Welcome to the Old National Bancorp Fourth Quarter and Full Year 2017 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC’s Regulation FD. The call, along with corresponding presentation slides, will be archived for 12 months on the Investor Relations page at oldnational.com. A replay of the call will also be available beginning at 1:00 PM Central Time on January 23rd through February 6th. To access the replay, dial 1-855-859-2056. Conference ID code 6268317. Those participating today will be analysts and members of the financial community. At this time, all participants are in a listen only mode. Following management’s prepared remarks, we will hold a question-and-answer session. At this time, the call will be turned over to Lynell Walton for opening remarks. Ms. Walton?

Thank you, Dorothy, and good morning everyone. Welcome to Old National Bancorp’s conference call to discuss our fourth quarter and full year 2017 earnings. Joining me are Bob Jones; Jim Sandgren; Jim Ryan, Daryl Moore; John Moran and Mike Woods. Before I begin the discussion of our results, I would like to remind you that some comments today may contain forward looking statements that are subject to certain risks, uncertainties and other factors that could cause the Company’s actual future results to differ materially from those discussed. Please refer to the forward looking statement disclosure contained on slide three of this presentation, as well as Old National’s SEC filings for a full discussion of our risk factors. As referenced on slide four, various non-GAAP financial measures will be discussed on this call. Non-GAAP measures are only provided to assist you in understanding Old National’s results and performance trends and should not be relied upon as a financial measure of actual results. Reconciliation for these non-GAAP measures to the most directly comparable GAAP financial measure are appropriately referenced and included within the presentation. Turning to slide five and to earnings. We did indeed had a strong fundamentally sound quarter, highlighted by double-digit organic commercial loan growth, low cost of deposits and a decline in legacy noninterest expenses; and probably most significantly, the closing of our Minnesota partnership less than 90 days following announcement. Our reported fourth quarter did include a previously disclosed revaluation to our deferred tax asset, which was an estimated $39.3 million. The fourth quarter also included other anticipated pre-tax charges as outlined on the slide. Looking through these charges, our adjusted net income would have been $32.7 million or $0.22 per share. For the full year 2017, on slide six, the story remains the same. In fact, and it’s not a typo, our percentage of organic loan growth, both in total and for our commercial portfolio, were the same for the quarter as they were for the year. Fundamentals, as measured by credit quality, operating leverage and growth, were very good. With this solid foundation in place, we are excited as we head into 2018. With that, I’ll turn the call over to Jim Sandgren.

Thank you, Lynell. Good morning everyone. I’m happy to report that Old National had a very strong close to an important year. As Lynell already stated, our net income for the fourth quarter reflects the impact of one-time non-cash charges. We’ll provide some additional detail around those after we discuss our business performance, which was an extremely positive and increasingly familiar story, fueled by strong commercial loan growth and fee based business revenue gains, Old National continued the positive momentum that define 2017. If you turn to slide eight, I’ll begin with a closer look at our loan growth, both quarter-over-quarter and year-over-year. As a reminder, we closed on our Minnesota partnership on November 1st, which for purposes of this slide we have depicted as day one Minnesota. Excluding these acquired loans, we experienced total quarter-over-quarter and year-over-year organic loan growth of 4.8%. As I alluded to in my opening statement, this is driven largely by strong commercial growth during the quarter and throughout the year. In spite of a couple of large seasonal C&I line pay downs, our commercial portfolio still grew by an impressive 10.1% in the fourth quarter, which is the same percentage growth we experienced for the full year of 2017. We continue to see run-off in our less profitable indirect portfolio as we continue to be focused on our overall balance sheet remix strategy. Overall, these annual growth numbers are in line with the guidance we provided at the start of 2017 and they represent a very successful year of executing our growth market strategy. While we experienced good commercial loan growth in multiple markets, I’m excited to report that our new Minnesota region led the way with over $36 million in growth since November 1st. Bob will touch more on early success of this…

Good morning, and thank you, Jim. Starting on slide 13, I will highlight a few of the accounting details for our Minnesota partnership that we closed on November 1st. The total loan mark was $47.4 million or 2.9%, slightly higher than our original model due to the higher loan volume and an increase in interest rates from the announcement to close. We also recorded goodwill of $173 million, which was slightly higher than originally announced. This increase was mostly attributable to the increase in our share price from announcement date to the closing date. Intangibles were $27.3 million. We are already beginning to realize cost savings and our system conversions are set for early May. We remain on track to achieve the full 36% cost savings we outlined in announcement and those will be reflected fully beginning in the third quarter. Moving to slide 14, I’m pleased to report that adjusted pre-tax, pre-provision income was more than $223 million in 2017, which represented a 10.5% increase year-over-year. The growth in adjusted pre-tax, pre-provision income reflect strong underlying fundamentals in our banking, wealth management, investments and capital markets businesses and our relentless focus on expense reductions. During 2018, we will remain focus on growing adjusted pre-tax pre-provision income, as well as continuing our expense discipline. And we are reaffirming our commitment to driving positive operating leverage. As demonstrated on slide 15, our adjusted efficiency ratio improved 230 basis points year-over-year. We also saw an improvement in our adjusted operating leverage of over 370 basis points year-over-year with stronger revenues and a moderation of operating cost despite investments in people and technology. Moving to slide 16, you’ll see the trend of our reported net interest margin, as well as a graph depicting the portion of our margin attributable to accretion income. Our…

Thank you, Jim. We’ll start to credit quality segment of this morning’s call with a customary review of charge-offs and provision expense for the quarter as shown on slide 21. Net charge-offs for the quarter were $800,000 compared to $1.1 million last quarter and zero in the fourth quarter of 2016. For the full year, we posted net charge-offs of $2.5 million or 3 basis points of average loans compared to $3.4 million or 4 basis points of average loans in 2016. Net charge-offs were again assisted by relatively strong recoveries. For the quarter, recoveries were 76% of gross charge-offs, which was lower than last quarter where recoveries were 100% of growth charge-offs. For the full year, recoveries represented 80% of gross charge-offs, relatively consistent with the 77% recovery rate posted in 2016. For the current quarter, we recognized provision expense of $1 million compared to provision expense of $300,000 last quarter and a $1.8 million recapture in the fourth quarter of 2016. The million dollar provision in the current quarter was 125% of net charge-offs for the period compared with full year of 2017 coverage ratio of a 120%. Provision expense to net charge-offs was roughly 29% for the full year of 2016. While the allowance needed remained relatively level in the period, there were some moving parts from the quarter that are important to acknowledge. In the non-acquired portfolio, lower loss rates and reduced measured impairment accounted for decrease in allowance requirements of roughly $2.5 million in the quarter, which was generally offset by increased need associated with loan growth and special mention loan increases. While the ending allowance for loan losses, as a percent of period or end of period loans, fell 8 basis points to 45 basis points. I would remind you that we also have…

Thanks, Daryl and good morning everyone and thank you for joining us. While the fourth quarter was noisy by any standard given the implications of the tax cuts and jobs act, and the other actions that we took, the noise only serve to reinforce our optimism for 2018. The impact to the tax reform bill goes well beyond just our income statement. Our clients appear ready to move from feeling good about their businesses to investing in their businesses. Our conversation with clients about technology investments, inventory expansion and other capital expenditures have increased in recent weeks. And with our shareholders in line, we have chosen to take a longer view regarding actions we may take with additional earnings from the lower tax rate. And for now, would anticipate that most of it will drop to the bottom line. We did make an incremental investment into our foundation during the fourth quarter as part of our continued commitment to our communities. We will also look at additional technology investments that are focused on improving our client experience. In addition, we are looking at some potential investments and employee benefits. Another important item in the fourth quarter was our ongoing focus on expenses. We have made considerable progress on our client experience program in a process expertise in-house. Despite the optimism that we all feel for economic activity, as my old college football coach used to say, you need to make hey when the sun shines. We will continue to invest and focus on improving the client experience and reducing our cost at the same time by enhancing technology in the processes. We did close another 14 branches in the fourth quarter. This creates a total of 181 branch closures or sales over the last seven years. I should note that…

Believe me or not, you guys banged through most of my questions in the outlook, so I appreciate that. This one I do hate to do to you just waste you guys time and everyone’s time. But on the margin, Jim, would you mind walking through the puts and takes you see in the margin again in the first quarter and where it all flushes out?

So I would say the first thing that we’re looking at is the drop in the FTE, Scott, as you saw, was 70 basis points, it’s been running historically. And so we think that’s probably 8 basis points to 9 basis points a quarter?

Yes.

And then as we look at the date down adjustment, obviously, the first quarter is always a short quarter and that’s approximately 4 basis points from just two fewer days. And then the other negative is the slightly lower non-accrual interest. We had a good quarter in the fourth quarter, so that’s about 3 basis points. There is some offsets there the full rate increase for Minnesota offsets, and that’s why we said we’re approximately 3.12% for the quarter on the --which will be the margin less the accretion income.

So 3.20% core margin is where it all flushes out?

3.12%, starting 3.26%, less 8 or 9 for the FTE, less 4 basis points for the fewer days, the 3 basis points for the non-accruals. And then there is plus or minus, there’s some benefits there from full anchor and full rate hike.

And then what would be your best guess as to how the margin traject through the reminder of the year, in other words beyond the first quarter and maybe with the incremental...

So if you can forecast what the long end of that curve is going do, Scott, we’d probably give you a better outlook. Obviously, rate hikes will become less important on the short end depending on the shape of that curve.

And then just also we’ve been very disciplined holding deposit cost. And every incremental move in here is obviously going to put pressure on the industry to raise deposit rates. And so I think the benefit is going to be less going forward for the industry just because of the deposit basis alone.

And that certainly stands to reason. So, okay sorry for making you go through that again, but I appreciate you doing that, Jim.

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

Maybe question for Jim to start. With the closing of the deal, any change in thoughts in the securities portfolio, either size or composition. And maybe entering the year, should we be assuming a decline into the portion of earning assets as you remix as you talked about, Bob. Or is that $4 billion-ish about the level as you expect?

I think it’s about the right level. I think the good news is we have lots of flexibility, and we actually brought the duration in, it came in to 4.15. And so I think we feel comfortable at the current level. But the good news is, we’ve got lot of flexibility in that portfolio, it still generates a lot of cash flow even in this environment. So we’ll let the balance sheet be the right size but we’re comfortable at the current balances.

And maybe while I have you, just make sure I got the expenses. I think you said 115 a quarter core for Q1, Q2, and then a decline in the back half. With the conversion occurring in early May, you said and that would suggest the savings would be by the end of second quarter. How should we be thinking about the step down in the cost in the back half?

Yes, I think it’s consistent. The third quarter will be the first quarter that for full year select the 36% cost savings we expect to come out of the income.

So ones the 115, but the 115 is the second quarter number. And then do we grow with inflation from there or is it -- just step down from 115 and then…

We’ll start to see some benefit in 2Q, but it’s obviously less than the third quarter we have the full run-rate. So really the 36% is really implied of Minnesota expenses….

To answer your question, Chris, you should see a step down in third quarter versus second quarter as we take the full benefit of those expenses. So the core expenses will be higher in the first half of the year and then second half of the year based on Minnesota. And again as I said in my comments, at this stage any incremental investments we make will be included in that core expense run rate.

And if I could sneak one more on fees, if we -- it looks like you brought million dollar, you didn’t get yet from Minnesota. And then first quarter is obviously seasonally little bit challenging for the industry. Is that 43-ish number for adjusted fee income a decent run-rate for the first quarter? I know you called out a large trust and safety, I’m not sure if that was a big number?

Obviously, the seasonality of the mortgage business will have some impact but I think for modeling purposes that 43ish plus is probably a good number as you go forward. You got some seasonality. We still have to get through a conversion in Minnesota to see the impact on service charges. But net-net I think that’s pretty good for a floor.

Your next question comes from the line of Nathan Race with Piper Jaffray.

Just question on the commercial production yields in the quarter. Obviously, we saw some firm re-pricing there. So just curious how much of that is just a function of the last couple rate hikes that we had versus maybe some differences you see from a competitive aspect of either spreads or structure?

I think really and obviously LIBOR led the interest rates hikes and then we got primary increase in December. So that was certainly a big driver of it. And then as I alluded to, I think with the little bit higher mix of CRE in our commercial portfolio, those tend to have longer-terms and amortizations and yields are a little bit higher than that group as well. So still obviously very competitive out there but nice to see the hike in yields.

And then Bob just thinking about the pipeline and just commercial line utilization look forward, obviously, your pipelines are up noticeably from the third quarter. So just curious, how much of increased optimism across your client base is actually translated in that growth versus just some of your efforts to get larger in some of these stronger areas?

I would say for the pipeline at the end of fourth quarter, almost all of that’s through Jim and his team’s efforts. I think we’ll see, towards the end of this first quarter, you’ll start to see reality hit for the client, because it takes time to put on paper than to make it happen. So any pipeline increase is really because the Jim and his team. Again, that’s part of optimism going into the year is that we think there is -- you could expect some upside in that pipeline as clients get more optimistic.

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

Bob, I just want to make sure I understand you correctly. You talked about potentially reinvesting the tax savings in a later day and something you discussed in the future. But then when you were talking about that 115 expense run rate, you did mentioned increase in technology and client experience, et cetera. I just want to make sure I understand how much of the tax savings will you be reinvesting or at a future day, do you think that we’re going to get additional commentary there?

Yes, I’d answer it this way, Terry. The numbers we gave you include any investments that we would make. If by chance, we make anything that’s not in the run rates we gave you, we’ll be clear to disclose that to you. But at this stage, I just don’t see that. We think -- we believe that we’re comfortable with those run rates and we can do the things we want to do. It’s important to realize that the subtlety of comment I made, we brought the expertise in-house to be able to continue look for ability to reduce cost and reduce processes. So I’m hoping to be able to self-funding I think over the year to be able to make those investments.

And then as it relates to tax reform and M&A. How is that changed your conversations with potential sellers as it relates to overall pricing given the -- just lower tax rate and enthusiasm and optimism around growth?

I think it’s a little too early to tell, to be honest with. I think everybody is still trying to figure out what the heck their write down is in and everybody’s responding to the daily news of people using some of those proceeds. So I think in terms of any pricing, it’s a little early. My sense is we’ll settle in and then you get to a new norm and things will continue almost like they have in ’17, but I think it’s too little too early to tell.

And then just last question for Daryl, the special mention loans from Minnesota, the $46.5 million. It just looks little large on the graph here on page 22. Was that number in level expected when you announced the deal?

It was. And Terry, what I want to make sure I understand is those special mention loans have some slight weakness is in them. And what you typically see when we bring on loans on balance sheet is if we don’t have all information, we see some weaknesses, we’ll park it in that category. And then as we review those loans over the first year and give more financial information and lot of those things just flow out. So that number did not concern us at all in this transaction.

Terry, that’s what we call Daryl being Daryl.

Your next question comes from the line of Andy Stapp with Hilliard Lyons.

Mike, I had tried to head start too, because my questions were answered, but I guess it didn’t take. Thanks though.

Well, good to hear your voice.

Thanks. Go eagles, by the way.

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

So, Mr. Arfstrom, I am so sorry about your Vikings.

That last comment, just on from Andy Stapp.

[Multiple speakers] we celebrated a perfect season.

Well, you can get a purple jersey Bob and you can wear it around Minneapolis.

Absolutely.

Just on the Minnesota topic, on the growth, what would you call out, is there anything in there. Is it larger loans, is it pent up production, is it health of the market? I mean, the way I see it maybe it’s a third of the organic growth during the quarter. So is it -- seems a little bit outsized or is there anything to call out?

I think it’s the basics. We got a great team that’s been doing strong C&I lending, that’s one of the real appeals we had when we looked at Jeff Hopkins and Jim Collins and the team up there. They just -- they’ve got a great niche, Jon. And they just continued to executive. They’ve kept the blinders on for all the noise and we’re optimistic that we’ll continue through next year.

Maybe Jim for you, I’m not sure you got this comment right on the commercial and construction backlog pipeline. Can you go through that again and then just maybe give us an idea of what and where is there…

So $640 million was the number I quoted in. So what that is commercial, it’s construction advances that still have yet to be made on certainly larger commitments. So these are projects that are in some percentage of completion that we will be advancing over the coming months and quarter. So certainly that gives us some optimism as we look forward to additional balance sheet growth.

And then Daryl maybe one for you. You guys touched on credit, I guess, but you called it indirect auto in certain parts of commercial real estate. Is there anything you’re seeing at this point that bothers you or is it just more of the same?

I think it’s -- there is things that bother me. But I think from an industry perspective, I think it's more of the same. I think everybody has talked about indirect. We saw our losses not high this year but creeping up a little bit. Our delinquencies at year end were little elevated. So that portfolio I think generally across the board with most banks everybody is watching to see where the dynamics go. Retail commercial real estate, everybody has got their eye on that rise, just the changing dynamics of that whole segment. And then the fact that we put so much multifamily on over the years. What we’re seeing though is we see a fair number of our developers actually backing off that a little bit, which pertains to where is demand going to be versus supply. So it's all those nuances that nothing really smacks you straight in the face, but it's just, okay, let’s just watch what we’ve got going on here and take care of business.

Your next question comes from the line of John Rodis with FIG Partners.

Bob, I wanted to -- could you just go back to your comments on yield accretion. Did you say you expected total yield accretion, which is projected to be $30 million? You said you expect that to be less than 5% of total revenue this year.

Yes.

So that’s down from what it was 6.5% last year?

Actually if you go back to some days if you look at the chart and Lynell was doing her job, she tell me exactly what -- page 33 in the appendix, you may head back in ’14, it was $86 million of revenue that was probably is by 20% plus of our revenue. So the point we’re making is -- and we understand, I guess, wrap is a strong word. But as I said I think a year ago, or maybe sooner, I had accretion income tattooed on my forehead. And I’m hoping that that goes away as we really focus on just what the core engines doing versus what an accounting methodology that’s necessary.

That makes sense. And then Bob another just follow-up to, I think Chris’s question on fee income. I think you said around $43 million was a good starting point. Now that excludes anchor. Is that correct?

You could add a little bit in there, Frank, on the deposit service charges, they really don’t add much else into the equation. And part of what I was saying that we’ve got to get at least a quarter or two of performance from anchor to be able to give you a better idea of what their performance, because we’re going to make some changes so we hope not many.

So $43 million to $44 million in total. Is that the right way to think about it in the near-term?

I think I said, that’s probably a floor. I think what we’re trying to do is all the nuances to the market and some of our wealth businesses, you understand there’s flexibility and your seasonality in those numbers as well. So I think what we don’t know is and as you well know, John, we don’t include any revenue enhancements. We’ve got the ability to take capital markets and wealth to Minnesota and still in Wisconsin quite frankly. So we think there is upside. But if you need a number, I’d use the 43 understanding seasonality and upside from the service charges out of Minnesota.

And then just one other question just to make sure the operating expense guidance of $115 million. That includes the expenses for the tax credit amortization?

No.

No, it was just core operating quarter.

And timing on those tax credit amortizations, if you remember, that’s a nuance because of the way we have to account for those. Those aren’t steady expenses. Those are like one-timers. Our sense is that as we think about the closing in those projects is probably towards latter part of second quarter, maybe sneaking into third quarter. So we’ll let you know. But for your modeling, we’ve excluded those from that core number.

And then -- so I guess Jim the full year guidance of the effective tax rate of 12% to 14%. Does that include the benefit of the tax credits?

It does. And we’ll have to accrue those benefits over the full year, even though those amortizations will occur, as Bob said, more heavily in 2Q and 3Q. But the tax benefits are spread evenly across the full year.

It’s a goofy accounting standard.

I understand. So I mean -- but if you -- on page 19, if cash credit amortization $17 million to $20 million than roughly $45 million a quarter, you add that on top of the $115 million?

Correct.

Your next question comes from the line of [Eric Grublic with Think Investor].

Just a question about one of your slides, I think you always put in the deck about the branch sales and closures. So if we make the assumption that for the foreseeable future, you don’t do anything new on the M&A side. Is there anything left to do there? Is it just small items or is there more to come with any branch consolidation?

No, absolutely more to come. Our customers’ behavior has changed obviously with our investment in the mobile. Jim is also been doing some work on universal banker model, which helps us a quite a bit. So speaking for the board and for myself, you should expect to see a continuation. And we have an access to some markets. We’ll take a hard look at as client behavior changes and maybe demographics change. So this is an ongoing quarterly discussion between our management team.

So Bob, if you’re looking at doing more of that and this is maybe a difficult question to answer. But if you look at the accretion impact or the profitability benefit when you’ve close branches before. Do you see that as better or worse going forward if you do more branches? So in other words the impact on your expense base should be -- there’d be more of a benefit or maybe less of a benefit now?

Well, from the expense side, it should be consistent benefit to what we’ve seen in the past because those are fairly well fix cost. You’ve got the real estate cost. You’ve got the cost of labor. And quite frankly, what we’ve been pleasantly surprised with is our ability to retain those deposits. So the upside comes under revenue where we’ve gotten better spread income and a little better fee based income, because we’ve retained, I think Jim’s told this story. We closed the branches it’d be close to more within 10 miles and we had over 90% retention. So obviously, expenses are going to be consistent and we just think there is upside to the revenue, because the client’s behavior has changed.

[Operator Instructions] And there are no further questions at this time.

Obviously, if you have follow-up questions, let Lynell, John or Jim know. And we appreciate everybody’s time and attention.

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 Web site, oldnational.com. A replay of the call will also be available by dialing 1-855-859-2056. Conference ID code, 6268317. This replay will be available through February 6th. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today’s conference call.