Old National Bancorp

Welcome to the Old National Bank Corp second 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 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 impressive second quarter earnings and announced the appointment of Tim Burke as our new president and COO. Today is Tim's first day with us, and we've opted not to include him on the call to allow him time to get oriented. Mark Sanders' last day is also today. Mark will always be a part of the Old National family, and I am incredibly grateful for his partnership. Thank you, Mark. We wish you the absolute best in retirement. Tim and his family are relocating from Northeast Ohio, and he has dedicated nearly 30 years of his banking career to serving clients and communities right here in the Midwest. Most recently, he held an executive position at a super regional bank where he oversaw a comprehensive range of commercial banking services, across 12 Midwestern markets, including those in Illinois, Indiana, and Michigan. I am confident that Tim possesses the experience, energy, optimism, and passion necessary to ensure that Old Nashville continues to outperform our peers, exceed our clients' expectations, strengthen our communities, and deliver outstanding returns for our shareholders. I look forward to the positive impact that he will undoubtedly make in the months and years to come. Now back to our quarter results. We met or exceeded all of our previous guidance for the second quarter. These impressive results were driven by a strong focus on the fundamentals, growing our balance sheet, improving our fee-based businesses, and maintaining well-controlled expenses. Furthermore, we were pleased to close our partnership with Bremer Bank ahead of schedule on May 1st. We remain on track for the systems conversion of Bremer to occur in mid-October. Net charge-offs fell within our expected range, We made meaningful progress in portfolio management by reducing legacy criticized and classified assets by 9% and improving our allowance for credit losses by 8 basis points to 1.24%. Our CET1 ratio was better than expected at 10.74%. Our tangible book value increased by 14% year over year, despite the impact of our Bremer partnership. In a moment, John will walk you through the quarterly results in more detail. We have also provided information regarding the merger accounting associated with Bremer. John will compare our modeled expectations at announcement to where we stood at closing. Across the board, our expected results are better than our original expectations. We have a long history of meeting or exceeding our merger model assumptions, and this partnership is no exception. In summary, we are well positioned for the remainder of the year, benefiting from a larger balance sheet and a stronger capital position. Our second quarter results demonstrate our ability to deliver consistent, high-quality earnings in any environment, and our newest partner further strengthens our position. With over 190 years of experience navigating uncertainty, we are committed to controlling what we can to exceed the expectations of our clients, communities, and shareholders. Thank you. I will now turn the call over to John to discuss the quarter results in more detail.

Thanks, Jim. Beginning on slide four, we reported GAAP 2Q earnings per share of $0.34. Excluding $0.19 of net merger related expenses, adjusted earnings per share were $0.53, which is an 18% increase over the prior quarter and a 15% increase year over year. Net merger related expenses include the following pre-tax items. $76 million of CECL day one non-PCD provision expense, and $41 million of merger charges, partially offset by a $21 million gain associated with freezing the legacy Bremer pension plan. Results were driven by the additional two months of Bremer operations, organic growth in loans and deposits, margin expansion, growth in fee income, and well-controlled expenses. Credit remained benign with a reduction in legacy-criticized and classified loans and normalized levels of charge-offs. Our return profile as measured on assets and on tangible common equity remained high. Lastly, our capital position is solid with CET1 at 10.47%, approximately 50 basis points higher than we expected. On slide five, you can see our quarterly balance sheet trends, highlighting stability in our liquidity and our strong capital position. Our balance sheet also reflects the close of the Bremer partnership on May 1st. On a combined basis, our deposit growth over the last year has continued to allow us to fund our loan growth. We grew tangible book value per share by 14% over the last year, even with the impact of the Bremer close reflected in this quarter's numbers. A favorable stock price, lower rate marks, and organic capital generation between announcement and close, combined with strong retained earnings at Bremer and the day one repositioning of their securities portfolio, all contributed to the higher than expected CET1 ratio. Given our capital levels are higher than we modeled at the time we announced Bremer last November, we have significant flexibility around our balance sheet, leaving us in a position to retain all CRE loans that we had originally contemplated selling. On slide six, we show trends in our earning assets. Period end loans increased $11.5 billion. Excluding Bremer, total loans grew 3.7% annualized from last quarter, which was in line with our 2Q guidance. Production for the quarter was strong throughout our commercial book, which drove 4.6% annualized growth in this portfolio, excluding Bremer. Of note, our CRE book was down, and this quarter was particularly strong for CNI. 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 $3.4 billion from the prior quarter due primarily to Bremer, as well as the reinvestment of cash flows and payroll changes in fair values. Shortly after deal closing, we repositioned Bremer's investments, which improved our total portfolio yield duration and risk-weighted assets. We expect approximately $2.3 billion in cash flow over the next 12 months. Today, new money yields are approximately 110 basis points above back book yields on securities, as the repositioning of the Bremer book lifted our back book. Will we pricing 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 continue to grow in the second half of 2025? Moving to slide seven, we show trends in deposits. Total deposits increased $13.3 billion and core deposits ex-brokered increased $11.6 billion. Excluding Bremer, core deposits were up just under 1% annualized. Non-interest bearing deposits represent 25% of core deposits, up 2% from first quarter levels. Business non-interest bearing and public funds increased, while community deposits had normal seasonal outflows related to tax payments. Our brokered deposits increased due to Bremer, and at 6% of total deposits, our use of brokered continues to be below peer levels. The loan deposit ratio was 88%, down 1% from last quarter. With respect to deposit costs, The two basis point link quarter increase in our cost of total deposits played out as we expected due to the close of Bremer. Our spot rate on total deposits at June 30th was 193 basis points. Moreover, our exception price deposits, which now include Bremer, represent 36% of total deposits. Overall, we remain confident in the execution of our deposit strategy. We are prepared to proactively respond to the potentially evolving rate environment while staying on offense with new and existing clients to drive above pure deposit growth at reasonable costs. Slide eight shows our quarterly income statement trends. As I mentioned earlier, adjusted earnings per share were 53 cents for the quarter with all key line items in line or modestly better than our prior guidance. Moving on to slide nine, we present details of our net interest income and margin. That interest income and margin increased as we had expected and guided, driven primarily by Bremer, organic loan growth, and repositioning of the Bremer securities portfolio. Slide 10 shows trends in adjusted non-interest income, which was $112 million for the quarter. All line items showed increases reflecting Bremer and organic growth in our primary fee businesses. On an organic basis, we were pleased with our growth in wealth, mortgage, and capital markets. Continuing to slide 11, we show the trend in adjusted non-interest expenses of $344 million for the quarter, reflective of two months of Bremer operations. Run rate expenses remain well controlled, and we generated positive operating leverage year over year. On slide 12, we present our credit trends. Total net charge-offs were 24 basis points, or 21 basis points, excluding charge-offs on PCD loans. Our non-accrual loans as a percentage of total loans declined five bips during the quarter. Importantly and positively, criticized and classified loans decreased $254 million, or approximately 9%, excluding Bremer, reflective of the focus on active portfolio management that we have discussed in prior calls. The fourth quarter allowance for credit losses to total loans, including the reserve for unfunded commitments, was 124 basis points, Up eight basis points for the prior quarter, primarily driven by Bremer. Consistent with the first quarter, our qualitative reserves incorporate a 100% weighting on the Moody's S2 scenario with additional qualitative factors to capture global economic uncertainty. Slide 13 presents key credit metrics relative to peers. Our proactive approach to credit monitoring has led to above peer levels of non-accruals, but below peer averages in delinquency and charge-off ratios 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 non-accrual to NCO conversion rates. It is also worth noting that roughly 60% of our non-accruals are from acquired books with appropriate reserves and or marks. In addition, roughly 60% of our non-accrual loans are paying principal and interest or interest only, And approximately half of our classified and criticized assets are in commercial real estate, where we continue to have confidence in collateral values and the quality of our sponsors. On slide 14, we review our capital position at the end of the quarter. All regulatory ratios decreased linked quarter due to the close of the Bremer partnership. As already explained, our CET1 ratio of 10.74% came in approximately 50 basis points stronger than we had expected post-Bremer. TANGIBLE BOOK VALUE PER SHARE WAS UP 14% YEAR OVER YEAR, AND WE EXPECT AOCI TO IMPROVE APPROXIMATELY 6% OR $37 MILLION BY YEAR END. SLIDE 15 PROVIDES A COMPARISON OF OUR BRAMER PARTNERSHIP ASSUMPTIONS AT ANNOUNCEMENT FIRST CLOSE. OVERALL, WE CLOSED TWO MONTHS EARLIER THAN EXPECTED, ADDING TO OUR 2025 EARNINGS MOMENTUM WITH FINANCIAL METRICS TRACKING TO EXCEED THE EXPECTATIONS WE SET AT ANNOUNCEMENT. Higher capital and lower purchase accounting marks shortened the TBV earn back by approximately half a year, and as we look to 2026, a larger balance sheet with the $2.4 billion in CRE that we had previously contemplated selling is expected to offset the lower marks from an earnings perspective. As previously mentioned, we restructured the majority of Bremer's $3.4 billion securities box. This action increased the book yield from 2.85% to 5.54%, reduced total duration from 6.4% to 4.7%, and improved RWA density from 19% to 13%. This is now cash yield as opposed to accounting yield. A quick word on loan accretion income. We view the rate component as locked in and repeatable, similar to how we would think about the accretion in our investment portfolio if we had decided not to restructure that book. The credit marks added only one basis point to our net interest margin this quarter. Old national legacy loan yields were up 10 bps, and even with the newly marked Bremer loans reflected in our numbers, our current origination yields are 65 basis points above our back book yields. Tom Connelly, slide 16 includes updated details on our rate risk position and net interest income guidance, reflecting the close of grammar on May 1. Tom Connelly, And I is expected to increase on the addition of grammar the benefit of fixed asset repricing and continued growth. Tom Connelly, Our assumptions are listed on the slide, but I would highlight a few of the primary drivers first we assume to cuts of 25 basis points each which 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 data to be approximately 40%, which is in line with our terminal operate data. 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 And the addition of Bremer did not materially alter our rate risk position. Slide 17 includes our outlook for the third quarter and full year 2025. With the exception of loan growth, all guidance includes Bremer. We believe our current pipeline support full year loan growth excluding the impact of Bremer of 4 to 6%, but likely toward the lower end of that range given first half results, current competition, the uncertain geopolitical environment, and active portfolio management. 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. Note that we have increased NII and fee income guidance with our other lines unchanged. At the midpoint of the ranges, you'll also see 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 economic and trade activity and a macroeconomic outlook, which has dragged on longer than we would have hoped, could widen the range of possible outcomes this year with respect to both growth and rates. That said, our larger balance sheet with the Bremer Partnership creates a meaningful positive offset. In summary, echoing Jim's opening comments, we had a strong first half of 2025. We remained on offense with growth in both loans and deposits. We showcased growth in fee income and disciplined expense management. We continued to execute against our deposit pricing strategy, and we maintained strong credit quality. Finally, we closed our Bremer partnership two months earlier than originally expected on May 1st and welcomed our newest team members and clients. I joined Jim in welcoming Tim Burke to Old National. Look forward to partnering with him to continue driving the success of the organization. With those comments, I'd like to open the call for your questions.