Welcome to the Old National Bancorp Fourth Quarter and Full Year 2023 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 CEO, Jim Ryan for opening remarks. Mr. Ryan?

Good morning. Old National reported strong fourth quarter and record full year results earlier this morning. During 2023, we successfully navigated a challenging interest rate environment, along with industry-wide liquidity pressures earlier in the year. At Old National, executing our basic banking strategy served us well. In fact, our 2023 adjusted EPS, return on average tangible common equity and efficiency ratio were the best in our nearly 190-year history. Tangible book value per share also grew by 17% year-over-year combined with our roughly 3.7% average dividend yield gave shareholders a strong return for the year. Our peer-leading deposit franchise disciplined loan growth, strong credit quality and well-managed expenses and dedicated team members who are committed to our clients and communities drove these outstanding results. While many in our industry spent the year on defense, we remain on the offense by continuing to invest in new client-facing and key support talent and being ready and opportunistic for acquisitions as evidenced by our recently announced CapStar Bank partnership which will expand our franchise to the highly dynamic markets of Nashville, broader Tennessee and Asheville, North Carolina. I will share more details about our progress with the strategic partnership later in my comments. Starting on Slide 5, GAAP earnings for the year were $1.94 and adjusted EPS was a record of $2.05 per common share, representing a 5% increase year-over-year. Our adjusted return on average tangible common equity and efficiency ratio were records at 21.3% and 50.4%, respectively. Adjusted ROA was a strong 1.28%. Moving to Slide 6, we reported GAAP earnings for the fourth quarter of $0.44 per common share. Our adjusted EPS was $0.46 per common share, and our adjusted results included higher than run rate costs related to a true-up of the accrual for the annual short-term incentive plan and…

Thanks, Jim. Beginning on Slide 7, we present our fourth quarter balance sheet, which highlights improvements in both liquidity and capital positions. Our fourth quarter core deposit growth has allowed us to organically fund loan growth and continue to reduce wholesale borrowings and broker deposits. We ended the year with a strong CET1 ratio of 10.7%, and we continue to accrete capital at a faster pace than most through the combination of our better-than-peer return profile and our at peer payout ratio. Tangible book value per share grew 11% quarter-over-quarter and 17% year-over-year due to strong earnings and a 24% improvement in AOCI. Overall, improvements in our liquidity and capital levels allowed us to stay on the offense in 2023, and our Q4 performance only strengthens our position as we begin 2024. On Slide 8, we present the trend in total loan growth and portfolio yields. Total loans grew in line with our expectations, and we remain focused on full relationships and structure at a price that meets our risk-adjusted return requirements. The investment portfolio increased during the quarter, largely due to changes in fair values. Please note that we did execute a small loss trade on $41 million of securities with an earn back inside of one year. Moving to Slide 9, we show our trend in total deposits, which were stable quarter-over-quarter, including $340 million of normal seasonal public fund outflows and a $164 million decrease in broker deposits. Our broker deposits as a percentage of total deposits is now 2.7%, which is well below peers. We experienced strong growth in both personal and business accounts largely through CD and money market promotions. New checking account acquisition was strong and continues to outpace attrition. However, migration to higher-yielding products continues to impact the growth in this category. We…

[Operator Instructions] Our first question will come from the line of Scott Siefers with Piper Sandler. Please go ahead.

Good morning, everybody. Thanks for taking the question.

Good morning, Scott. Good to hear from you.

You too. Thank you. Brendon, I wanted to ask you about some of the nuance in the NII. So it looks like NII should drop in the first quarter, which is great. Maybe I was hoping you can discuss some of the puts and takes. Obviously, day count becomes a factor in the first quarter, but maybe sort of the interplay with how the margin fits in there. And then I think that you said the margin might expand in the second half, if I heard that correctly. Maybe just some thoughts as we go forward.

Sure, Scott. Yes, so we're looking at approximately a 10 basis point decline in net interest margin into Q1 levels off from there and probably grow a little in the back half. Obviously, as we get three rate cuts and as we position the balance sheet accordingly, we don't think we'll get a lot of impact from -- or negative impact from rate cuts in the back half and then we get the benefit of all the fixed asset repricing and the growth, both organic and from CapStar in the back half of '24.

Perfect. And then I guess, along the lines of sort of underlying loan growth, you've got the to expectations. Maybe just some thoughts on how that evolves through the year. Industry trends have, of course, been pretty soft, but I think you guys have gotten at least your fair share, if not a little more of any opportunities that are out there. So maybe just sort of your thoughts on how things trend including demand through the year.

I think you summarized it well, Scott. I mean, as much as loan demand has slowed somewhat, customers are still feeling okay. C&I clients are, I would say, cautiously optimistic for '24. Financials are holding up well. Employment levels are keeping consumer spending at solid levels. And -- but again, I think that most of them think growth is going to slow a little bit in '24. And CRE activity, of course, slowed at the end of last year as expected as we guided to, but it's begun to pick up a little bit. Competitors are getting more active. And as much as that still has to play out. There's -- rents are holding up well in the segments that we're active in multifamily and industrial.

Perfect. Okay, good. Thank you, guys, very much.

Thanks, Scott.

Your next question comes from the line of Terry McEvoy with Stephens. Please go ahead.

Thanks. Good morning, everybody.

Good morning, Terry.

Maybe first question, could you maybe expand on the $5 billion of time deposits repricing over the next year? I'm seeing kind of brokered CDs were over five other times or just below four. And it looks like the seven-month promo is about 4.75%. So what are your underlying assumptions there?

Yes. So a lot of these CDs, I'm going to say 87% -- not almost, but exactly 87% of our time deposits will mature within the next 12 months. I think you have the weighted average rate really close in that four handle. And so we'll have the opportunity to reprice a bulk of the CDs lower throughout the year. In fact, the repricing characteristics actually gives us an opportunity to refresh those most of those early in the first half of '24.

And then maybe just stepping out of the model for a bit, Jim, we're hearing the word scale more and more from banks with assets, call it over $100 billion or over $250 billion. So my question is, how are you thinking about scale as a $50 billion bank and your ability to compete with community banks as well as the larger banks?

Terry, I really think we're in a sweet spot. We're big enough to be relevant and compete for almost any client situation in the markets we serve. We're not so big that we get in our own way sometimes as you get bigger, we know that happens. We're close to our clients, we're nimble, we're fast, we're opportunistic. We can reach out and touch our clients and touch our team members on a regular basis. I really like the size we're at today. And given where we're operating on an efficiency ratio basis, I think we're operating fairly efficiently. So I'm really happy with where we're at and don't see any need to do anything dramatically different than where we're at today.

Great. Thanks for taking my questions.

Thanks, Terry. Good to hear from you, and hope you're staying warm.

Your next question comes from the line of Chris McGratty with KBW. Please go ahead.

Oh, great. Good morning.

Good morning, Chris.

Maybe a question on credit. You still have 5% PCD mark from First Midwest. How should we be thinking about portfolios that you're maybe watching a little bit more closely going into 2024? Any derisking or exits or tweaking that needs to happen? And just kind of broader credit commentary. Thanks.

Yes. We feel good about where we are with credit, certainly, Chris -- this is Mark. We saw a little further modest risk rate of migration in Q4, but consistent with a little bit of a slowdown and more limited growth. I mean, we feel good about where our portfolio is at, there are certain areas we're watching more closely, obviously, CRE office, like everyone, and that will remain to be play out. Senior housing is something that is slowly recovering, but -- portfolio quality there, we feel really good about. So no real changes in our underwriting and feel really good about where we're at.

Great. Thanks. And then maybe, Brendon, a question just on the balance sheet. How do we think about maybe adding bonds at this point to reduce more rate sensitivity, just overall size of earning assets for 2024?

Yes. Great question. So I think there's some opportunities and work to do on our rate risk position that will include likely some reinvestment of cash flows in the invest portfolio and probably adding some to floating rate debt to offset. So I think that would enhance our rate risk position and not have a negative impact on net interest income.

Okay. But just beyond the maturing cash flows in the bond book, will the bond book grow in absolute basis or just...

No, not expected to grow, but I do think we'll start to replace it and hold it at approximately these levels.

Okay, great. Thank you.

Your next question comes from the line of Brody Preston with UBS. Please go ahead.

Hey, good morning, everybody. Thanks for taking my questions.

Good morning, Brody.

Jim, I don't know -- I guess I'll speak for Terry and say we're both called up here in Maine.

I appreciate it.

I just wanted to ask on the -- running on the nuances of the deposit beta commentary. So we're going to peak at 39%, is that happening in 1Q? And then the declining to a total beta of the low 20s by '24, feels a bit more conservative than what some of your larger peers have kind of outlined in terms of talking about pretty aggressive down betas within their NII guide. I guess what makes you feel more conservative when you talk about your beta?

Yes, sure. I'll answer the first part of that first. So we think our deposit beta peaks on the up cycle, not until 2Q, although kind of a very slight modest kind of quarter-over-quarter impact on total deposit costs in our model. On the back half, we didn't go up a side. We have 35% of our book as exception priced. We think we can drive a really strong beta down on that side. But I also think deposits are still really valuable. And we got to pay attention to maintaining and continuing to grow deposits to continue to take advantage of lending opportunities. And I think that probably informs the more conservative guide on the way down.

Okay, got it. And I wanted to just also ask on the securities. Could you remind us, I think you have over $1 billion in securities that are set to mature or reprice in 2024. Would you plan on kind of running those down and using it to fund the good loan growth that you've talked about in the guidance?

I think a little bit of a mix, Brody. Certainly, we will start to reinvest some of the cash flows off that book and that will come at a positive spread of about 150 basis points. And we'll see how the rest of the year plays out. And a lot of that is dependent on our ability to continue to grow the cost as well and then ultimately, the loan demand.

Got it. And if I could just sneak one more in, the $2.5 billion of balance sheet hedges that you have are -- just to clarify, are those -- is that just on the loan book? And then do you have any maturities of swaps occurring in '24 or '25 that are meaningful that we need to be aware about?

Yes. So it's a mix on both the investment portfolio and on our loan. We don't have a time maturing, we actually had the duration of these put pretty far out as we're trying to -- we didn't want to be too precise on the timing of expectations around rate cuts. So we have sometimes no major maturities or anything rolling off of significance there and probably some more work to do if we're done with the year.

Okay, great. Thank you very much.

Thanks, Brody.

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead.

Thanks. Good morning, everyone.

Good morning, Jon.

A couple of follow-ups. By the way, Slide 16 is really good. That's a great slide. Terry took one of the questions on CD repricing, but you talked about exception pricing on 30% of your deposits. Has that eased at all? Is that just a product of last spring or early summer, is that persisting.

Yes. That's been fairly persistent. We continue to go out there. We've been unapologetically aggressive and gathering new deposits. And so that's creeped up a little bit every quarter. And we'll continue to be aggressive, although we can do that at marginally lower rates in this environment than we have over the last couple of quarters. So we think that exception price or marginal cost will be a little lower than it has been. But that -- yes, that's been a big part of our success this year.

Okay. Slide 19, you talk about your commercial real estate maturing inside of 18 months. And just a small bit of it is you've got that 4% demarcation line, and I understand that. But what is the message here on credit? Is it that we're going to see some incremental NPLs as this stuff gets repriced and reworked or you're just -- you're not seeing that at this point in time?

We're not seeing this at that -- that at this point in time. I think, again, the CRE office still has some time to play out. So could you see some go to criticized and classified. Could you see that increase a little bit? Yes. But we don't -- we think we're ahead of identifying. We like to identify early and aggressively take action. I think that's what we continue to do so we're just trying to size up kind of where some of the risks are, we think they're very manageable.

Okay, good. And then if I can add one more just Jim, anything on CapStar? Anything new to report or updates? And just you put out a date, I know it's difficult, but just confidence level in putting that data out for a close. Thanks.

We feel really good where we stand today, both in terms of the people and the client opportunities. I mean every time we're with our team members, both the existing team members and our new team members. We just feel really good about the opportunities. And I do think some of that growth we're going to experience is going to come out of places like Nashville, Detroit, can't say St. Louis. We've got new team members that we've hired in the last handful of years to continue to execute and create new opportunities for us that just weren't available to us in the past. With respect to the regulatory applications, we feel really good about that. We're in constant dialogue with the regulators. We obviously announced our addendum to our existing community growth plan, which we thought was an important step as a part of the process to get to the finish line here. So I mean it's hard to always predict exactly when you're going to get approval for these things. But nonetheless, we feel really good about where we stand at this point in time. And more importantly, I just think Nashville, Tennessee, the Asheville location will continue to represent a great opportunity for us to grow and probably contribute in the future in a much more meaningful level than even a typical partnership on the size would contribute.

Okay. You've got some new Investor Day, potential locations as well.

I like it.

Thank you.

Thanks, Jon.

There are no further questions at this time. I'd like to turn the call back to Jim Ryan for closing remarks.

Well, as always, we appreciate your support and feedback and the entire team will be available to follow-up any questions you might have. Thank you very much.

This concludes Old National's call. Once again, a replay, along with the presentation slides, will be available for 12 months on the Investor Relations page of Old National's website, oldnational.com. A replay of the call will also be available by dialing 800-770-2030 access code 5258325. This replay will be available through February 6. If anyone has additional questions, please contact Lynell Durchholz at 812-464-1366. Thank you for your participation in today's conference call. You may now disconnect.