Welcome to the Old National Bancorp Third 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, [Pom] [ph]. Good morning, we are pleased to discuss our outstanding third quarter results and update you on our transformational merger. We completed our systems conversion and branding changes during the quarter. Internally, we have branded our merger as better together. And these last two quarters of strong results demonstrate how we are truly better together to all stakeholders. I also want to take this opportunity to acknowledge and thank our team members for their hard work and dedication to serving our clients, communities and supporting one another throughout this process. Let’s start on Slide 4. We reported GAAP earnings for the third quarter of $0.47 per share. The third quarter included pre-tax charges of $23 million in merger expenses. Excluding these charges from the quarter, adjusted EPS was $0.51 per common share. This quarters’ adjusted EPS was almost 11% higher than the second quarter. Our adjusted return on average tangible common equity and assets were a strong 23% and 1.35%, respectively, and our adjusted efficiency ratio was at low 51%, which is the best efficiency ratio I can remember in my 20-year plus career at Old National. Our focused execution on our merger, strong deposit franchise, and growing commercial business drove these robust results and leading returns. We saw higher balances in every portfolio and most markets across our commercial business. Total loan growth was 14% and the commercial business grew 17% on an annualized basis. The higher loan growth paired with the benefit of a strong deposit franchise contributed to a 38 basis point margin expansion. Our commercial pipeline ended at a strong $5.4 billion. Overall, credit quality remains strong, and we continue to be diligent, given the increasing economic uncertainties. However, corporate balance sheets remained solid and personal clients retained higher saving rates than we…

Thanks, Jim. Turning to the quarter results on Slide 5, we reported GAAP net income applicable to common shares of $136 million or $0.47 per share. Reported earnings were impacted by $23 million in merger-related charges. Excluding these charges as well as debt securities losses, our adjusted earnings per share was $0.51, up 19% year-over-year. Slide 6 shows the trend in total loan growth on historical combined basis, excluding PPP loans. Q3 represents our ninth consecutive quarter of organic loan growth, but total loans increasing 14% on an annualized basis. Commercial loans grew an annualized 17%, while consumer loans grew an annualized 7%, driven by residential mortgage. The invest portfolio decreased 6% quarter-over-quarter due to a rate-related fair value adjustments and reinvestment of portfolio cash flows in support of loan growth. We expect investment cash flows of $850 million over the next 12 months. Slide 7 provides further details of our commercial loans and pipeline. The strong second quarter growth was well distributed with 17% annualized growth in C&I and 15% in CRE. Q3 production put some pressure on the pipeline, but loan demand remained strong, and we did see a marked increase in the HSA category, which was up $400 million over prior quarter. Turning briefly to pricing. New money yields on C&I increased to 109 basis points from Q2 to 5.29%. With new CRE production yields up at 88 basis points to 4.55%. Slide 8 shows details of our Q3 commercial production. The $2.4 billion of production was well balanced across all product lines and major markets, and as always, we’re consistent with our disciplined approach to credit. In addition, all of our product segments posted quarter-over-quarter balance sheet growth, which demonstrates the success we’ve had in retaining lenders and clients in Chicago, our successful entrances into new…

Thank you. [Operator Instructions] Our first question comes from the line of Scott Siefers with Piper Sandler. Scott, your line is now open.

Good morning, Scott –

Good morning guys. Thanks for taking the questions. How’s everybody doing?

We’re doing great. Great to see you take your rightful place back as number one.

You know, I even got it down a bit in the queue since 9:16. I’ve got to get a license on point here. I’m glad to – get in the queue. So appreciate you taking the question. Maybe Brendon first question looks appropriate for you. So obviously just you know a huge ramp up in the margin and NII with great deposit betas. Just curious you know given some of the steps you’ve taken to kind of protect things, what do you think is your ability to grow NII and the margin sequentially once the Fed starts raising rates? And just maybe kind of qualitatively how much does – this margin is levitating just on a transitory basis? And how much can you kind of harvest and keep for a longer period?

I mean a lot to unpack there and a lot of that will depend on the deposit betas and deposit pricing post the Fed move. That said, you know we have a pretty good view of our margin with a forward curve of ‘23 and we feel really confident we continue to expand the margin as the Fed continues to move rates. Post that we’ll continue to have opportunities to re-price our fixed rate book at much higher levels and then what it’s running off at, and that’ll help offset additional deposit costs. I think the big question is, how long does the Fed stay there, will be a big determining factor and how long we can hold on to the margin at the peak.

And also Scott you know we continue to have a mix shift right on a lower yielding assets and the higher yielding commercial assets and that will continue to help you know let the margin grow regardless of what the Fed does or doesn’t do.

Okay. All right, perfect. And then just sort of a cleaner question. Brendon, can you sort of repeat what those offsets were to the anticipated HSA gain in the fourth quarter?

Yeah, we’re evaluating a number of things. The biggest ones are thoughts around all of our real estate, both branch and non-branch real estate and we’re working through that now. So that’ll have an impact, and we’ll likely spend some of that gain in the fourth quarter.

Okay, perfect. So in other words, kind of a one-time gain and then you know potentially a one-time charges offsetting you know maybe some portion of it.

You got it.

Yeah which should also lead us to some additional savings in the next year.

Yeah, perfect. All right. Good. Thank you guys very much.

Thanks, Scott.

Thank you for your question. Our next question comes from the line of Ben Gerlinger with Hovde Group. Ben, your line is now open.

Good morning, Ben –

Hi, good morning. Got that line and by the time you dialed in, you beat me by two minutes.

We were watching you dialed in first, we saw that.

I was curious. I mean I know that you guys have a pretty large footprint now relative to the past five years. So I was curious just from a kind of a macro perspective, what do you – what are the kind of the conversations you’re having with clients today, some of their concerns and kind of juxtapose against the lending portfolio? Does that open up any opportunities for growth? Are any areas you might want to potentially pivot away from? I know you guys don’t change your credit standards throughout the cycle, but it’s kind of that macro conversation you’re having with clients.

The macro conversation with clients is, we think we have opportunities across our geographies and across our four lines of business. And you know we saw that this quarter and real estate was the largest growth driver this quarter. But all three of our other lines in commercial, middle market, business banking and specialty all grew about $100 million. So and it was widely dispersed geographically. And I just think we have the team to compete and win in every market we’re in, Ben. So, I don’t – we don’t favor one versus the other. I think there’s just a lot of opportunity to grow. Jim, anything you would add?

No and you know we’re going to continue to look to expand in other markets, obviously, we talked a little bit about Nashville and St. Louis and Kansas City continue to perform well, and looking at other potential metro markets that can help us support growth.

Got you. That’s helpful –

You know I think the franchise or the franchise – Ben I would just add the power of the franchise is getting noticed in some markets that we hadn’t been noticed before. And I think that’s really getting people excited about joining our company. And as we talked about you know we were able to hire 25 you know client-facing folks this quarter and we continue to do that. You know there isn’t a week goes by that we don’t have somebody come through headquarters here, looking at an opportunity to join the team. And I’m really excited about that. It’s great to tell our story. The story resonates really well with folks and I think it’s going to allow us to continue to make those strategic investments.

Yeah, that actually dovetails nicely to my next question. I know you just said the plus 25. And then you highlighted Nashville specifically from a lender perspective. Is there any cities or MSAs you want to – you could highlight? I don’t know if I jotted those down correctly or not?

No, I would just say you know in our existing footprint, we continue to have opportunities you know adjacent to our footprint we’re having conversation. So you know you’re – we’re not looking at expanding you know outside of the Midwest at this point in time, we still feel like we’re very comfortable solid in Midwest. We do think there’s an opportunity to build on Nashville, the wealth management presence, we’re in early days there, we really just got started with our office. The great news is, as they’re making – referring lending opportunities to our team. And so we’re servicing those opportunities today. But we’ll be looking to add you know folks in that team selectively you know where it makes sense. So that may be the only place really outside the Midwest that I would note, but it’s mostly inside the Midwest, inside our existing footprint or maybe some adjacent markets where we have opportunities to continue to grow.

And most of the hires reflect our footprint, Ben. I mean we’ve hired over the last two quarters seven or eight people in Chicago, seven or eight people in Minneapolis, a few in Indianapolis, and we’ve got a handful in the number of other markets.

Got you. Sorry, I muted myself. Appreciate it. I’ll step back in the queue. Thank you.

No – no worries.

Thank you for your question. Our next question comes to the line of Terry McEvoy with Stephens. Terry, your line is now open.

Good morning, Terry –

Thanks. Good morning – good morning. Same here. I guess the first question, do you think the potential savings from the real estate positioning can offset the $5 million decline in service charges?

You know we’re early stages of estimating that, but I don’t think that’s far off what we’re hoping to achieve with that repositioning.

Okay. And then maybe just sticking with expenses that – the $225 million run rate for 4Q expenses. And then you’ve got some remaining cost savings in the early part of next year. You know how should we kind of think about and maybe you could frame kind of your expense expectations for next year? Or is it still too early given you know what you’re going to do with some of the real estate repositioning?

No, I think $225 million is a good launching point and base to move off of into 2023 and you layer in some you know merit increases as we talked about we’re not going to stop hiring. But we also have some cost saves to come. But I think $225 million is a good base with merit, it gets you in the ballpark of how we’re thinking about next year.

Perfect. And then maybe just a point of clarity, the 15% deposit beta. Was that by the end of the fourth quarter of this year? And if so, what are your thoughts on call it through the cycle deposit betas as we think about the end of next year?

Yeah that is through the end of the fourth quarter, that’ll be cycle to-date beta of 15%. Who knows where this deposit beta ultimately goes? We’ve been pleased that we’ve been able to underperform – you know outperform our expectations to-date. You know I can just tell you at last cycle, the combined organization of FMB and ONB had a significant advantage in deposit betas we expect to continue to keep that advantage in this rate cycles no matter what deposit betas do.

That’s great. Thanks for all the information.

Thank you for your question. Our next question comes from the line of Chris McGratty with KBW. Chris, your line is now open.

Good morning, Chris –

Hey, good morning. Hey, everybody. Brendon, maybe the question on just the size of the balance sheet. You talked in your guide for the Q4 you know a static balance sheet ex the deposit sale. In your prepared remarks you talked about around $800 million or $900 million of cash flows on the bond book that come off? How should we be thinking about just the size of the investment portfolio? Or maybe in other way, what are your expectations for deposit growth?

So I think we’re going to fight to hold deposit stable, I think deposit stable next year is a win, I think given what we’ve seen in the industry. And so we’re going to fight to hold that, we’re going to allow investment cash flows to help provide liquidity we also have an amount of asset liquidity in a few transactional books, including the indirect book. And we have lots of wholesale funding capacity. We just feel like we have a lot of options for liquidity heading into this that we don’t want to fight for every deposit. But we’re going to go out there and take care of our clients. And we think we have room to – and we’re starting from a low loan-to-deposit ratio base.

And his comments exclude the HSA sale as you remember that will come off the top during the quarter.

Okay. Thanks – thanks for that. So the $800 million just as I go back to the $850 million of bond cash flows. The expectation is the bond portfolio would shrink to fund loan growth to some degree?

Yes.

Okay. And then maybe Jim just a higher level question. You were talking probably about the 51% efficiency ratio, which is a great metric. Maybe comment about trajectory from here?

Yeah. You know I think if you look at you know, Brendon’s expense guidance and expanded margin you know I think modest improvements are expected but it’s not going to be and maybe as quickly as we got to 50%, 51%. But I think all the trends are heading in the right direction to see that number grew.

Okay. And maybe just a quick credit question. I think in your prepared remark you said, expect a little bit higher charge-offs on the PCD book. Maybe any higher level questions – comments about what you’re might be seeing in a legacy FMBI book which I think gets a little bit more attention?

Nothing that is unusual that we haven’t seen before, Chris I guess is what I would say you know this is Mark. Our commercial clients are still seeing strong demand and profitability and liquidity overall. There’s a little growing sense of caution out there. So nothing different than what we’re all hearing in terms of economic outlook. So I know we feel good about our credit metrics.

Okay. Thanks, Mark.

Thanks, Chris.

Thank you for your question. [Operator Instructions] Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Jon, your line is now open.

Hey, thanks. Good morning, everyone –

Good morning, Jon. Yeah, good to hear –

As I dialed in – I dialed in at the top of the hour. And there are going to be last. Just a quick follow-up on Chris’s last question. You talked a little bit about moderating – you know moderating growth. But give us a little bit more in terms of what you’re seeing there in terms of moderation and – severe is the wrong word, but how material is it? And then talk about kind of your approach to the marketplace as well if you’re being any more cautious?

Yeah, I don’t really think we’re being any more cautious. You know I think like everybody else, we’re wondering about you know what next year brings us but you know the pipeline was our second highest pipeline of $5.4 billion, Brendon told you our accepted category is not meaningfully, I mean so you know we continue to expect the portfolios to grow just the pipeline down after we closed you know, $2.4 billion this quarter, but we’re really not slowing down at all. And I think our view is really consistent with what other CEOs are thinking about you know I think everybody is you know looking forward and cautious about you know potential recession, but there really have not been much signs of it from our borrowers today, particularly in the Midwest. Mark or Jim.

Said another way, but same thing, our near term outlook is favorable, because the pipelines are still very strong and clients are still doing quite well. I mean, but again, some of the CRE markets are immune to the impact of rising rates. But there was plenty of room to run in the former equity levels and debt service coverage ratios of our client, so the pipeline is still really strong, they’re still, it will.

And you follow this long time, Jon you know 17% you know annualized growth is a strong number by any measure. And so you know I think we’re all just cautious that you know how can we continue to grow at these kinds of levels over the long-term. I think the answer is, it’s probably going to get revert back closer to some kind of long-term average.

And that’s what we said at the end of the second quarter, and we surprise on the upside this quarter. We will probably be a – we’ll still grow in Q4, but at a little lower pace than this quarter.

Okay, okay. Yeah that’s interesting time. No doubt about it. Brendon, Slide 7 you talked about average new production yields. Can you give us an idea of where things are coming on today in C&I and CRE in terms of yields?

Yeah, they’re marginally up from there. So you know today, September yields are up a little bit and 15 bps in commercial real estate, but not much higher. But I expect those continue to go higher, given where the five year has moved and certainly what we expect LIBOR to do over the next and SOFR to do over the next 60 days.

Okay. Just two more wealth management you’ve talked about a little bit you know like Scottsdale and Nashville and I understand you expect the numbers to be down. But can you talk a little bit more about organic growth? What you’re seeing in terms of you know progress there may be I don’t know if it’s new household or how you measure it, but take the market impact away, what are you seeing?

Right what we see in organic growth and it’s all about focusing on what you can control. And we know we can’t control market values, but we can control what we produce and what retention we have. And we feel really good about the opportunities, not just these teams that we hired, that’s incremental, but each of our existing markets, we see organic growth, we measured by the net new clients and net assets under management.

Any numbers in terms of net new clients?

We monitor them, we don’t disclose them, I guess is sort of the best way I could say it. So it is growing.

I think internally, we are meeting our own expectations around our growth in that business for – from the organic acquisition of new clients, and Nashville and you know our high-net-worth teams are off just a really strong start. I mean, we’re getting some advance that we’ve never had a chance at before you know given the sophistication level, the new team we’re bringing on or we brought on you know last year and the new team in Nashville I mean, they’re bringing in just great new opportunities for us.

Okay. And then just last one, a smaller item. You talked about playing offense in deposit gathering where you have limited market share. Can you give us an example of that? Thanks.

Yeah so you know we’ll go out an area in Michigan maybe take a Grand Rapids where we have relatively low market share and we’ll put up a pretty heavy write down and you know a money market, a new money – new money, money market account at a fairly high rate generally a teaser rate will run some pricey CD specials that those markets and try to be annoying to some of our bank competitors in that space. And that’s worked really well for us last rate cycle and it’s allowing us to grow some deposits in this cycle.

Okay, got it. Thank you.

Thanks, Jon.

Thank you for your question. We now have a follow-up question from Chris McGratty with KBW. Chris, your line is now open.

Great. Brendon just a clarification on the non-interest income guidance. You know it sounds like that the run rate on the service charges will make its way to you know, 18, 18.5 once the implementations go in. And I heard you on the Trust. What about the other income line? It’s kind of been all over the board and just trying to get a sense of if we take all these pieces together what’s like a reasonable range for just total fees entry next year?

Yeah. Yeah, I think the other income item is $11 million on the slide. I think that’s a good base to grow from, the noise really was in 2Q and we had that $4 million is kind of an odd set of factors that hit 2Q, but I think that $11 million is a good run – run rate base.

So that would put kind of the total run rate around $80 million something like that?

I think that’s fair.

Okay. Thank you.

Thanks, Chris.

Thank you for your question. There are no further questions at this time. I’d like to turn the call back to Jim Ryan for closing remarks.

Thanks for joining us today. Hope you can tell we feel really pleased with the third quarter and we feel really good about where we’re heading. As always, the team is here to answer any follow-up questions and thank you for participating today and look forward to seeing you on the conference circuit here shortly. Thanks Pom.

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 866-813-9403, access code 902-394. This replay will be available through November 8th. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today’s conference call.