First Midwest Bancorp, Inc.

Old National Bancorp fourth quarter and full year 2024 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 statements 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 containing non-GAAP measures, which management believes will 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 Old National's chairman and CEO, Jim Ryan, for opening remarks. Mr. Ryan?

Good morning. Old National reported strong results for the fourth quarter and the full year this morning. In 2024, we successfully navigated a challenging environment while maintaining an offensive growth strategy, investing in client-facing and key support talent, and remaining opportunistic for new acquisitions. Our basic banking strategy has served us well. A hallmark of this strategy is our focus on low-cost core deposits, which grew by approximately 10% in 2024, funding a corresponding 10% growth in loans. Since 2022, total deposits and loans have experienced a compounded annual growth rate of 8%. Our total cost of deposits finished the year at 1.93%, driven by a 93% down beta on our exception price deposits. Our peer-leading deposit franchise, disciplined loan growth, strong credit quality, well-managed expenses, and dedicated team members who are committed to serving our clients and communities enabled us to exceed our expectations that we set as we began 2024. Our full-year results can be found on slide four. Gap earnings per common share for the year were $1.68, with adjusted earnings per common share of $1.86. Our adjusted return on average tangible common equity was 16.9%, and our adjusted return on average assets was 1.14%. Notably, the adjusted efficiency ratio stood at 52%. At the same time, our net charge-offs were low at 17 basis points. Our tangible book value per share also grew by 8% year over year, and our total shareholder returns significantly outperformed the KRX and our executive peer group in 2024. During the first half of 2024, we successfully closed and converted Capstar Bank and Old National Bank, strengthening our presence in Nashville and other high-growth southeastern markets. Later in the year, we announced our partnership with Bremer Bank, enhancing our presence in the Upper Midwest and expanding our footprint across Minnesota, North Dakota, and Wisconsin. We have recently filed our S4 with the SEC and our regulatory applications to the OCC and the Federal Reserve in connection with our partnership. A forthcoming community growth plan will accompany this partnership, too. After a recent visit with Bremer team members, I can report the genuine enthusiasm for our combination, and we are excited to collaborate with the executive team and our new team members as we start the integration process. We still anticipate closing the partnership by mid-year and completing our integration in the latter half of the year, with 100% of the cost savings projected to be realized in 2026. In summary, our 2024 EPS results were more resilient than most peers in a challenging year, thanks to our relentless focus on fundamentals, growth of core deposits, strong underwriting practices, and disciplined expense management. John will provide our official 2025 outlook at the end of his prepared remarks. Looking ahead, I'm confident in our ability to navigate changes in short-term interest rates, shifts in the yield curve, and overall economic conditions as we have for the past 190 years. I want to take a moment to discuss two leadership changes announced in this morning's news release. As mentioned in the release, our President and COO, Mark Sander, will retire on June 30th. Mark has been an invaluable partner over the past few years. Although my time working alongside Mark has been brief compared to his lengthy and distinguished career, his steady leadership has played a significant role in Old National's transformation into a high-performing bank. He has helped solidify our position as one of the premier banks in the country. I would also like to acknowledge Mark's lasting impact on the Chicagoland community, where he's been a prominent banking leader and a dedicated community advocate. On behalf of all of us at Old National, I express our gratitude for his daily embodiment of our organizational values. We have begun searching for Mark's successor and will consider internal and external candidates. Additionally, we announced today that Dan Herman, a highly respected business leader and a significant contributor to our corporate board for the past five years, has succeeded Becky Skillman as our lead independent director. On behalf of our executive leadership team and the board, I want to thank Becky for invaluable guidance in this role since 2016. On a personal note, she has been an exceptional mentor and partner during my tenure as CEO. I'm pleased to share that she will continue to serve as a key member of our corporate board. I want to emphasize how fortunate we are to have Dan as our lead independent director. He brings a wealth of leadership experience, and I'm confident that our board will continue to excel under his guidance, providing strong support to our executive leadership team. Thank you. With that, I will now turn the call over to John to discuss the core results in more detail.

Thanks, Jim. Turning to slide five, we reported GAAP 4Q earnings per share of 47 cents. Excluding two cents per share of merger charges, adjusted earnings per share were 49 cents. Results were driven by net interest income and margin that were in line with our expectations. strong fee income, and a favorable tax rate partially offset by incentive true-ups. Credit remained benign with normalized levels of charge-offs, and our return profile as measured on assets and on tangible common equity remained high. On slide six, you can see our fourth quarter balance sheet, which highlights stability in our liquidity and continued improvement in our capital position. Total deposit growth over the last year has again allowed us to organically fund loan growth while minimizing borrowing. Since 2022, our 8% CAGR in both loans and deposits has exceeded H8 industry growth. As Jim mentioned, we grew our tangible book value per share by 8% over the last year. We also accreted nearly 70 basis points of CET1 for the year, ending 2024 with a strong CET1 ratio of 11.38%. We continue to expect that we will accrete capital at a faster pace than most. These liquidity and capital levels continue to provide a strong foundation which strengthens our position as we begin 2025. On slide seven, we show trends in our earning assets. Total loans decreased 1.6% annualized from last quarter with strong production in our commercial book offset by $600 million of outsized payoffs and lower line utilization. For the full year, we saw total loans grow 10% or 4% excluding Capstar. Quarterly new loan production rates are in the 7% range, and marginal funding costs are in the high 3% range. The investment portfolio was consistent with the prior quarter, and duration is now just over four. We have approximately $1.5 billion in cash flow expected over the next 12 months. Today, new money yields are currently running approximately 180 basis points above back book yields on securities and fixed rate loans. The repricing dynamics in both loans and securities support our expectation that net interest margin will be stable to improving in 2025. Moving to slide 8, we show our trend in total deposits. Core deposits, ex-brokered, continued to grow and were up nearly 2% annualized as we remain focused on growth in this key funding source. Non-interest bearing deposits were 24% of core deposits consistent with third quarter levels. Private banking and community deposits were up during the quarter while public funds saw normal seasonal decreases. Our brokered deposits decreased approximately $200 million and at 3.7% as a percentage of total deposits, our use of brokered remains less than half peer levels. The total loan to deposit ratio was 89% consistent with last quarter. With respect to deposit costs, the 17 basis point decrease in deposit rates compared to the prior quarter played out as we expected. and total deposit costs steadily decreased in the quarter consistent with Fed actions. Our spot rate on total deposits at December 31st was 193 basis points. Moreover, our exception price deposits have experienced a 93% down beta since we started lowering rates in that book in early 2Q. Our fourth quarter total deposit beta came in at 28%, which was in line with our expectations and accelerated over the course of the quarter. Overall, we are highly confident in the execution of our deposit strategy, and it continues to unfold as expected. We are prepared to proactively respond to future Fed actions and the evolving environment while staying focused on driving above-peer deposit growth at reasonable costs. As we have mentioned in past calls, we remain front-footed with respect to client acquisition. Slide 9 provides our quarter-end income statement. We reported gap net income applicable to common shares of $150 million, or 47 cents per share. Excluding $0.02 per share of merger-related expenses, our adjusted earnings per share were $0.49. A quick note on taxes. This quarter included additional tax credit benefits, which were partially offset in the operating expense line and also benefited from the resolution of certain tax matters. Without those items, our FTE tax rate would have been in line with the 25% we had guided. Moving on to slide 10, we present details of our net interest income and margins. Net interest income was relatively stable, as expected, and net interest margin was likewise flattish as lower deposit costs and higher accretion were offset by increased paydowns and lower line utilization. Year over year, we again showed deposit growth that essentially kept pace with asset generation while maintaining a low total cost of funding. Slide 11 shows trends in adjusted non-interest income, which was $96 million for the quarter and above our expectations. Our primary fee businesses performed well with wealth, mortgage, and bank fees ahead of expectations, while capital markets declined as a result of lower CRE production. Other income benefited from $8 million of discrete items. As a reminder, looking back to third quarter, other income was also elevated by approximately $3 million, primarily related to market valuation gains. Continuing to slide 12, we show the trend in adjusted non-interest expenses of $269 million for the quarter. This was slightly higher than expectations due to a $5 million year-to-date performance-driven incentive accrual true-up, as well as $1.2 million in higher tax credit amortization that is offset within the tax line that I mentioned earlier. Run rate expenses remain well controlled, and we again generated positive linked quarter operating leverage. On slide 13, we present our credit trends, which reflect the quality of both our commercial and consumer portfolios. Total net charge-offs were 21 basis points and a low 17 basis points, excluding four basis points related to PCD loans. The non-performing loan ratio and delinquency ratios were relatively stable from last quarter. The fourth quarter allowance for credit losses to total loans, including the reserve for unfunded commitments, was 114 basis points, up two basis points from the prior quarter. Consistent with third quarter, our qualitative reserves incorporate a 100% weighting on the Moody's S2 scenario, with additional qualitative factors to capture the possibility of grade migration. Also, we remind you that our allowance for credit losses plus the discount remaining on acquired loans, the total loans, now stands at nearly 160 basis points. Slide 14 presents key credit metrics relative to peers. We remind you again that our proactive approach to credit monitoring has led to above peer levels of NPLs, but delinquency and charge-off ratios that are below peer averages over time. We have long practiced conservatism here, and we continue to believe that the results will speak for themselves. On slide 15, we review our capital position at the end of the quarter. Again, all regulatory ratios increased, driven by strong retained earnings. The increase in rates at the intermediate points of the yield curve led to a modest decrease in TCE and tangible book value per share, given a $142 million linked quarter AOCI headwind. Despite that headwind, tangible book value was up 8% year over year, and we expect AOCI to improve approximately 15% or $110 million over the next 12 months. Slide 16 includes updated details on our rate risk position and net interest income guidance. NII is expected to be relatively stable in the first half of 2025, excluding the impact of two fewer days in the first quarter, and then increasing in the back half of the year with the benefit of fixed asset repricing, growth, and the anticipated closing of our Bremer partnership. Our assumptions are listed on the slide, but I would highlight a few of the primary drivers. First, we assume two rate cuts of 25 basis points each, which is one cut more than the current forward curve. Second, we anticipate our total deposit beta to accelerate from 28% in 4Q to approximately 40% as we move through 2025, in line with our terminal up betas. we expect the non-interest bearing mix to remain stable at 24% of total core deposits. Importantly, our guidance would be unchanged for one cut or no cuts as our balance sheet remains neutrally positioned. On slide 17, we include our outlook for the first quarter and full year 2025. With the exception of loan growth, all guidance includes Bremer and assumes a July 1st close. We believe current pipelines support full year long growth of four to 6%, which is expected to ramp up over the course of the year. We anticipate continued success in the execution of our deposit strategy and expect to meet or exceed industry growth in 2025. Other key line items are highlighted on the slide. At the midpoint of the range on these lines, you'll note that we expect full year results that yield earnings per share above the current analyst consensus estimates, and again, feature positive operating leverage a peer-leading return profile, good growth in fees, controlled expenses, and normalized credit. In summary, 2024 results were excellent, with run rate and fourth quarter results in line with our expectations. We remained on offense and we continued to demonstrate our ability to execute against strategic priorities. First, we organically grew deposits at a sufficient pace to fund our asset generation. Both deposits and loans were ahead of overall industry growth rates. Our adjusted return profile remains top quartile against peers at 17% on tangible common equity. Third, we remain disciplined on expenses, driving positive operating leverage and an adjusted efficiency ratio in the low 50s. Fourth, our credit remained resilient, and we believe we have ample reserve coverage along with a well-diversified and granular loan book. And fifth, we are continuing to compound tangible book value per share, which was up 8% year over year. With those comments, I'd like to open the call for questions.