumes are down, but you still have a couple of sectors, multifamily and industrial, which is where we do the vast majority of our new business these days, which are holding up well. They're not seeing major rent increases, but they're still seeing modest rent increases off of really strong basis. So you still have pockets of strength out there.

That's great to hear. And then I know you guys have done a pretty sizable rebranding and adjustment and frankly, highlighting wealth management. Do you still think that there's a lot of additional hires? Is that kind of embedded or are we still kind of -- are we planning somewhat of a run rate? I mean, obviously, market-dependent helps assets under management. I'm just trying to think from a fee income perspective. It seems like you guys are growing faster than peers, but clearly investing there, too. So I'm just trying to see the dynamics within that subcategory?

Maybe I can start, Ben, and Mark can chime in. But First, the new hires are embedded in our outlook on the expense guide. So a lot of that would include additional wealth hires. And I know we're still seeing a lot of talent and having a lot of that and so continue to invest that. And I do think the momentum you've seen over the last couple of quarters in this space, we're hopeful that continue as market dynamics and be a bit of a headwind there.

I think the story here is. Similar to what we said relative to the growth, right? I think we still see opportunities at a lower level of new hires in '23 than we saw in '22, but we'll still hire. We hired 8 revenue producers across wealth and commercial in Q1. Again, I think it'll continue there's still markets we like to build out further. And we still -- we invested a long haul. And so we're a franchise that people want to join, and we still are -- I think they're a nice -- I think people who are high performers pay for themselves quickly. We never tire of saying that to the people. And I think we're going to -- you'll continue to see a steady stream, albeit at a lower level of new hires in '23.

The next question comes from the line of Terry McEvoy with Stephens.

And first off, Jim, I also want to share my ongoing support for you and the Old National team.

Thanks, Terry. That means an awful a lot.

And then just a couple of questions here. Brendon, I recognize and appreciate the predicting and forecast in deposit betas tough to really estimate, but when you look at your NII guide of 9% to 12%, is there a deposit beta range or some underlying assumptions that you're willing to share within the outlook for full year NII.

Sure. As you said, this is a tough environment, but we did want to at least put some out there. So what we did is we modeled both the forward curve, which implies kind of 2.5 cuts in the back half of the year. And then something more consistent with the Fed dot plot, which is one more and flat. And then we looked at a range of betas from 30% to 40% cumulative by the end of the year, and that's kind of where the range of possibilities came out. as we look at that and try to probability weight it, we have a bias towards the higher end of that range, but it's just difficult to pinpoint with any more precision than that.

Right. And then maybe as a follow-up, any comments with regards to deposit trends in metro versus community markets and how they've differed over the last several quarters at all?

There really hasn't been a big difference. We have one market in particular, one state that has typically had a higher beta than others, but generally fairly consistent across the footprint.

And we have slightly different pricing parameters across markets. And so to reflect some of those regional differences. But yes, the performance has been stable across the entire footprint.

And then one last quick one. The debt security loss, was that an investment in one of the banks that fed last quarter?

It was.

The next question comes from the line of Chris McGratty with KBW.

Great. Like everyone else, extend our condolences to the ONB family. Jim, the -- or maybe a question for Brendon. The $1.2 billion that's going to come off the bond book over the next year would effectively map to one for one on your loan growth. So I guess, is that the way you're thinking kind of flat earning assets from here? And then the second part would be great. And the second part would be, given the steps you've been doing to protect downside risk on the margin. How do we think this bigger picture, the trajectory of the NIM, the core margin if the futures curve does give us some cuts maybe into next year?

Yes, I'll point you back to the kind of year-over-year guide that we just -- we talked about clearly there'll be pressure on the margin embedded in that the year-over-year increase. And just -- it's really difficult to, again, say where that thing is going to land. But in terms of the downgrade protection, we continue to be really active on that spot and continue to put pressure. I mean put additional protection there. And obviously, as deposit costs continue to increase, we get closer and closer to a neutral risk rate position, which is what we're trying to move towards over the next couple of quarters.

And in terms of just broader balance sheet management, is there anything that might be on the table given the environment has gotten a little bit more challenging? And also, can you remind us where you'd be comfortable letting the loan-to-deposit adrift.

Yes. So yes, obviously, we're -- this is a dynamic environment. All tools are on the table, both off balance sheet and on balance sheet opportunities to preserve margin and protect capital. So we'll continue to look at all opportunities, but we don't see anything big or major restructurings in the future. And we think we have room to grow on the loan-to-deposit ratio. We have ample liquidity and we have levers to continue to let some of the noncore consumer books shrink to support higher and better quality commercial growth.

Okay. Great. And then, Jim, maybe one for you. You noted the buyback. I see that happened before, March 9. I guess what would it take to either turn it back on? Or perhaps consider something external with your capital. Typically, you guys have been pretty disciplined in when you see things, but there's a lot of volatility and there likely could be some opportunities?

Yes. Obviously, more stability for a longer period of time, I think is what's going to require for us to get more comfortable in looking at capital differently, getting more clarity as the year plays out with respect to the economy, I think, is also going to be critical. We're in no hurry to do much different with our capital. We're just going to continue to watch how the year plays out. And if it plays out where it's a little bit better than everybody anticipates. I think we could be thinking about capital in the future. But until then, we just got to sit on the sidelines and watch things play.

The next question comes from the line of Brody Preston with UBS.

Good morning, everyone. Again, like everybody else, I want to say I'm terribly sorry about what happened. That's very tragic. Yes. To some of the noninterest-bearing deposits, I just want to ask if there's any geographic concentration as to where that runoff occurred within your footprint? And any thoughts you can offer on expectations from here? I think Scott asked something about it earlier, but I might have missed it.

Yes, sure. I can tell. No geographic concentrations. Clearly, it's mostly in the commercial side. We look at a higher percentage of noninterest-bearing deposits in total. And we had talked about pre-COVID, we were at a low point about 28% on noninterest-bearing deposits, and that might be a good way to think about a potential .

Okay. Understood. And then I did want to just circle back on the assumptions and the allowance that the 7.1% unemployment. Is that like a 2024 number? Like just give me a timeframe on that.

Yes. I can't remember specifically the quarter that, that peaks, but that is the peak unemployment in the Moody's S3 scenario. We can follow back up with you.

Yes, that would be great. Could you just -- I want to circle back on the beta commentary. I think you responded to Terry's question maybe on NII, you said 30% to 40% beta is what you ran through when you did the different scenarios. I'm assuming the 40% is maybe in the flat scenario using the dot plots and the 30% is maybe closer if we get Fed cuts. Is that a good way to think about it? And could you help us understand what the interest-bearing beta is or if that was the interest-bearing beta that you were talking about?

That is the interest-bearing beta. We ran all of those beta assumptions through both curves, but to your point, obviously, we'd expect probably a lower bid in the forward curve where there's cuts, higher beta and if it's higher for longer. But just where we're leaning towards [indiscernible] at the higher end or by towards the higher end of that range as we look through it. It's probably unlikely we have the highest beta in a down or a rate-cutting environment.

Got it. Could you remind us what percentage of the loan portfolio is floating rate and then give us a sense for what the fixed rate loans that need to reprice over the rest of the year look like?

Yes, we are at 56% floating today. And the duration of our loan book is roughly 5 years. So you'll keep about 20% of our fixed rate loans reprice meaningfully higher.

Got it. And are we done with the hedging? Or is there additional hedging that's going to take place on the loan side?

No. We'll continue to look for opportunities. Like I said, both on balance sheet and off balance sheet to continue to layer in downward protection and protect margin. And we're not taking our eyeball off OCI and capital. So we'll -- there's some opportunities to do there to protect that.

Got it. And then last one for me was just if you happen to have the assets under management at quarter end.

Yes, it was $28 billion.

Okay. So relatively flattish quarter-over-quarter?

Yes.

We have a follow-up question from the line of Scott Siefers with Piper Sandler.

Just sort of a [indiscernible] within the 9% to 12% NII guidance, growth NII guidance, does that assume the contractual accretion? Or is there a different number baked into there?

Slightly higher than the contractual accretion number, kind of in that typical 20%, 30% range.

The next question comes from the line of John Arfstrom with RBC Capital Markets.

Like the others just deepest condolences to everyone impacted. I wanted to get to a couple of follow-ups here. But you used the term limited pricing exceptions in terms of your deposit management. How much more frequent is that today than, say, it was prior to mid-March.

I don't know that it's picked up materially, it's been pretty steady since December. And I think if you look at the average interest-bearing cost and sort of the spot rate differences, to that pace hasn't really increased. So I think it's indicative. It's a pretty steady state.

We have competitive rack rates, as Brendon alluded to earlier. And some of the larger deposit balances we've got to them early. And so -- but most of that has played its way out. I wouldn't say it's done, but I would say the vast majority of the pricing exceptions is largely behind us because, again, the large balances were on it quickly. We're also getting aggressive and on the offense judiciously in our markets, right, where we're opening more accounts than we're losing and raising balances across our footprint.

Okay. Do you guys -- this seems like a crazy question, but have things really changed that much in terms of deposit pricing since mid-March?

Interesting question. Not really. Yes, it's a great question. There's been a lot more conversations, but the actual pricing hasn't changed dramatically since mid-March.

Yes. Okay. That was my sense, but I thought I should ask. A couple more things here. You're talking about your relationship managers and the focus on the full banking relationship. Is that something that's different that's now expected from your borrowers and your relationship managers? Or does that change or restrict any opportunities for you? Just you're thought, talking about a tightened pricing structure, enhanced credit structure and kind of chasing deposits as well.

I really appreciate that question because the answer is no. I mean that's our model, right? It's a relationship-based model, and we lend to people that bank with us. In times like this, you can be more adamant and forceful and disciplined, but I'd like to think candidly that we always are. And I think in general, we are, but this is a place where you draw a line in the sand a little bit more and make sure that that's the case.

Okay. And then just last one, this is a follow-up on Brody's question. The S3 Moody's rating is obviously pretty severe. Are you guys more concerned today about credit than you were a quarter ago? And if there's a degree of whether you're more concerned or not, you haven't changed your views at all. And then what happens if that S3 is just way off and it doesn't come true and where we end up in a much better spot than that.

Jon, let me take the top of that. I don't think we're meaningfully more concerned about credit today than we were heading into really all of last year and into this year. Obviously, we're not immune from hearing about what's going on in the economy. And -- but as Mark said, we spent an awful lot of time with clients, and when we're out with clients, we're just not hearing that same kind of feedback that seems to be discussed in today's new cycle. Having said that, we think it's prudent and have had that opinion for quite some time. I guess the question gets back to maybe more of an accounting question about when do we think about a different forecast to run through there? And Brendon, I don't know what else you'd add to that?

No, obviously, I think there will be a time where whatever recession may or may not be coming hits, we're going to -- we'll have to think about a different weighting for the Moody's S3 and that would imply some opportunity for potential reserve relief depending on what the environment looks like.

Mark continues to lead us through portfolio reviews and making sure that we're going through and doing deep dives on the entire book and particularly those areas that are generally more vulnerable. We're going to continue to do that, look for kind of active, proactive management that we've always been known for. And if we identify weaknesses, we're going to put them in the hospital quickly with the hope that they come out healthy again. And we're just going to continue to do that. And that's -- we're probably a little bit more sense to that today than we were maybe 6 months ago, but that's absolutely the approach that we've always taken and in these kinds of times.

[Operator Instructions]. There are no further questions registered at this time. I'd like to turn the call back over to Jim Ryan for closing remarks.

Well, thank you for your participation. Thank you for your support. It's meant a lot to all of us. And as usual, if you have any follow-up questions, please don't hesitate to reach out to the whole team. We'll be here to answer anything you have. Thank you.

This concludes Old National's call. Once again, a replay, along with 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 569807. This replay will be available through May 9. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call.