Old National Bancorp

Welcome to the Old National Bancorp Second Quarter Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. The audio webcast and 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 Nationals Chairman and CEO Jim Ryan for opening remarks. Mr. Ryan?

Good morning. Earlier today, Old National reported record second quarter results for 2026. In short, this was an exceptional quarter for Old National. We achieved record adjusted EPS along with record net income and a record efficiency ratio. We also generated approximately a 20% adjusted return on average tangible common equity and adjusted ROA of 1.39% and continue to produce strong profitable growth across our company. These results show what happens when we stay focused on the fundamentals, growing high-quality relationships, maintaining disciplined credit and expense management, investing in talent and technology, and building tangible book value over time. The strength of our franchise was clear throughout the quarter. End-of-period loans increased by $1 billion or 8% annualized, driven by robust, high-quality commercial productions. Commercial production reached $3.5 billion and our period-end commercial pipeline hit a new record of 5.6 billion. We remain actively focused on winning new business where we can develop full relationships, meet our return expectations, and maintain the strong credit profile that has long been a hallmark of Old National. Fee income was another bright spot. We experienced broad-based strength across all fee businesses. This diversification is intentional. As we grow, we are building a stronger, more balanced earnings engine that is less reliant on net interest income. We also continue to demonstrate strong operational discipline. We delivered record gap and adjusted efficiency ratios with the adjusted ratio at 45.2%, marking our seventh straight quarter of positive year-over-year operating leverage. We are investing in technology, AI, and process improvements to make Old National More scalable while remaining disciplined with expenses. That balance is key. We are investing for growth while maintaining operational efficiency. Credit quality remains a key strength. Non-accruals decreased by $50 million or 10% from the prior quarter and net charge-offs were consistent with our expectations. We stay diligent and proactive in managing credit. Our loan portfolio is well diversified, our underwriting standards remain rigorous, and we believe our straightforward community banking model positions us well through economic cycles. Our capital position continues to be strong. Tangible book value per share increased 14% year over year, our CET1 ratio was 11.09%, and we returned $163 million of capital to shareholders through dividends and buybacks. We will continue to approach capital allocation carefully, supporting organic growth, investing in the business, maintaining strong capital levels, and returning capital to shareholders. In summary, this was a record-breaking quarter and another clear example of Old National successfully executing its organic growth strategy. We delivered strong loan growth, broad base fee income, record efficiency, solid credit metrics, and returned significant capital back to our shareholders. Thank you for joining us today.

Thanks. As Jim mentioned and as summarized on slide four, we delivered a record quarter driven by strong organic loan growth, disciplined expense management, stable credit performance, and increased capital return. Beginning on slide five, we reported GAAP 2Q earnings per share of 65 cents. Excluding $12.1 million in merger-related expenses and a $13.2 million valuation gain on the settlement of the Bremer pension plan, adjusted earnings per share were also 65 cents. Results were driven by better than expected loan growth and strong fee income, along with well-controlled expenses. Credit remained stable with 22 basis points of non-PCD charge-offs. Our profitability profile, as measured by return on assets and on tangible common equity, remained top decile versus our peers. Capital finished the quarter with CET1 over 11%, and we grew tangible book value per share 11% annualized from the prior quarter and 14% year over year. We delivered this growth even as we absorbed Bremer one-time charges, generated better than expected balance sheet growth in the first half of the year, and returned capital. Specifically, during the second quarter, we returned a total of $163 million to shareholders in the form of increased cash dividends and share repurchases. On slide six, you can see our quarterly balance sheet trends underscoring continued strength in our liquidity and capital positions. Our loan-to-deposit ratio increased modestly to 91%, and the CET1 ratio remains above 11%. We compounded tangible book value per share year over year despite the impact of the Bremer merger charges over the past year and the increased pace of capital return. We repurchased $107 million or 4.4 million shares during the current quarter and 10.5 million shares over the last year. With dividends and repurchases, our combined payout ratio was 65% of 2Q net income to common. As we've stated in the last several quarters, the best investment we can make today continues to be in ourselves. On slide seven, we show trends in earning assets. Total loans grew 8.3% annualized from last quarter, led by balanced growth in both our CRE and our CNI portfolios. Production was also diversified across our commercial book and predominantly floating rate. Thank you so much for joining us. Strong loan growth, ongoing repricing across both loans and securities, and continued deposit pricing discipline supports net interest income growth over the course of 2026. On the NIM, I would point out that 2Q margin was impacted two basis points by the full quarter effect of our sub-debt issuance in late January and lower SOFR rates during the quarter, without which margin would have been up slightly. Moving to slide eight, we show trends in deposits. Total deposits increased 3.4% annualized, primarily driven by commercial and public fund growth, partly offset by seasonal tax outflows in retail deposits. Non-interest-bearing deposits remain 23% of total deposits consistent with the prior quarter, and like our loan pipelines, deposit pipelines remain very healthy. We were able to decrease total deposit costs by one basis point and lowered interest-bearing deposits a similar one basis point linked quarter, all while remaining on offense with respect to client acquisition in a competitive deposit environment. Overall, our deposit pricing strategy continues to perform as we expected. Slide nine shows our quarterly income statement trends. As I mentioned earlier, adjusted earnings per share were a record 65 cents for the quarter and our profitability remains peer-leading. Moving on to slide 10, we present details of our net interest income and margin, both of which reflect my prior comments around the full quarter impact of our sub debt issuance and lower SOFA rates in the quarter. We anticipate growth in NII dollars to be supported by strong asset generation, stable funding costs, and fixed asset repricing. Also, the combination of our higher floating rate production and earning asset remix opportunities positions us well. Slide 11, shows trends in adjusted non-interest income, which was $140 million a quarter, exceeding our guidance. We saw better than expected performance within all our fee businesses. The other income line was elevated this quarter by approximately $10 million due to market value adjustments, higher BOLI income, and an asset recovery. While these items are core, we would expect this line to run rate closer to 1Q levels for the balance of the year. Continuing to slide 12, adjusted non-interest expense was $360 million for the quarter. Run rate expenses remained well controlled, driving positive operating leverage both quarter over quarter and year over year while delivering a record low 45% efficiency ratio. On slide 13, we present our credit trends. Total net charge-offs were 26 basis points or 22 basis points excluding charge-offs on PCD loans. Criticized and classified loans declined $109 million this quarter, while non-accrual loans decreased to 91 basis points of total loans, marking several quarters of improving performance driven by active portfolio management. The second quarter's allowance for credit losses to total loans, including the reserve for unfunded commitments, was 121 basis points, down one basis point from the prior quarter, primarily driven by charge us on PCD loans and improved credit quality. Our qualitative reserves continue to incorporate a 100% weighting on the Moody's S2 scenario with additional qualitative factors to capture global economic uncertainty. Slide 14 presents key credit metrics relative to peers. We have continued to experience a lower conversion rate of NPLs to NCOs as compared to our peers, which is driven by our approach to client selection on the front end and credit workouts on the back end. We remain comfortable around the credit outlook. On slide 15, you can see our strong capital position at the end of the quarter. Tangible book value per share was up 11% annualized link quarter and 14% year over year. Regulatory ratios and TCE remain stable link quarter with strong earnings absorbed by quarterly loan growth and continued share repurchases. As previously mentioned, we repurchased $107 million of common stock during the second quarter, and we have $277 million remaining under our program. We continue to believe we would see approximately 100 basis points of capital benefit under the proposed Basel III capital rule changes. These changes, if finalized, would obviously increase capital flexibility. Slide 16 includes our outlook for the full year 2026. While our overall expectations remain largely unchanged, we have increased our loan growth and non-interest income guidance from the prior outlook provided. We believe our year-to-date results and current pipeline support full year-long growth of 6% to 8%. Our NII guidance is unchanged but updated for the impact of our sub-debt issuance. The exact path of NIM and NII in the back half of the year will obviously be dependent on growth dynamics, the shape of the yield curve, the absolute level of rates in the middle of the curve, and the competitive deposit landscape. Our base case outlook assumes no Fed rate actions this year and a stable five-year treasury. Given our strong loan growth outlook, our ability to effectively manage our funding costs, ongoing fixed asset repricing, and earning asset remix opportunities, we believe our balance sheet is well positioned and we see more opportunities than challenges in the back half of the year. We have increased our non-interest income guidance to reflect two cues outperformance and expect our core fee businesses to continue to perform well. Our outlook for expenses, credit, and tax rates are all unchanged. In addition, we expect to fully utilize the remaining buyback authorization opportunistically over the course of the current plan period, which runs through the end of February 2027. In aggregate, You'll note that we continue to expect full year results that yield 15% plus growth in earnings per share and again feature positive operating leverage with peer leading profitability, good growth in fees, controlled expenses, and normalized credit. To close, our first half performance underscores the strength of our franchise, the consistency of our execution, and the durability of our business model. Organic loan growth remains strong, pipelines are at record levels, and credit performance continues to be stable. Our fee businesses are performing well and our continued focus on efficiency and profitability gives us the flexibility to invest in the franchise while returning capital to shareholders. As Jim said at the top of the call, Old National enters the second half of 2026 with strong momentum and increased conviction in our ability to execute. With those comments, I'd like to open the call for your questions.