Welcome to the Old National Bancorp Fourth Quarter 2019 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 two, 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 to differ from those discussed. The company’s risk factors are fully disclosed and discussed within 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 performance trends. Reconciliation 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, Dorothy. Good morning everyone. Old National announced several strategic actions today including a new strategic plan, the consolidation of 31 or 16% of our branches across our footprint and two capital actions, including raising our dividend and authorizing a new share repurchase program. And as I mentioned on prior calls, we spent the last year totally focused and I challenged our executive team to think about ways we can better serve our clients, our team members, our communities and importantly our shareholders. This new strategic plan is called the ONB Way. I'll share more details later in my remarks, but some of the initial charges related to implementation are included in our fourth quarter earnings. Starting with Slide 3, our fourth quarter net income is $49.2 million including $8.4 million in charges from the ONB Way as well as merger charges. Adjusted net income was higher at $55.2 million. As you review our results, you will see that our core margin is stable despite the Fed fund rate cut in September and October and a challenging yield curve. Credit quality remained strong. We recorded $1.3 million of provision, our net charge-offs were $3.6 million. The higher net charge-offs were primarily a result of a single credit that was previously reserved for in prior quarters. Non-accrual loans declined nicely in the quarter and year-over-year. As I've said in prior quarters, while our credit quality is strong, we are not immune from losses. We're still watching a small number of credits, but I'm not losing sleep over credit today. We saw record commercial production for the quarter and strong core deposit growth. Importantly, we also effectively manage our cost of total deposits lower by 9 basis points to 43 basis points and reported strong year-over-year operating leverage and efficiency ratio…

Thank you, Jim. Turning to the quarter on Slide 6, our GAAP earnings per share was $0.29 and adjusted earnings per share was $0.32. Adjusted earnings per share excludes $8.2 million in ONB Way related charges, $250,000 in merger related charges, as well as $400,000 in debt securities gains. Moving to Slide 7, our quarterly adjusted pretax pre-provision net revenue was 10% higher and up a notable 23% for the full year. This result was driven by increased scale from our recent Minnesota partnership, our strong low cost deposit base, and a continued focus on expense management. We also improved operating leverage by strong 636 basis points year-over-year. Slide 8, shows the trend in outstanding loans. As Jim referenced, our commercial loan production of 681 million was the largest in our company's history. We ended the quarter with a record $2.2 billion pipeline and good momentum heading into 2020. Persistently high levels of prepayments has helped commercial outstandings flat despite our third consecutive quarter of record production. As expected, September and October rate cuts loan portfolio yields excluding accretion is down 14 basis points in the fourth quarter. Production yields in the fourth quarter were 3.76% which reflects the lower long term rate environment and we expect will continue to put pressure on asset yields. Moving to Slide 9, both period-end and average deposits increased during the quarter. Our total cost to deposits declined 9 basis points quarter-over-quarter to a very low 43 basis points. We are pleased with the results of our deposit pricing strategy that has resulted in a meaningful reduction in deposit costs while simultaneously growing our core deposit base. With a little over $1 billion in deposits indexed to fed funds and proactive management of exception price book we are confident in our ability to manage…

Thanks Brendon. Turning to Slide 18, I want to share some details on the ONB Way. In May we started with the performance improvement diagnostic to define our go-forward strategy and identify revenue and efficiency opportunities across the bank. In August of 2019 we set out to build a Bankable Plan that would deliver three key objectives. First, transform Old National into a leading commercially-oriented regional bank with a distinctive client-centric value proposition delivered through a segment-focused organization. Secondly, lay the foundation to be a top performing independent bank by streamlining our operating model and strengthening their risk and credit processes to provide a seamless client experience. Thirdly, improve our operating leverage, invest in our operational IT infrastructure to meet our clients where they are and ensure they were keeping pace with technologies and client digital expectation through a balanced portfolio of revenue and cost initiatives, to help us deliver top-quartile performance. We have now entered the implementation phase to capture the value identified in the design phase. We have over 800 milestones with 60 total initiatives. We anticipate the execution lasting one to two years. We have communicated the impacts for the ONB Way changes to our team members last week including the 31 branch consolidations. We plan to also hold an Investor Day on May 13 in Indianapolis to provide more details and share updates on our progress. Moving to Slide 19, let me share our vision for the ONB Way. We will be a leading commercially-oriented regional bank with a distinctive client-centric value proposition based on strong relationships, streamlined operating model, and an exceptional work environment that empowers our team members to deliver their best. Moving to Slide 20, let me share some key organizational structure changes for the ONB Way. Historically, Old National has been organized…

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

Good morning, Mr. Siefers.

Good morning, guys, how is everything going?

Fantastic.

Good, good. Just want to make sure I understand the expense opportunities on Slide 22 and gentlemen I think you said this, so I just want to make sure I am crystal clear. All the, you know, if we look the walk, the $5 million, $7 million, $9 million throughout 2020 and then the $40 million in full year 2021 benefits, those are all expenses which are net of revenue opportunities right? So that's all in other words anticipated to drop to the bottom line, is that the right way of looking at it?

Yes, they are all expense savings opportunities, which include any required investment to achieve those expense saving opportunities. We haven’t included any revenue synergies this year, primarily because those will be de minimis this year, but we expect the impact to really start achieving that in 2021.

Okay, all right, perfect. So, that's good news. And then may be just a separate question on sort of run rate stuff. So the margin on a core basis came in better than I would have thought this quarter. I know you mentioned in your prepared remarks or Brendon did, the shape of the yield curve being the factor that would cause further compression. But I guess I'm just thinking given that the compression wasn’t as bad as feared in the fourth quarter, what the main puts and takes would really be as you look out going forward?

Yes, I'll may be give you a high level, I'll let Brendon come in where I don’t get it exactly right. You know, I mean given the shape of the yield curve loan yields are continuing to be under a little bit of pressure here. We will continue to look for ways to offset that through deposit side, but as our deposit costs have come so low, it just, it is going to be hard to keep up with the changes in the yield curve and those are really the puts and takes is just how much the yield curve continues to change and evolve and how much pressure that puts on continuing loan yields.

Okay.

And Jim, I mean Scott the only thing I might add to that just a reminder, we still have a number of CDs that will be maturing over the next year, almost 75% of our CDs mature in one year about a third of those mature in Q1. So there is some leverage there. We still have an exception, the fixed exception price book that we can push on. So we have some leverage on the funding side that we'll continue to go after, but it is really around new production yields relative to our portfolio yields that will continue to put pressure.

All right, perfect. 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, everybody. Thanks for the question. Jim, I want to come back to the efficiency program, just to make sure I understand it. I think in your remarks you multiple times talked about operating leverage and you talked about the efficiency improvement the bank made over the last couple of years. If I'm thinking kind of in terms of efficiency ratio, you've been in the high 50s - if you are – somewhat 58 to 60. Assuming that Fed doesn’t move and just kind of rate is kind of the equalizer here, how do we think about this program in the context of efficiency? Is this a program to try to maintain efficiency at these levels or drive the efficiency ratio lower?

Yes, you know, I think it is all about the context right, in which how much revenue pressure we have from lower margins, from additional Fed rate actions. Right? I mean regardless of what the economic environment or interest rate environment was going to be this year, we want to accomplish this program for so many reasons. Right? It is the right program to do. It is the right evolution of our company at this time. On top of that this happens to be a more challenging interest rate environment for the industry, and so for us I hope ultimately will lead to operating improvement and efficiency ratio improvements, but I really cannot predict what's going to happen with interest rates this year and the shape of the yield curve continues to be frustrating. All those things I think will help offset any impacts from a challenging rate environment. But long term the whole idea is to drive further operating improvements and efficiency ratio improvements.

Okay. And may be actually [Indiscernible]

I'm sorry, that's before the revenue impact. Again, I am more excited about what those potential revenue impacts look like for us starting in 2021.

Great, if I could just add one more Jim?

Yes.

You guys had historically kept expense growth at or below inflation, I'm just trying to attack it from a different angle. The $40 million that you are talking about for 2021, is – I'm just trying have a kind of ballpark for a run rate of dollars, because of I think the big wildcard, is the expectation that your core expenses would be down in 2021 relative to 2020 as you kind of hit full steam or is this a way to come back to some of the inflationary technology investments or stuff like that? I'm just trying to get a ballpark of what the expense growth rate may be?

Yes, maybe we've done a pretty good job of wanting to keep these expenses below inflation and we'll continue to do that. Obviously it will benefit in 2021 versus 2020 in terms of additional expense saving dollars. You know, we don’t think you guys have the expenses too far off in the model when you adjust for the ONB Way, you adjust for the tax credit amortization that Brendon talked about and I feel like the expenses, you guys have a consensus makes sense to us. But again, I would also point out that and we'll provide further updates in May, but these revenue initiatives do require new people, some additional technology, and so there'll be some expenses related to that. But on a net basis, it should all improve the bottom line and improve the operating leverage of the company.

Okay, and so that expense that you're referring to a consensus, so if I look at consensus, 2020, 2021 expenses, you're saying, what's this announcement? You feel good about that or with this announcement you should do better than the consensus number?

I'm saying in 2020 the expense number seemed to be on the right trajectory of where we think minus those adjustments we just talked about. And our goal is to again further drive improved operating leverage, and so we'll continue to watch expenses and year-over-year from 2021 to 2020 our expenses should be better.

Got it. That's helpful. Thanks.

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

Good morning, Terry.

Hi, good morning. Sorry to have to start with the CECL question, but I'm going to. As you transition the $2.3 billion of acquired loans from call it a PCI world to a PCD world, there should be an impact to net interest income and I'm just not sure if you've yet quantified what that impact would be. And if so, kind of discuss maybe your high level thoughts on CECL and thanks for the reserve disclosure, but more so on the NII impact?

Yes, Terry it’s Brendon. We don't have a lot of accretive impact related to that movement. It's a relatively small bucket. The march on those shouldn't have a huge material impact you are going run right around it, around accretion. We've calculated that and it's relatively, relatively small. I think other institutions might have a slightly larger impact than us or on that number.

Okay and then the reserves on acquired loans, that percentage, I'm guessing is higher than the core portfolio. So my question is, as we move forward and the acquired loans continue to come down, should the reserve ratio to total loans, should that come down as well?

So if you take the $2.3 billion, which you're right, Terry does have a higher mix of commercial. So the general impact of CECL might be a slightly higher reserve, but that is embedded in that $35 million to $45 million range that we provided. Should you take that and add it to our current reserve, that should give you a pretty good idea of what the reserve level will be going forward. And then it'll all depend, provision will all depend on through the mix of our production heading in Terry, production will be a little higher, mortgage will be a little lower.

And then a question for Jim, if I think about what Bob did at Old National moved from a community bank to a super community bank. Today, we're talking about moving from that super community bank to a regional bank. I guess what were some of the risks that you discussed internally as it relates to what this could mean to the commercial bank and the community bank as well, given that the very strong deposit base that comes through the community bank?

Yes, let me first start with, at our heart, we are a community bank. We continue to be involved in our communities. We think we're better at it than most banks are in terms of how we continue to support our communities and how we continue to serve our clients. So that really doesn't change, regardless of the ONB Way. Having said that, as we get bigger, and our clients are more diverse, and we're more spread farther apart, we recognize the need that our platform maybe wasn't as scalable as it was under that more geography centric structure. It was hard for Jim to tack on another region with another CEO, some more presence on top of that, that became more challenging for us. And so we think this new structure, we've broken the company up into three primary segments that takes off with clients, and then support that with our operations in IT and finance functions, all makes a lot of sense to us. And we think this is pretty typical of banks of our size when they get to this point where they have to think about the evolution of its structure. I'm also really excited about some of the talent we're able to bring to the organization. When we're out telling our story, whether it's the individual relationship managers and markets, or whether it's to senior leaders in our company, people are pretty excited about the story here at Old National and they see this as a place of them being successful. And I think this organizational structure helps us support that. And then we're also obviously able to generate a savings that we're reinvesting back in ourselves and better technology to make the organization more efficient, but also improve our client offering. So I think this is just a natural evolution for where Old National has been over 185 years, but I also think that it makes the platform more scalable for us going forward.

That's great. Thanks, everyone.

Good question, Terry.

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

Mr. Siefers?

Hey, thanks for taking the follow-up. Just want to drill down into the expense base in the fourth quarter of 2019 for a bit. It came in a little higher than I had anticipated and you guys called out the incentive comp for example, how much of that ends up indeed being transitory, in other words comes kind of immediately back down and how much is this sort of a start, if at all is higher sort of structural level for a bank [ph] ?

Sure, Brendon will walk you through the changes.

Yes Scott. Most of that $4 million would walk right back down in the first quarter. What you'll see though, is then we'll be adding in payroll taxes and then merit in the second quarter. As Jim mentioned earlier, we feel pretty good around the consensus estimates, excluding the ONB Way initiatives that are out there for the full-year 2020. If you back off the $22 million we expect in 2020 related to ONB Way and then adjust for the $13 million in tax credit amortization, that gets you to a pretty good view of how we’re looking at expenses next year.

Okay, perfect. And then just on the tax credit amortization, I could be mistaken, right? I thought we were sort of stepping back from that business and the next year it will be much bigger. What are sort of the dynamics around that?

Yes we had, we're not stepping back from that business. But there is a certain type of federal historic tax credit. That's a one-year deal that creates this kind of volatility that we're talking about today. We have a handful of credits that originated sometime ago that will be running through this year. This is the last of these tax credits, they're no longer available to be done going forward. So this is the last of that.

Okay.

Scott, these are projects that we're working on for, there's a long runway for these projects. And these projects were the last of those projects and quite frankly, the last of the one-year that were even eligible to be done. So we hope through this fund structure we talked about before will create less volatility, that fund continues to get bigger. But these are the last of those kind of one-year deals that unfortunately, we just have to push through with this accounting.

Yes, okay, that makes sense. Thank you. And then just in terms of how the impacts will flow throughout 2020, is that going to be kind of evenly through the year or will there be lumpiness?

Good question. A bulk of it actually comes in the first half of the year, again but again, these are historic deals. So you have to get certificates of occupancy and things like that. And so those things could, there could be some timing push from 2Q to 3Q. But I think a bulk of that stuff to happen in the first half of the year. But again those tax, the tax rate effect is a full-year tax rate effect, but a bulk of the expenses actually come through when they get this place in the surface and we think that's going to be in the first half of the year with a little bit tailing in the third and fourth quarter.

Okay, perfect. Thank you guys very much.

Good questions Scott, thanks.

[Operator Instructions] Your next question comes from the line of Kevin Swanson with Hovde Group.

Hi Kevin, good morning.

Good morning. I appreciate the comments on M&A. But just curious on your thoughts around some of the larger community bank and regionals teaming up through MOEs and kind of the transactions being generally more accepted?

Yes, I think there's a little bit of a mixed track record here on some of those transactions and we continue to look at all forms of M&A as you would expect us to do. And for us, Plan A is to continue to do the types of deals we've done which is to continue to expand our footprint, build scale in existing footprint, try and drive efficiencies out of that scale. That would be Plan A. But as you would imagine, our Board looks at all types of transactions and we'll continue to look at those opportunities as they evolve. But as I said earlier, I mean those transact - any transaction has a higher hurdle today, given our focus on needing to achieve the initiatives and milestones embedded within the ONB Way.

Most of my other questions are answered, but maybe just one more. It looked like in a period basis, indirect increased a little bit this quarter. Is that just a timing issue or is there a change in the thought on that portfolio?

Yes, no change in thought. It’s just that portfolio ebbs and flows and sometimes you have more rundown than others, it just happened to be a little bit higher production on a net basis.

Got it, thanks guys.

Thanks.

You have a follow-up question from the line of Chris McGratty with KBW.

Yes sir?

Yes, thanks Jim. Just to make sure I’m clear on the expenses. Slide 22 where you give the one-time charges for 2020 and also the benefit, the recurring benefit, Brendon was your comment that you're comfortable with 2020 consensus? I think you said excluding the M and implementation charges or is it including the, what it looks like $20 million or a little over $20 million of benefit?

We're comfortable with the consensus kind of on a standalone basis and then you can add in the impact on Slide 22 plus the tax credit amortization. Is that clear?

Okay. So comfortable with consensus, but then if you hit the $15.79 million per quarter, we would need to reduce the expenses by that amount. Is that what you're saying?

Yes, you take that expense line and then you can subtract the consensus estimates and then you can subtract the full-year $22 million benefit from ONB Way.

Okay, so you're comfortable with where it was prior to the announcement and the announcement helps that?

Yes.

That’s great. All right, thank you.

Thanks Chris.

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

Thanks everybody for the support. We appreciate the extra time you spent with us this morning. As usual, Lynell, and Brendon, and Jim, and Daryl, everybody is here for follow-up questions. Thank you so 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 5278346. This replay will be available through February 4. If anyone has additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call.