Welcome to the Old National Bancorp First Quarter 2020 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. Before turning the call over, management would like to remind everyone that as noted on Slide 2, certain statements on today’s call maybe forward-looking in nature and are subject to certain risks, 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 its SEC filings. In addition, certain slides contain non-GAAP measures, which management believes provides more appropriate comparisons. These non-GAAP measures are intended to assist investors understanding of performance trends. Reconciliation for these numbers, are contained within the appendix of the presentation. I would now like to turn the call over to Jim Ryan for opening remarks, Mr. Ryan.

Thank you, Dorothy. Good morning, everyone. I hope this call finds all of you and your families safe and healthy. While we are pleased with our first quarter core fundamental trends and the implementation of the ONB Way strategic initiatives, our commitment and focus today is on supporting our clients, team members, and communities. I would also like to thank our team members for their hard work and dedication to serving our clients and communities during this difficult time. Starting on Slide 3, our first quarter net income was $22.6 million, including $31.2 million in ONB Way charges. Adjusted net income was higher at $42.1 million, which includes higher loan loss provisions for the first quarter adoption of CECL. As you review our results, you will see that our core margin was down due to the Fed fund rate cuts and the challenging yield curve. We were able to lower total deposit costs by 9 basis points to 34 basis points. Our commercial production of $647 million was seasonally higher. As a result of the good production, lower payoffs, and some higher quality line usage, commercial loans grew over 13% annualized. We recorded $17 million in provision expense during the quarter related to the adoption of CECL. I suspect you will see wide variances in CECL provision this quarter for midsized banks as we all adapted to this new standard and the multiple economic forecast. Once we determined the accounting relief from CECL was very temporary and the regulatory capital relief was extended, it made sense for us to proceed with adopting as of January 1. The depth of this crisis is yet to be known. I won’t even speculate on future losses or provision needs, but the impact is clearly very broad-based. The Midwest hasn’t felt the same impact…

Thank you, Jim. Slide 6 gives us a high level overview of the composition of both our commercial and consumer portfolios. While there’s no denying that most industry segments have been negatively impacted by the COVID-19 outbreak, we have outlined in the top chart for you the commercial industries that many believe will suffer disproportionately in this crisis. Over the years, we’ve tried to identify those industry segments that are most volatile and do not perform well in a cycle, and for the most part have attempted to either not participate in those segments or participate with appropriate structure and risk mitigation in place. We certainly will not be immune to difficulties in these segments, but as you can see the size of our exposure to these most vulnerable industries appears to be well managed going into the cycle. With respect to our consumer loan book, you can see in the chart in the bottom-left quadrant of the slide, a breakout of the size and average FICO scores of the different product types within our consumer portfolio going into the cycle. There is no doubt that because of the significant increase in unemployment, we will experience difficulties in this portfolio that none of us would have anticipated when we originated these loans. But again, looking at the FICO scores and the fact that less than 2.5% of the portfolio could be considered sub-prime, we believe that we are fairly well positioned to address any developing difficulties in this portfolio. Just a couple of comments about line utilization, as reflected on the chart in the lower right-hand quadrant, we have seen an increase in commercial line utilization predominantly from clients with stronger asset quality ratings. Commercial line utilization at March 31 was 35.2% compared to 32.6% at the end of the…

Thank you, Daryl. Before turning to the quarterly financials, we would like to provide some additional color on our CECL allowance on Slide 9. Our day 1 CECL reserve of $96 million was $41.3 million over our year end reserve and right in the middle of our projected range. The relatively large day 2 increase in reserves and $17 million provision expense for the quarter were primarily driven by projected economic impact of the coronavirus. The macroeconomic variables used in our models were derived from the Moody’s critical pandemic forecast scenario published on March 20. The scenario assumes a sharp decline in GDP in Q2 and a return to growth by year end. The immediate increase in unemployment is less severe than current expectations, but does remain elevated through 2023. The slide also outlines the key economic variables and portfolio inputs used in our model. In addition to the quantitative inputs, we also considered several qualitative factors in our final reserve assessment, including the risk that the economic decline, specifically unemployment and GDP, prove to be more severe and work for long than our baseline forecast. We also took into consideration the mitigating impact of the unprecedented fiscal stimulus, including direct payments individuals, enhanced unemployment benefits as well as the various government sponsored loan programs, which we expect will provide relief to consumer and commercial borrowers. Lastly, as Daryl reviewed, we considered a relatively low exposure to the industry as expected, to be most vulnerable to this crisis. The future severity of the economic fallout from this virus is yet unknown as is the ultimate effectiveness of the government response on providing a bridge for the individuals and businesses impacted. As times goes on, we will have more clarity on both and will adjust our reserve levels accordingly. As said,…

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

Good morning, Scott.

Good morning, guys. Hey, how is everyone doing?

We are doing fine. Hope, you are doing well too.

We are. We are. Thank you very much for asking. I appreciate you taking the questions. First ones that I wanted to ask was just on credit, so first maybe just sort of a second on the 86 basis point reserve to loan ratio and basically what that means in a CECL world, maybe just kind of a refresher there just in terms of adequacy. And then you noted that you guys had updated your stress scenario and still remain well capitalized even at the low point, just curious how the existing reserve compares to what you guys might consider sort of stress losses in that scenario?

Yes, sure. Scott, I will start off and Daryl can chime in. So just as a reminder, so we started the reserve at $55 million at year end. We are now sitting at $106 million, and the $67 million of March still remains outstanding on those loans. As far as the stress test concerns, we ran the most recent portfolio through our stress test models and come out with cumulative net charge-offs that are roughly in line with great recession totals at 2.5% to 3% range. So that would be the right comparable to our 86 basis points in losses [ph].

Okay, perfect. Thank you. And then I had another question on the PPP loans, maybe just I guess a little bit of a tutorial on how you plan to account for them in addition to what you put in the guidance slide. So first of all, those – everything that you guys approved, that actually gets funded right based on what you guys have in the outlook? And then the origination fees, those it looks like will all flow through the margin as well. So I guess we could see kind of the PPP be dilutive to the margin here in the immediate term, but presuming they are forgiven as planned, then you would sort of accelerate so you’d get a bump up in the margin as they payoff, is that the right way to think about it?

Exactly right, Scott. That’s how we are seeing it.

Okay, perfect. Alright. Thank you guys very much.

Thanks, Scott.

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

Good morning, Chris.

Hey, good morning everyone. Just want to go back to Scott’s question on the PPP loans. I think a lot of the programs are much shorter than I think the 2 years that you laid out in the slide. For modeling purposes, I mean we bumped up the loan growth in the second quarter by the amount of $1.3 billion. My sense is most of that will come -- kind of unwind over the next 6 months. Is that a reasonable base case with how you are doing it and how you are structuring it?

That’s our expectation too, Chris, but initially, you have to set these things up to amortize over the life of the loans. But – so if they are all forgiven within Q2, then you’d see a bump there, but if it does -- if they are not forgiven till Q3, it would be dilutive to the margin in Q2.

Chris, I would just add, there is still a lot of details to be determined about how we verify compliance with the forgiveness rules that are yet to being written or published. So, it could take a couple of quarters for this to kind of all unwind. I think we are all hopeful it unwinds quickly, but the reality is since we don’t know the rules to play by, it’s going to be difficult to determine exactly how fast these loans are going to get forgiven.

Okay. And then the expectation is to either fund them with the balance sheet flexibility you have with loan-to-deposit or through some of the government programs that you expect to qualify, is that right?

Yes. We are actively planning to participate with the Federal Reserve’s or the Treasury department’s program.

Okay, I appreciate that. Just one more, I am trying to map Slides 6 and 7, the deferrals and the vulnerable industries. I think in your prepared remarks, you talked about CRE being a big piece of the deferral. Any color on maybe the restaurant book or some of the other portfolios that might be – you might be working with in terms of trying to extend some terms for your stress clients?

Yes. Chris, this is Daryl. Certainly, within those deferrals, there have – there is a fair amount of request from restaurants, and we have been working with those clients. I would – I don’t think that we will see them come back again until we get through at least the 90 days and see where we are. On the hotels, the very little hotel exposure that we have -- most of those have been asking for deferrals as you might imagine. And on the CRE piece, much of that comes from either multifamily that have retail associated with it where the retail has been closed down. Some just apartments early on we’re concerned about ability of their tenants to pay rent. We looked at a little bit of that, and then anything kind of retail, strip mall, those types of things were also heavy requestors early on in the deferral approval process.

And Daryl, as you are going through this process with your borrower, what kind of conversations are you having in terms of having them put more kind of skin in the game to work with you and to make sure you are not on the hook?

Yes. Chris, so early on, we had some conversations with those clients, but mostly just given the uncertainty and the fact that we knew they are going to have cash strains, we did a lot of these deferrals. Just look back on their operating history, if they hadn’t had problems before, look to see what we thought was reasonable and then just moved on. As we hit to the end of the 90 days, on those that we did 90 days, we will – we are going to be asking for updated financial information on sponsors and I have to sit down and have in some cases some tough conversations if this hasn’t turned around. Some borrowers, we did 180-day extensions on, because it made sense to do that. All of our relationship matters will be out in 90 days talking with those clients beginning to understand how deeply they have been impacted and start to gather financial information, start to have those conversations about additional capital or collateral or how we are going to work through this. It is so fluid right now.

Thank you very much.

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

Good morning, Terry.

Hi, good morning. Maybe could you start – just provide some insight into the accounting for the commercial and consumer deferrals, did you keep accruing but the yield is now lower? And if so could you talk about what type of impact that could have and I would assume it’s built into your projections and outlook today?

No change in, Terry, to how we accrue for them. Obviously, there is a cash flow impact on that, but relatively minor, but we will continue to accrue those as we normally would.

Okay. And then maybe could you expand on the CD pricing over the next, well I think you just said 6 or 12 months kind of average rates today on the balance sheet what current market rates are?

Yes. So as I said, we are sitting at 1.34%. Three quarters of that book will re-price over the next 12 months. And depending on the maturity and the tenor, I am not giving you a specific number on that, but they will be meaningfully lower than they are today.

Maybe just one last quick one, can you just talk about the impact on fee income in the first quarter from some of the actions you took to help your clients? And maybe just some color on what happened in March or late in the quarter to help us on a year-over-year basis kind of model out some of those transactional revenue lines?

Yes. I would say the first quarter impact from some of the fee waivers was de minimis with all kind of coming in the middle part of March and so really didn’t have a meaningful impact. I think, as Brendon pointed out though, I think everybody is seeing the spend slowdown, right and everybody saw service charges, I think across the industry be lower. It’s just hard for us to get a handle on how permanent – we have already seen a better pickup in April. And so it’s just really hard for us to have a pickup for – a view on how long this lasts and what the exact impact is going to be.

Understood. Thank you.

Thanks, Terry.

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

Good morning, Jon.

Hey, thanks. Good morning. I just wanted to follow-up on a couple of things. Can you talk about the magnitude? I think Brendon you talked about it in your comments and Jim, you just alluded to just the magnitude of the increase in consumer activity. Is it meaningful at all or is it just very, very early?

I think it’s just very, very early. I will tell you – and Jon you are in the Midwest, so you understand. I mean, I see a lot of people still buying food for restaurants and out and about, but clearly, card spend is down and that’s going to have an impact on, I think the entire industry. But I think it’s just too early to understand what the exact impact is. I guess, what I am optimistic is, I know our state is having a lot of great conversations about return to work. And I am very optimistic that by the end of April, we will start the economy back up here in the Midwest. And I think hopefully card spend and other things will return back to kind of normal. I know it’s going to take some time to get fully back up to speed, but I am optimistic that the Midwest will start to restart and maybe some of the earliest in the whole country.

A question for you guys as well on the loan demand today, you talked about the big pipeline that may not all pull through, but what does the loan demand today look like compared to maybe what it was 2 or 3 or 4 weeks ago? It looks like it was line draws initially, but what does it look like today and what are the areas where you are seeing the demand?

Yes. Jon, this is Jim Sandgren. I would say the pipeline is down a little bit. The breakdown of that pipeline is still kind of 50% commercial real estate and balance C&I. I think everyone is kind of taking a step back to see how this is all going to impact their particular industries. Of the pipeline typically when we look at the accepted category, it’s about 90% to 95% likelihood. We are going to close those deals. After reviewing with our commercial segment leaders, I think that number drops to closer to 75%, still a lot of deals I think to be booked, but there is certainly going to be some borrowers, they are going to be a little cautious and projects or investments may get delayed a quarter or two, so kind of a wait and see.

Jon, I might add. This is a little bit longer term view, but I think manufacturers are looking at their supply chain today and saying how much of this could be done onshore versus offshore. And I am optimistic that Midwest might see some increased investment over the coming year or two and expect people think about those critical suppliers in their supply chain and how much of that really should be produced here in the U.S. versus someplace else. And so I think the Midwest can be a long-term beneficiary of that kind of new view of the supply chain dynamics.

I could keep going with questions, but I have a couple of more follow-ups I guess. Maybe Daryl or Scott, you talked about the increase in CRE deferrals and I am curious areas where you expect to see deferral increases from here? And if you have any shot at what percentage of book do you think could be deferred I don’t view that as a negative. I guess I am just curious as to how far you think this could go?

Yes, Jon. This is Daryl. I think we have most of the deferral requests behind us. It has slowed considerably now, maybe pick back up after the PPP. But I just don’t think that you’re going to see significant increases or changes going forward.

And then one more, Daryl, for you, just maybe more of an industry observation, I’m curious. The PPP, I don’t want to say loan quality, but any assessment of the business, health of the businesses that are in the PPP program we should think about that longer term?

Yes. Jon, that’s really interesting. So, if you think about the program, none of the review of what we did on any PPP loans had anything to do with the financial strength of those businesses was verification now. Anecdotally, as we all work through those, it goes the gamut, right? We’ve got some very strong borrowers who we’re not concerned about at all that took advantage of this program, and then we also have some very small businesses who I’m sure have very little cash. And I know just by talking to some of them that they are asking when does this money come? So, it is really all across the board.

These are things we will eventually find out and you think a quarter or two when we will know more on that?

Yes. The PPP program is a program that is meant to bridge these borrowers through to keep people employed. And to the extent that as Jim suggested at least in our markets, so we can begin to open things up fairly quickly, I think we’ll have a really positive impact with respect to being able to get these businesses started up again. The longer it goes, the more risk we have that these programs won’t be as effective as well they’ll be.

Alright. Thanks for taking my question.

Thanks, Jon.

[Operator Instructions] Your next question comes from the line of David Long with Raymond James.

Good morning, David.

Good morning, everyone. Thank you for taking my question. I appreciate the color you provided with the Moody’s critical pandemic forecast. But curious if you could tell me – tell us what the specific economic inputs may have been that you built into your reserving as far as it relates to unemployment in GDP?

Yes. So, David, what we did is, we look at every one of the Moody’s forecast from the 10th, the 20th and the 27th. We run all of them through our models and sensitized the model. So we did consider all of the economic forecasts. The one we actually went through and put through as a baseline for a model and then did qualitative adjustments on top was the one on the 20th. And unemployment in there is – it goes up about 6% and then stays elevated at around that level for an extended period of time. GDP comes down pretty sharply, I think 6%, 7% and then starts to rebound in a V-shaped manner in Q4, starts growth again in 2021, kind of growth at the same pace it was prior. Those are the two key critical inputs into the model.

Got it. Thank you. And how frequently have they been providing you with updates?

They’re – so, through the quarter end, the last one we ran through our models was the one on the 27, but I believe there was another one April 10 that came out. But that’s not the one that we run through our model.

And just as a reminder, we only expected to receive one forecast per quarter. So, interesting timing of having multiple forecasts come out throughout the quarter, especially if this is the first quarter we adopted.

Yes. I would assume that this is obviously new to them. But hopefully we can get it to one per quarter at some point here in the future but...

Okay. I appreciate the color. Thanks, guys.

David, I will also add. Our sense is, as we’ve obviously compared a lot of notes with a lot of different banks and a lot of different banks used a bunch of different forecasts, a bunch of different management overlays. And so, I think you’re just going to see, as I said in my prepared comments, just kind of a wide variance of how we look at this. And every day makes a difference of how you view this, the future economics around the pandemic. And so, we thought we put in place a very supportable forecast that made sense for us at the time. But every day, you have better optics and we’re going to continue to wait and see and adjust as necessary.

Got it. Thank you, Jim.

Thanks, David.

And there are no further questions at this time. Are there any closing remarks?

We appreciate everybody’s support. Please stay safe and healthy. And as usual, we are here for any follow-up questions. Thank you very much.

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 1855-859-2056, conference ID code 9178738. This replay will be available through May 4. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation on today’s conference call.