Old National Bancorp

Welcome to the Old National Bancorp third 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. Thank you for joining us. Thank you for joining us. Good morning. Good morning.

Earlier today, Old Nash reported another record quarter with third quarter EPS of 66 cents and new records in net income, adjusted diluted EPS, and adjusted efficiency ratio. These results reflect the strength of our franchise and disciplined execution of our strategy. Growing profitable relationships, funding that growth of core deposits, maintaining strong credit standards, and operating efficiently. Growth remained healthy and balanced with strong deposit growth and continued expansion of both C&I and CRE lending. Active portfolio management moderated reported loan growth during the quarter. Despite the increased competition, we remained disciplined and pursued opportunities that met our pricing, relationship, and credit hurdles. These results reflect our consistent focus on full relationships, sensible pricing, strong underwriting, and core deposit funding. Revenue trends remain constructive with continued growth in net interest income and broadly stable fee income performance. As John will discuss, we believe the current rate environment is modestly helpful to net interest margin going forward. Operating discipline remained a clear strength. We delivered record efficiency while reducing adjusted expenses from the prior quarter, even as we continued to invest in technology, AI, process improvements, and talent. This balance supports strong current returns and durable shareholder value. Credit quality remains stable and consistent with our expectations. We continue to manage credit proactively, maintain rigorous underwriting standards and stay close to our clients. Our diversified portfolio and straightforward banking model continue to serve us well. Our capital position remains strong, supported by continued significant capital generation and tangible book value growth. Thank you for joining us today. Two in Cleveland and two in Columbus. Important expansion markets where we believe our brand and go-to-market strategy will resonate. We also added leaders in our fintechs, FX, and food and beverage businesses, broadening capabilities that support key strategic priorities. We are pleased with the caliber of talent we attracted and developed during the quarter. We will continue to invest selectively in high quality bankers and specialized expertise where we see attractive opportunities to drive organic growth, deepen client relationships and expand fee income. In summary, this was another record quarter with disciplined growth, exceptional efficiency, stable credit and strong capital. We remain focused on the fundamentals that create durable shareholder value, profitable organic growth, deeper client relationships, disciplined investment, and strong risk management. I want to thank our team members for their continued commitment to our clients and one another. With that, I'll turn the call over to John to discuss the quarter's financial results in more detail.

As Jim mentioned, we delivered a strong quarter, highlighted by record earnings and efficiency, very strong deposit growth, and many more. We also reported balance loan growth, disciplined expense management, stable credit performance and meaningful capital return to shareholders. Beginning on slide five, we reported GAAP 3Q earnings per share of 66 cents. Less than $1 million of merger related expenses were offset by a similarly sized valuation gain on the settlement of the legacy Bremer pension plan. Excluding these, our adjusted earnings per share were also 66 cents. Results were driven by strong deposit and disciplined loan growth, and well-controlled expenses. Credit remained normalized with 24 basis points of non-PCD charge-offs. Our profitability profile remained top decile as compared to our peers with return on assets of 1.37% and return on tangible common equity of 19.6%. Capital finished the quarter with CET1 over 11% and we grew tangible book value per share 5% year over year. but for the impact of higher rates on AOCI, tangible book value would have increased an even stronger 13% annualized from the prior quarter. We continued to return capital to shareholders through cash dividends and share repurchases in the third quarter with a combined payout ratio of 62% of net income to common. On slide six, you can see our quarterly balance sheet trends underscoring continued strength in our liquidity and capital positions. Driven by strong deposit growth, our loan to deposit ratio declined to 89% and the CET1 ratio remains above 11%. Again, we compounded tangible book value per share year over year, despite the impact of merger charges and the increased pace of capital return. We repurchased $100 million or 3.9 million shares during the current quarter and $327 million or 13.4 million shares over the last year. As we've stated in the last several quarters, we continue to believe that the best investment we can make today is in ourselves. On slide seven, we show trends in earning assets. Total loans grew 3% annualized from last quarter and 7% annualized year over year. This growth was led by our commercial portfolio with CNI up 12% and CRE up 3% year over year. Production this quarter was balanced across our commercial book and remained predominantly floating rate. The next few quarters should be supported by a pipeline of $4.4 billion, up 6% from a year ago. The investment portfolio declined due to rate-driven market valuation with new purchases coming on at higher yields. We expect $1.8 billion in cash flow over the next 12 months. Today, new money yields are approximately 6%, which are well above backbook yields of 4.2%. Loan growth, ongoing repricing across both loans and securities, and deposit pricing discipline supports continued growth and spread revenue into the fourth quarter. Moving to slide eight, we show trends in deposits. Period end total deposits increased 11% annualized, primarily driven by $1 billion of organic increases in business accounts and seasonal strength in public funds. Non-interest-bearing deposits grew $182 million and represent 22% of total deposits. Like our loan pipelines, deposit pipelines remain healthy. Both total deposit costs and interest-bearing deposit costs increased eight basis points linked quarter. We remained on offense with respect to client acquisition in a competitive deposit environment. The spot rate on total deposits was 187 basis points at September 30th. Overall, our deposit strategy outperformed our expectations even after adjusting for normal seasonal strength in public funds. Slide 9 shows our quarterly income statement trends. As I mentioned earlier, adjusted earnings per share were a record 66 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. NII grew 4% annualized from two Q levels. Total margin was down modestly in the quarter with rate, volume, and day count benefits offset by increased funding costs. We anticipate fourth quarter growth in NII dollars to be supported by continued earning asset generation, disciplined deposit growth, fixed asset repricing, and the slightly higher mix of floating rate loans. We remain well positioned to the forward curve, and based on current spot rates for loans, deposits, and securities, and assuming a static balance sheet, we would expect a two basis point positive impact to margin, all else equal. Slide 11 shows trends in adjusted non-interest income, which was $128 million for the quarter. Core banking, wealth, and capital markets fees continue to perform well, while mortgage fees reflect some softness given the rapidly changing rate environment. Continuing to slide 12, Adjusted non-interest expense was $355 million for the quarter. Run rate expenses remain well controlled, driving positive operating leverage both quarter over quarter and year over year while delivering a record low 44.9% adjusted efficiency ratio. As Jim mentioned up front, we continue to invest in top talent across our footprint in both commercial and wealth. Third quarter saw a strong pull through from the talent pipeline with many of these hires happening late in the quarter. I'll discuss the anticipated expense impact on our outlook slide. On slide 13, we present our credit trends. Total net charge-offs were 27 basis points or 24 basis points excluding charge-offs on PCD loans. Criticized and classified loans declined 9% this quarter and are down 16% from a year ago. Non-accrual loans remained relatively stable linked quarter at 92 basis points of total loans, but are likewise down meaningfully from 123 basis points last year. The third quarter allowance for credit losses to total loans, including the reserve for unfunded commitments, was 120 basis points, down one basis point from the prior quarter, primarily driven by charge-offs on PCD loans and improved credit quality. On slide 14, you can see our strong capital position at the end of the quarter. Tangible book value per share was up 5% year over year. Overall regulatory capital ratios were up modestly linked quarter, with strong earnings absorbed by loan growth and continued share repurchases. Previously mentioned, we repurchased $100 million of common stock during the third quarter, and we have $177 million remaining under our program. Slide 15 includes our outlook for the full year 2026. Our overall expectations remain unchanged from the guidance that we first provided in January of this year. We continue to expect positive operating leverage, growth in tangible book value, and EPS growth exceeding 15%. We expect to achieve these results even as we have navigated a markedly different operating environment over the course of the year and our 2026 estimates proved to be durable. As you can see, we believe our year-to-date results and current pipeline continue to support full-year loan growth of 6% to 8%. You'll recall that we increased this range last quarter given the strong performance in the first half of the year. With three key results and a focus on striking the right balance between growth of full relationships that come with sensible pricing and credit discipline, We now expect mid-single-digit growth for the fourth quarter, which would bring us to the lower end of the annual range. Our NII guidance is unchanged. Obviously, the exact path of NIM and NII in the fourth quarter will be dependent on balance sheet growth dynamics, the shape of the yield curve, the production mix, and the deposit landscape. However, we believe our balance sheet is well-positioned to the forward curve and, as previously mentioned, our spot margin is up slightly from 3Q levels. That said, given the year-to-date results, mathematically we expect full-year NII to come in on the lower end of the stated range, with 4Q NII dollars expected to show continued growth from 3Q levels. Our fee income guidance, which had also been increased earlier in the year, remains unchanged. We expect our core fee businesses to continue to perform well, with mortgage fees softness likely to continue in 4Q amid the rising rate environment and seasonal factors. Our outlook for expenses is likewise unchanged and given year-to-date results is now expected to fall near the lower end of the annual range. Robust hiring at the end of the third quarter is expected to run rate into 4Q and next year. The outlook for credit and tax rates are also unchanged. Finally, we expect to fully utilize the remaining buyback plan opportunistically over the course of the current authorization, which runs through the end of February 2027. In aggregate, We continue to expect 15% plus EPS growth, positive operating leverage, peer leading profitability, normalized credit, and sustained growth in tangible book value per share. Importantly, the durability of that outlook has now been tested across three consecutive quarters of volatility in the operating environment. It is held and it is expected to result in record EPS for 2026. To close, this was a strong quarter for Old National. Record earnings, record efficiency, very robust deposit growth, improving credit trends, and continued capital return. These are not one-time results. They are the direct output of the franchise we have built. A franchise with peer-leading profitability, sustainable growth, a diversified and growing fee income platform, and a capital base that gives us the flexibility to invest in talent and technology while returning meaningful capital to shareholders. We're not just performing well today, We are investing to ensure Old National is an even stronger company in 2027 and beyond. With those comments, I'd like to open the call for your questions.