Welcome to the Old National Bancorp First Quarter 2018 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. At this time, the call will be turned over to Bob Jones for opening remarks. Mr. Jones?

Great. Thank you, Dorothy. As we begin this call, let me remind everyone that as noted on Slide 2, certain statements we will make may be forward-looking. And as such, they will be identified with the appropriate terms. In addition, certain slides do contain non-GAAP measures, which we believe provide for more appropriate comparisons. A reconcilement of these numbers is not - is contained in the appendix. Now with all that being said, let me welcome everyone to Old National Bank's First Quarter 2018 Earnings Call. We do appreciate your interest and flexibility with our change in date and time. This change, as well as the changes to the format of our slides, was really based on your input. Our goal is to provide you with greater detail on the slides and for our comments to be focused on the substance behind those slides, much like the old radio show, Paul Harvey: The Rest of the Story. While Jim Ryan and I will be the sole presenters on the call, we are joined by Jim Sandgren, Daryl Moore, John Moran and Lynell Walton. And all of us will be available to answer questions after the brief presentation. By the way, Mr. Moran has forbidden me from making any jokes or corny analogies as I've done in the past. You'll see if I can do my best to abide. Slide 3 does provide an excellent overview of our quarter. It's the best quarter of earnings in the history of our company. I could just stop there, but let me add some highlights and insights into the drivers and opportunities that we see that exist for our company. Every quarter, I do a letter to our board prior to our meeting, which, much like what we hope to accomplish with these slides,…

Good morning, and thank you, Bob. Starting on Slide 5, I will highlight a few items we think are important to our strong first quarter results. Adjusted earnings per share was $0.34, which was $0.12 better than the fourth quarter and $0.07 better than a year ago. Adjusted earnings per share for the first quarter excludes $2.3 million of merger charges, $2.8 million of branch consolidation charges, and $800,000 of securities gains. Overall, we are pleased with the almost 11% commercial loan growth, which continues to highlight the dynamic markets we've entered recently. Moving to Slide 6. Adjusted pretax preprovision net revenue was more than 16% higher year-over-year. This result was driven by our stated strategy of, one, remixing our balance sheet towards higher-yielding commercial loans; two, maintaining our strong low-cost deposit base; and three, improving our operating leverage, which saw a 184 basis point improvement in the first quarter. On Slide 7, we wanted to highlight our strong C&I growth of almost 14% during the quarter. Importantly, our commercial volume was up 21% from the fourth quarter to $1.7 billion despite the strong pull-through we experienced in the first quarter. This is particularly encouraging considering typical first quarter seasonal factors and broader industry trends. Our loan yields increased 16 basis points, aided by the increase in short-term rates during the quarter and improved mix and a full quarter of our Minnesota partnership. Slide 8 demonstrates our year-over-year changes in earning assets. Again, this is very consistent with our ongoing remix strategy. As a percentage of total earning assets, commercial loans are up over 7%, and indirect lending is down almost 2%. Our securities book is also more than 2% lower. Moving to Slide 9. You can see that we more than funded our loan growth to deposit growth. We…

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

We can change the starting time or the date, and you still get that first Q.

I try. I've been in the queue since about 4:30 this morning.

For this call? We could have had the call, just you and I, at that time. I was in.

That's right, that's right. We'll do that next quarter. That is a generous offer. But no, I appreciate you guys taking the question. So let's see. Jim, wanted to just make sure I'm fully understanding the costs that - they're the expense expectation. So 2Q costs of just under $112 million and then an additional - and that's before the tax credit business. So we add in like $15 million, $16 million, so that implies a reported expense number sort of in the ballpark of $134 million to $137 million. That's the way you're looking at it as well, right?

Right.

Okay. And then - so the tax credit costs will be highest in the second and third quarters. Would you be willing to sort of venture a guess as to what the reported number might look like as we get to the fourth quarter? Or maybe even directionally, when we talk about the tax credit business expenses being highest in the 2Q and 3Q, what's the order of magnitude of reduction in the fourth quarter? Like if we have, after the second quarter, call it $10 million-or-so, in tax credit business expenses left, how much of that occurs in the third, how much in the fourth?

I would say majority of it's going to appear in the third quarter and just a little bit in the fourth quarter, Scott. I think it'll be closer to the first quarter in this case, but - so there'll just be a little bit left in the fourth quarter to take.

Okay, perfect. That's very helpful. I appreciate that. So another one...

Yes. Scott, as you know, there's timing on these projects, and the number for the noncore amortization's up a little bit over our prior guidance. And it's really - it's all the store credits we had in Minnesota that came on a little quicker than expected. But it's still, in our mind, a good business. It's going to give us $3 million in net benefit, plus we get the ancillary benefits that come with it and we're comfortable that we're accounting for it accurately.

Okay, perfect. And then so I guess what that implies is you're really going to be - at least on a reported basis, you'd be ending this year with potentially significantly lower expense base than you'll have in the second quarter and third quarter - second and third quarters of this year, right?

Absolutely. If we don't, then we've got big problems.

Yes. Okay, all right. And then if I can sneak one additional one in, can - Bob, maybe if you can just talk - or Jim, if you can talk a little bit about the fee momentum. Wasn't a huge delta but came in a little softer than I had anticipated this quarter. And then, Bob, you touched on fees as a sort of an area for improvement in your remarks. Maybe just...

Yes. Yes, great question, Scott. So mortgage clearly was a little softer in the first quarter, which is not abnormal. It's a seasonal business. And I think when you start getting rates to move around, you get a little bit of apprehension, but the pipelines build up very nicely. March was a very strong month for us. So we feel optimistic. The other big delta change was Capital Markets. And again, that's just a pull-through on terms of the derivative in the foreign exchange business. But Chris feels relatively comfortable. We've built the pipeline up there in sales. Jim hit on the wealth. The comparison during the fourth quarter and the first quarter, we did have a significant fee out in the state that matured. And that - obviously, that's - those are - we can't predict those. But - and then you get a little bit of volatility there because of the equity markets, but - and actually the bond markets. So we feel good about the guidance we gave you, which is kind of that mid-40s, and I think over time, we're going to be able to get to that level. I just - seasonality is what it is. I should note service charges, which was another large component of that, we're actually pleased with the performance in the first quarter on a relative basis. We saw some stability there. And as you know, we've been fighting that headwind for a while. So feel good about the stability that we finally have achieved in the service charge area.

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

I'm interested in your deposit commentary. Your beta cycles to date have been, I think, probably top decile in the group. Wondering if there's any pricing differences that you could speak of by market, any changes you might have seen since the March hike. Any color would be great.

Yes. I think, first of all, the overall commentary would be, it's really reflective of the franchise that we've built. I use this word, "demographically accretive" just because I really like it. But - so we've been able to get into these markets that are able to give us much better economics and grow loans. But we still have what is the legacy franchise. It is just a great deposit generator. So that balance has allowed us really, Chris, to stay away from a lot of special pricing. We've got some special pricing, it's on an ad hoc basis. It's less than 7% of our markets, if I had to do anything in. And as you well know, we're not a huge believer in public funds and municipal deposits. So we've been saying for years that there's going to be value in core deposit franchises, and I think now with this environment, we're starting to see that. So we're not getting a lot of pressure on deposits yet. I think - I judge a lot of that by the e-mails or the phone calls I get or Jim gets from the field. And so far, so good, and again, reflects kind of our brand as well as our market share in some of these existing markets.

That's great. If I could add one on M&A, Bob. You talked about the - I think, the increase in books that are being moved around. Interested if there's any change in the size of banks that are becoming available, given the hopeful progress that we're seeing on the $50 billion.

Yes. I don't know that the Senate Bill 2155 has really changed much. Obviously, if you move those artificial bright lines, then you might see some of the larger banks that are pushing the $50 billion or above, get back into business. I'd say the books are consistent with what we've seen in the past. They tend to be that $500 million to $3 billion banks that either has succession issues or realizing the cost to continue to compete is difficult. And so again, we're seeing a lot of books, but we're going to be very selective in any partnering that we do.

Great. And if I could sneak one for Jim. The 40% of the commercial book, the short term, I think, tied. How much of the total book is tied to LIBOR?

I don't know if I have the exact percentage. Scott?

It's 26% is tied to the one-month LIBOR on a variable rate. So 51% of our book is variable. 26% of that is tied to the one-month LIBOR, if that helps, Chris.

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

Just a question on loan growth to start. Obviously, you had good growth this quarter, and looks like you're getting good production out of Wisconsin in the Twin Cities. So just curious on your updated thoughts, in terms of if you need to add any more folks in any of those two states to really increase your production out of there or you feel pretty comfortable with the team you have in each of those areas.

Yes. Just a great question, and it's the conversation I have with Jim Sandgren probably every day. We've actually been able to add some talent in both markets. We've added some really excellent, both C&I and CRE lenders, that have come to some of the larger banks. So we will continue to selectively invest in markets like that, like Indianapolis and others, where we believe that our model works very effectively and that we can get some folks to join. Our focus really in Wisconsin would be on the C&I side and might be just a little bit different in the Twin Cities where we could grow our CRE book because they've got such a strong C&I team. Indianapolis, quite frankly, we could grow both C&I and CRE and still feel very, very good about where we are.

Got it. And then just going back to the discussion around acquisitions, Bob, just curious if you could kind of give us a little more color, just in terms of the type of franchises that are coming up for sale. Are these more of the demographically accretive transactions, as you put it earlier? Or are these kind of more tuck-in deals in certain other areas?

Yes. It's a little of both. Clearly, our focus will be on the demographically accretive, and I think Ryan ought to copyright that term. I think, as you think of the success that we had in Wisconsin and the success we had in Minnesota, those will be clearly the types of transactions we would love to do, the kind of partnerships we would like to do. And we also don't want to stray from who we are as a company and the core values and the strategies that we've laid out.

Got it. And if I can just sneak one last one in for Jim. On the FHLB advances this quarter, they're up a little bit. Was that just kind of a timing aspect along with the branch sales that are coming due later this year?

Yes, that's correct. And obviously, whenever we have opportunities to take advantage of special, we'll take advantage of some of those special that occur. And so I think that's what you saw in this quarter.

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

Thanks for the new slide format. Very efficient from my seat. I appreciate it.

It's all Mr. Moran. Just so you all know, when you address him, it's Mr. Moran.

Okay. Well, thank you, Mr. Moran. Very helpful on a Monday morning.

Sure.

If we could start, maybe a question for Jim. Slide 8, the earning asset mix. What are your thoughts on building out the securities portfolio? In the margin guidance, it looks like yields are going to come down three basis points. And then maybe a year from today, so 1Q '19, how does that slide change?

Well, I think the good news is we have a lot of flexibility here, Terry. We'll continue to look for liquidity. As Bob said, we're not going to always play the hot special on the deposit pricing side, so a lot of liquidity in this portfolio. I think generally speaking, as we think about that remix, we'd like to see that as a lower percentage of total and as a store of liquidity and help us manage our interest rate risk. But just generally speaking, I see that coming down versus going up from here.

And then there's always a lot of talk about the lending environment in your more urban metro markets. What's going on in the community markets? Are you seeing any growth at all? I'm just trying to get a feel for the local economy and overall business activity in those markets.

Yes. I'll give a high-level answer, Terry, then I'll turn it over to Jim Sandgren. But one of our better markets was Evansville. While it's not a demographically accretive market, it clearly reflects what really the legacy franchise looks like. And we're seeing good opportunities throughout the franchise. It's competitive, but I don't think it's as hypercompetitive as we've seen in past cycles. And clearly, we're able to compete. We haven't had to reduce price a lot. We're able to compete on value proposition versus price and credit, and we've continued to adhere to the credit standards we've had. So Jim?

No, I think that's a good assessment. We continue to see growth in both our newer markets and our legacy markets. I think sometimes in the legacy markets where we face a lot more of the maybe smaller community bank competition, that's where sometimes, from a credit perspective, structure gets a little loose, whether it's guarantees or loan to value. So obviously, we're very disciplined on that front, and we continue to find ways to do deals, but there's certainly deals that we'll step away from. I think on the larger metro markets, as we're competing against some of the larger banks, I think for the most part, they are good competitors from a credit perspective. So yes, we still feel good about our ability to compete, build long-term relationships. And I think this quarter is another reflection of being able to do that.

And then just one last question. You mentioned, it sounded like pushing out some technology spending. Could you just talk about where you're spending on the technology side? And is it more defense as you compete against the very large banks? Or are there areas where it's more offensive in nature to grow the business?

A little of both, Terry. So one of our larger spends - two of our larger spends this year will be on a new mortgage servicing system, Black Knight, which we implemented over this last couple of weekends, it's been well received. And we've got a significant treasury management system that we're going to put in place latter half of this year, which will allow us to be much more competitive in the treasury management. And as we've entered these demographically accretive markets, it really allows us to do that. And then you've got that core system that it's kind of just the opposite. Our view of that would be, let's eliminate redundancy and complexity and go to a basic system so that can remove costs. So - and then obviously, the whole issue around digital and mobile banking, we've really taken a position there to partner with folks. And we'll continue to invest in that partnership and continue to invest in that product set. But I don't think we're arrogant enough to think that we can go out and build our own system to be competing with what our friends at JPMorgan Chase and others are doing. And - but we can find the right partner to do that.

[Operator Instructions]. Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

A few follow-ups. You talked about an increase in the number of - when we were - you were talking about acquisitions and increase in the number of books that you're seeing. Why is that? Is there a theme?

I think a couple of reasons. I think that you get through the budget planning, the implementation, the boards look at it, and you kind of get through the holidays, and you think about timing of the increase in books, you kind of have board meetings. So I think banks make decisions that maybe, "Let's go out and explore the opportunity." Without being arrogant, I think we see a lot of books because, one, we've got a strong track record of execution, and we've got great relations with the regulators. And we've clearly stated that in the right opportunity, that we want to be a partner. And then just the reputation from our current partners. You get folks from Wisconsin and Minnesota and other parts that talk to other bankers, and people make phone calls. So - but I mean, ultimately, let's be honest, we're still an industry that's got a capacity hitch, we've got way too many banks serving far too many clients, and you need to give consolidation. And I think there's a lot of hope that Senate Bill 2155 will kind of break through some of that, and while it's incremental, it's directionally correct. So I think all of the above gets us to a point in time where people are making the decision to see what's the right thing to do for their owners.

Okay, good. On lending, you all sound pretty optimistic on commercial and commercial real estate. What's driving that? Is it larger loans? Is it new customers that you're bringing into the bank? Is it existing customers that are borrowing more? Can you maybe touch on that?

Yes. Yes, so Jon, it's really a mix of both. We are bringing in a lot of new customers. In some of the markets obviously, there's some market disruption with some acquisitions. So we certainly take advantage of that when we can. We're always deepening our existing relationships, and I think it's really been a good mix. Our focus, as Bob mentioned earlier, is to continue to add talent. And we've been able to do that and really have focused on larger banks where folks come up - over, and they're very strong from a credit perspective. And their ability to build relationships with our product set is really working out well.

Okay, okay, good. And then, Bob, just one. In your prepared comments, you talked about running on 6 or 7 cylinders. What gets you to 8? Is it just the expense work and maybe optimizing fees a bit? Or is there something else that's on your mind?

A couple of things. One, I'm not sure I'd ever get to eight because I think I'd always upgrade my car. And so I never want to rest on the laurels, I want to push. But clearly, we have an opportunity to increase our operating leverage, and it's really on both sides of the equation. I think we're just beginning to see the value of the revenue engine that we've kind of built over the years and a lot - ability to focus clearly. As I've talked about, systems integrations and systems opportunities, removing some of the redundancy and complexity allows us to become much more efficient. Just the branch closures, I don't know that we get enough credit for the magnitude of the change we've put through the branches. And while it's only $3 million in savings in '19 for your modeling, this is a consistent process that we'll look at. So it's all of the above. And I think we'll run on seven cylinders for a while, and we'll continue to kind of push to that 8-cylinder that - they do make 12-cylinder cars, too. So again, my wife's Prius has only got one, but...

I could you see rolling at a 12-cylinder, Bob.

If you want to get a great visual, look at me driving that Prius for 8 hours.

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

Yes, just a couple. One, clearly, this is a new format, both in terms of slides and presentation. Your feedback to Mr. Moran or Lynell would be valuable. And then as always, if you have any follow-up questions, reach out to Lynell and we'll get back - right back to you. Appreciate everybody's interest and time.

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 1-855-859-2056, conference ID code 7676787. This replay will be available through April 7. If anyone has any additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call.