Old National Bancorp

Welcome to the Old National Banker First Quarter 2025 Earnings Conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FT. 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 would 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 first quarter earnings. These better than expected results demonstrate our ability to navigate a challenging and uncertain economic environment, setting us up favorably as we move into the second quarter, and importantly, as we prepare for the close integration of our partnership with Bremer Bank. Our strong deposit franchise and solid loan growth drove results for the past quarter. Our net interest income and margin performance met expectations. non-interest income benefited from the gain on sale of some previously acquired loans and from higher fees from mortgages and service charges our discipline expense management is reflected in our efficiency ratio net charge-offs were in the expected range and we took the opportunity to increase our allowance for credit loss incorporating global trade and economic uncertainty in our reserve level additionally our tangible book value increased meaningfully compared to both the previous quarter and year-over-year. In summary, our first quarter results showcase our disciplined expense management, our ability to maintain margin through careful deposit pricing, growth in core deposits and loans, and strong credit quality. Despite the uncertain macroeconomic environment, we remain confident in our strength, supported by our robust balance sheet, diverse revenue streams, and resilient Midwest markets. now bolstered by our partner, Bremer Bank. With over 190 years of experience navigating through uncertainty, we are committed to controlling what we can do to serve and support our clients, communities, and shareholders. Before I turn the call over to John, I also want to provide an update on our Bremer Bank partnership. I'm excited to share that we've received all necessary regulatory approvals and anticipate a legal close date of May 1st. We expect conversion of the banking centers and systems to occur in mid-October. We are thrilled to officially welcome our new clients and team members from across the Bremer footprint, including Minnesota, North Dakota and Wisconsin. I've traveled extensively throughout the Bremer footprint, meeting team members and clients, and I'm even more convinced that this partnership will be one of our best. The individuals in these markets are ones we know and appreciate. Not only does this partnership significantly enhance our footprint, providing greater scale and density in the upper Midwest, but it also offers a valuable boost for our balance sheet and earnings growth in an uncertain environment, which should translate into more value creation for our shareholders than the industry can provide today. Thank you. I will now turn the call over to John to discuss the quarter results in more detail.

Thanks, Jim. Turning to slide four, we reported GAAP 1Q earnings per diluted common share of 44 cents. excluding one cent per share of merger-related charges, adjusted earnings per share were 45 cents. Results were driven by growth in loans and deposits, net interest income and margin that were in line with our expectations, stable fee income, controlled expenses, and a favorable tax rate. Credit was benign with normalized levels of charge-offs in our return profile, as measured on assets and on tangible common equity remained high. On slide 5, you can see our quarterly balance sheet trends, which again highlights stability in our liquidity with continued improvement in our capital position. Total deposit growth over the last year has again allowed us to organically fund our loan growth while minimizing our borrowings and broker deposits. We grew our tangible book value per share by 5% as compared to last quarter and by 13% over the last year. We ended the quarter with a strong CET1 ratio of 11.62%, up 86 basis points from a year ago. With capital levels higher than we had originally modeled at the time we announced Bremer last November and rates lower, we have significant flexibility around the size of our contemplated commercial real estate loan sale post-close. On slide six, we show trends in our earning assets. End-of-period total loans increased 1.5% annualized from last quarter, or 2.3%, excluding approximately $70 million of CRE loan sales in the quarter, in line with the lower end of our 1Q guidance. Production for the quarter was strong throughout our commercial book. Quarterly new loan production rates are in the high 6% range and marginal funding costs are in the mid 3% range. The investment portfolio increased 2.6% from prior quarter due to the reinvestment of cash flows and favorable changes in fair values. Duration pulled in modestly linked quarter to just under four. We expect approximately $1.7 billion in cash flow over the next 12 months. Today, new money yields are approximately 150 basis points above back book yields on securities and fixed rate loans. The repricing dynamics in both loans and securities combined with loan growth and the Bremer partnership support our expectation that net interest income and net interest margin will grow in 2025. Moving to slide seven, we show trends in deposits. Total deposits were up 2.1% annualized and core deposits ex-brokered were up nearly 1.7% annualized as we remain focused on growth in this key funding source. Non-interest bearing deposits were 23% of core deposits, relatively stable with fourth quarter levels. Business non-interest bearing in public funds saw normal seasonal outflows while community deposits grew. Our brokered deposits were stable, and at 3.8% as a percentage of total deposits, our use of brokered continues to be less than half peer levels. The loan-to-deposit ratio was 89%, consistent with last quarter. With respect to deposit costs, the 17 basis point linked quarter decrease in our cost of total deposits played out as we expected, and total deposit costs held steady throughout the quarter, consistent with Fed actions. Our spot rate on total deposits at March 31st was 190 basis points. Moreover, our exception price deposits have experienced a 103% down beta since we started lowering rates in that book in early 2Q of 2024. Our cumulative total deposit beta came in at 37%, which was favorable to our expectations. Overall, we remain confident in the execution of our deposit strategy. We are prepared to proactively respond to future Fed rate actions while staying on offense with new and existing clients to drive above peer deposit growth at reasonable costs. Slide 8 shows our quarterly income statement trends. As I mentioned earlier, adjusted earnings per share were 45 cents for the quarter with all key line items in line with our prior guidance. Moving on to slide 9, we present details of our net interest income and margin. Net interest income decreased as we had expected and guided, with net interest margin likewise down modestly due to lower accretion and fewer days in the quarter. Away from accretion and days, net interest margin would have been up six basis points with lower deposit costs, more than offsetting rate and volume dynamics on the asset side. Slide 10 shows trends in adjusted non-interest income, which was $94 million for the quarter and above our guidance. Our primary fee businesses performed well with bank fees showing normal seasonality and wealth, mortgage, and capital markets all stable despite choppy market conditions late in the quarter. Other income benefited $4.8 million from a gain on the previously mentioned sale of approximately $70 million of commercial real estate loans. As a reminder, looking back to fourth quarter, other income was elevated by approximately $8 million of discrete items. Continuing to slide 11, We show the trend in adjusted non-interest expenses of $263 million for the quarter, which was moderately better than our guidance due to lower other expenses, predominantly professional fees, FDIC assessment, and tax credit amortization. Run rate expenses remain well controlled, and we again generated positive linked quarter operating leverage. On slide 12, we present our credit trends. Total net charge-offs were 24 basis points or 21 basis points, excluding three basis points related to PCD loans. The delinquency ratio improved from the fourth quarter while the NPL ratio increased modestly. The fourth quarter allowance for credit losses to total loans, including the reserve for unfunded commitments, was 116 basis points, up two basis points from the prior quarter. Consistent with the fourth quarter, our qualitative reserves incorporate a 100% weighting on the Moody's S2 scenario with additional qualitative factors to capture global trade and economic uncertainty. Also, we remind you that our allowance for credit losses plus the discount remaining on acquired loans to total loans now stands at nearly 150 basis points. Slide 13 presents key credit metrics relative to peers. 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. A steadfast approach to client selection, conservative structuring, and our proactive stance on workouts have long been hallmarks of ONB's credit discipline. This, in part, explains our lower NPL to NCO conversion rates. It is also worth noting that roughly 40% of our NPLs are from acquired books with appropriate reserves and marks. On slide 14, we review our capital position at the end of the quarter. All regulatory ratios increase driven by strong retained earnings. Tangible book value per share was up 5% in the quarter and 13% year over year, and we expect AOCI to improve approximately 10% or $65 million by year end. Slide 15 includes updated details on our rate risk position and net interest income guidance. This guidance continues to include the original M&A marks and $2.4 billion of loan sales, but NII was updated to reflect the close of Bremer on May 1st versus our assumption of July 1st in our prior guidance. Away from this update, our guidance is relatively unchanged with NII expected to increase with the addition of Bremer and with the benefit of fixed asset repricing and growth. Our assumptions are listed on the slide, but I would highlight a few of the primary drivers. First, we assume three rate cuts of 25 basis points each, which generally aligns with the current forward curve. Second, we assume a five-year treasury rate that stabilizes at 4%. Third, we anticipate our total down rate deposit beta to increase from 37% in first quarter to approximately 40% by 2Q, which is in line with our terminal uprate betas. And fourth, we expect the non-interest bearing mix to remain relatively stable as a percentage of core deposits. Importantly, our guidance would be unchanged for one Fed cut or no cuts, as our balance sheet remains neutrally positioned to short-term rates. Slide 16 includes our outlook for the second quarter and full year 2025. With the exception of loan growth, all guidance includes Bremer closing on May 1st, two months earlier than the July 1st assumption in our original 2025 guidance. Again, this guidance continues to include the original M&A marks and $2.4 billion of loan sales. Excluding this update, our guidance is essentially unchanged. We believe our current pipeline support full year long growth, excluding the impact of Bremer of 4 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 the 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 in line with current analyst consensus estimates, and again, feature positive operating leverage and a peer-leading return profile with good growth in fees, controlled expenses, and normalized credit. As we note at the bottom of the slide, uncertainty surrounding global trade and the macroeconomic outlook, if prolonged, could widen the range of possible outcomes this year with respect to both growth and rates. That said, the pending Bremer close creates interesting alternatives. A few thoughts there. As compared to the M&A model assumptions that we presented last November, ONB's capital starting points are almost 30 basis points higher than we had expected. Bremer's underlying performance has also tracked slightly better. ONB stock is lower, and rates are approximately 40 basis points lower across the board, suggesting lower marks all else equal. On balance, this is expected to result in higher legal day one capital levels, creating significant balance sheet optionality. More specifically, while our guidance continues to incorporate up to $2.4 billion of loan sales, we believe more day one capital can support a larger pro forma balance sheet, a tremendous lever to have in a year that looks likely to be more uncertain than we would have guessed when we last spoke in January. We will provide an update to this guidance with two key earnings once we finalize accounting In summary, echoing Jim's opening comments, we had a strong start to 2025. We remained on offense with growth in both loans and deposits. We showcased stability in fee income and disciplined expense management. We continued to execute against our deposit pricing strategy. We maintained strong credit quality. And finally, we anticipate closing our Bremer partnership two months earlier than expected on May 1st and look forward to welcoming our newest team members and clients. Bremer will not only provide greater scale and density in the upper Midwest, but also provides meaningful balance sheet flexibility and earnings growth in an uncertain environment. With those comments, I'd like to open the call for questions.