Old National Bancorp

Ladies and gentlemen, welcome to the Old National Bank Corp third quarter 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 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 Old National's Chairman and CEO, Jim Ryan, for opening remarks. Mr. Ryan?

Good morning. Earlier today, Old National reported our third quarter 2024 results with earnings per share in line with expectations. These solid third quarter results were driven by our ability to execute on our organic growth strategy and invest in new markets and talent in our footprint. Our results were also driven by the strong organic deposit growth, prudent loan growth, durable margin management, and focused efforts in growing our fee income businesses. Moving to our third quarter highlights on slide four, we reported GAAP earnings of 44 cents per common share and our adjusted EPS was 46 cents. Our adjusted ROA TCE for the quarter was 16.8% and our adjusted ROA was 1.13%. Our adjusted efficiency ratio was a low 51.2%. Our core deposit growth was strong at 10.1% annualized with our non-interest-bearing deposits growing nearly 100 million during the quarter. Our total cost of deposits for the quarter remains at a low 225 basis points, and we were already taking advantage of recent Fed actions, which John will touch on later in his comments. Meanwhile, our commercial loans were up 4.1% annualized due to disciplined client selection. Growing our tangible common book value per share remains a top priority rising 8% since the second quarter of 2024 and 21% year-over-year. In summary, our third quarter 2024 earnings evidence another strong quarter for Old National. We remain focused on the fundamentals, continue to fund loan growth with low-cost core deposits, effectively managing credit, creating positive operating leverage through disciplined expense management, and consistently growing tangible book value per share. With that, I will now turn the call over to John Moran.

Thanks, Jim. Turning to slide five, you can see our third quarter balance sheet, which highlights continued improvement in our liquidity and our capital position. Total deposit growth over the last year has again allowed us to organically fund loan growth while reducing our borrowings. As Jim just mentioned, we grew our tangible book value per share by 21% over the last year, and by 8% from the prior quarter. We ended the quarter with a strong CET1 ratio of 11%, and we continue to expect that we will accrete capital at a faster pace than most. Our liquidity and capital levels continue to provide a strong foundation, which positions us well as we finish 2024. On slide six, we show our earning asset trends. Total loans grew 2.7% annualized from last quarter, in line with industry performance, with strong production in our commercial book in the quarter, partly offset by payoffs. We remain focused on full relationships and structure at prices that meet our risk-adjusted return requirements. Quarterly new loan production rates in the mid-7% range and marginal funding costs in the low 4% range support our expectation that net interest income will grow modestly in 4Q24. The investment portfolio increased 3% in the quarter due to reinvestment of cash flows and positive changes in fair values with duration decreasing to just under 4 years. We have approximately 2Billion dollars in cash flows expected over the next 12 months. New money yields are currently running approximately 110 basis points above back book yields on securities and approximately 175 basis points above back book yields on fixed rate loans. Moving to slide seven, we show our trend in total deposits, which grew 8.5% annualized from QQ. Core deposits ex-brokered were up an even better 10% annualized, and we saw a nearly $100 million increase in non-interest-bearing deposits in the quarter. Commercial and community deposits were up, and public funds saw normal seasonal increases. Our brokered deposits decreased, and at 4.2% as a percentage of total deposits, our use of brokered remains well below peer levels. We did see a nine basis point increase in deposit rates compared to the prior quarter as we remained on offense with respect to client acquisition, and we drove our loan to deposit ratio below 90%. Total deposit costs decreased in September consistent with Fed actions, and our spot rate at September 30th was 212 basis points. Moreover, our exception price book has seen a 90% down beta since we started lowering rates in that book in early 2Q. This was in line with our expectations. Overall, we are highly confident in the execution of our deposit strategy, and it continues to unfold as we expected. We are prepared to proactively respond to future Fed rate actions and the evolving environment while staying focused on driving above-peer deposit growth at reasonable costs. Slide 8 provides our quarter-end income statement. We reported GAAP net income applicable to common shares of $140 million for 44 cents per share. Reported earnings include two cents per share of merger-related and separation expenses. Excluding these items, our adjusted earnings per share was 46 cents. Moving on to slide nine, we present details of our net interest income and margin. Net interest income grew as expected, while net interest margin was essentially unchanged as increases in asset yields and accretion were offset by deposit costs. Year over year, we again showed deposit growth that essentially kept pace with asset generation while maintaining a low total cost of funding. Slide 10 shows trends in adjusted non-interest income, which was $94 million for the quarter and above our expectations. Our primary fee businesses all performed well with bank fees ahead of expectations, mortgage benefiting from seasonality and a modest improvement in production, and capital markets benefiting from CRE production. Continuing to slide 11, we show the trend in adjusted non-interest expenses of $263 million for the quarter. Expenses remain well controlled, and we generated positive linked quarter operating leverage. On slide 12, we present our credit trends, which reflect the quality of both our commercial and consumer portfolios. Total net charge-offs were 19 basis points and a low 16 basis points, excluding three basis points related to BCD loans. The non-performing loan ratio increased eight basis points due mostly to poor borrowers in unrelated sectors that we are actively monitoring. The third quarter allowance for credit losses to total loans, including the reserve for unfunded commitments was 112 basis points, up four basis points from the prior quarter. Risk rating migration over the last several quarters has been driven by the effects of higher interest rates and a more conservative posture in our risk rating framework. While the grade migration has resulted in an increase in our quantitative reserves, our total qualitative reserves are unchanged from the prior quarter. Qualitative reserves now incorporate a 100% weighting on the Moody's S2 scenario, with additional qualitative factors to capture the possibility of further grade migration. This is logical as greater conviction comes into focus that a hard landing scenario is unlikely. Moreover, the S2 scenario assumes an unemployment rate that is 70% higher than current levels and negative GDP. Also, we remind you that our allowance for credit losses plus the discount remaining on acquired loans to total loans now stands at nearly 160 basis points. Slide 13 presents key credit metrics relative to peers. As you can see, our proactive approach to credit monitoring has led to above-peer levels of NPLs, but delinquency and charge-off ratios that are well below peer averages over time. We have long practiced conservatism, and we continue to believe that the results speak for themselves. On slide 14, we review our capital position at the end of the quarter. All ratios increase, driven by strong retained earnings. In addition, the rate environment further aided TCE build. Slide 15 includes updated details on our rate risk position and net interest income guidance. NII is expected to increase modestly in the fourth quarter. 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 consistent with the forward curve. Second, we are now anticipating a declining rate total deposit beta of approximately 30% and a non-interest bearing to total deposit mix that remains stable at 24%. We continue to believe that we have positioned the balance sheet well, and we have maintained our neutral rate risk position. Slide 16 includes our outlook for the fourth quarter and the full year of 2024. You can see the details in the chart, but it is worth pointing out that our full year outlook for pre-provisioned net revenue remains unchanged from the initial expectations we shared with you in January of this year, and our outlook proved more durable than many peers. Full-year loan growth and NII are expected to be right in line with those original expectations, while higher fee income is expected to be partially offset by higher non-interest expenses. Net charge-offs are in line with our original range, while provision expense is slightly higher than originally expected as a result of grade migration driven by our proactive approach to credit management. In summary, year-to-date 2024 results have been excellent with third quarter results in line with our expectations and strong performance metrics. More importantly, we continue to demonstrate our ability to execute against our strategic priorities. First, we are driving organic deposit growth to fund our asset generation. Second, 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 of 51%. Fourth, our borrowers remain resilient, as evidenced by non-PCV net charge-offs of just 16 basis points, and we believe we have ample reserve coverage along with a well-diversified and granular loan bulk. And fifth, we are continuing to rapidly compound tangible book value per share, which was up 21% year over year. With those comments, we'd like to open the call for your questions.