Welcome to the Old National Bancorp First Quarter 2024 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 and 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, please go ahead.

This morning, Old National reported its first quarter 2024 results. Our peer-leading, low-cost deposit franchise, above-average deposit and loan growth, disciplined expense control, and stable credit performance during the quarter drove these better-than-consensus results and sets us up favorably as we move into the second quarter. Before I delve into the first quarter highlights, I want to underscore the strategic importance of our partnership with Nashville-based CapStar Bank, which we closed on April 1st. Not only has this partnership expanded our franchise to robust and dynamic southeastern markets, but it also accelerates our growth potential. It's a milestone that officially welcomes CapStar clients and team members to our Old National family. CapStar Bank will operate as a division of Old National Bank until the Banking Center and Systems conversions, which we anticipate will occur in the third quarter. Let's focus on our first quarter earnings starting on page four, which have laid a strong foundation for the year. We reported GAAP earnings of $0.40 per common share for the first quarter, and our adjusted EPS was $0.45. Notably, our adjusted earnings per share exceeded consensus estimates by 5%. This accomplishment was driven by above-average deposit loan growth, stable credit performance, and importantly, disciplined expense management, which underscores our financial strength and consistent quality returns. Our adjusted ROATCE for the quarter was 16.7%, and our adjusted ROA was 1.1%. Our adjusted efficiency ratio was a low of 53.4%, despite the challenging interest rate environment. Total deposit growth was 5% annualized during the quarter, despite seasonal outflows by businesses and public sector clients. Loan growth was 7.5% annualized. Our total cost of deposits for the quarter remains at a low 201 basis points. Year-over-year, we saw total deposit growth of 8%, and total loan growth of 6%. Meanwhile, our tangible common book…

Thanks, Jim. Turning to slide five, you can see our first quarter balance sheet, which highlights stability in our liquidity and capital positions. Our first quarter deposit growth has again allowed us to organically fund loan growth while holding our borrowings and brokered deposits consistent. Over the last year, we have grown deposits 8%, 200 basis points faster than our 6% year-over-year loan growth, while increasing tangible book value 11%. We entered the quarter with a strong CET1 ratio of 10.76%, and we continue to expect that we will accrue capital at a faster pace than most through the combination of a better than peer return profile and a targeted 30% dividend payout ratio. Our liquidity and capital levels continue to provide a strong foundation, which positions us well into 2024. On slide six, we show the trend in total loan growth and portfolio yields. Total loans grew 7.5% annualized from last quarter, slightly above our expectations. We remain focused on full relationships and structure at prices that meet our risk-adjusted return requirements. New loan production rates in the high 7% range and marginal funding costs in the low 4% range support our expectation that net interest income has bottomed out in the first quarter. The investment portfolio increased very modestly in the quarter due to reinvestment of cash flows, partly offset by changes in fair values, and the duration was effectively unchanged. As we've mentioned in past calls, new money yields are running 200 basis points above back book yields, and we have approximately $1.3 billion in cash flows expected over the next 12 months. Moving to slide seven, we show our trend in total deposits, which grew 5% annualized from 4Q, despite normal seasonal outflows in public funds and business non-interest bearing. Our broker deposits as a percentage…

We are now opening the floor for question-and-answer session. [Operator Instructions] Our first question comes from Scott Siefers from Piper Sandler. Your line is now open.

Good morning, guys. Thanks for taking the question. Hey, I was hoping first maybe we could discuss some of those deposit pricing metrics, John, that you mentioned, sort of the late first quarter and then the spot rates as well. Just maybe overall competitive dynamics, what's kind of giving you comfort that it sounds like in places you're able to lower rates exactly, just maybe overall competitive and thoughts on your own positioning as well.

Yeah. Thanks, Scott. Look, I'd say it's still a competitive deposit environment out there. We are on offense and we're unapologetic about that. I mean, as long as we can continue to put on good business at incremental margins that make sense, we'll continue to be focused on growing our deposits. We did see costs start to abate late in the quarter, right? And that's what I was kind of getting at with the 205 basis points in March, which was only four basis points higher than average. And our spot rate at March 31st was actually a couple of basis points below that. So, knock on wood, hopefully a little bit less competitive, but we're still on offense.

Okay, perfect. Thanks, John. And then was hoping you could also touch on loan growth a little. I'd say your growth seems to be holding in better than what we're seeing from most peers this quarter. So, just maybe some thoughts on demand, overall customer behavior. You're sort of seeing demand accelerate, decelerate, stay the same, just maybe overall dynamic split.

Hey, Scott, it's Mark. Loan growth came in a little bit above what we expected in Q1, but just a little bit above. And I would say C&I clients are still in a solid position and you're seeing decent demand out there. So, we're not looking for anything robust, but I think we can slightly outgrow the industry, which is what we've put out there. We also had the benefit of some tailwinds from our construction book that funded this quarter and will for the next couple of quarters. So that probably was about half of our loan.

Okay, perfect. All right. Thanks, guys, very much. Appreciate it.

Thanks, Scott.

Our next question comes from Ben Gerlinger from Citi. Your line is now open.

Hi, good morning.

Good morning, Ben.

I just want to touch base on the growth thing again. I get that you guys don't move your credit box. You have the market kind of come to you and kind of where your time to shine is. Is there anything that can be done to potentially exceed the growth guides you had? I mean, from here -- I completely understand you're not changing credit, but like if the market offers because competitors aren't in the market as much, are you seeing risk adjusted yields? Would you be able to grow loans faster than deposits or have the appetite to do so?

We'll continue to have the appetite to grow good, profitable, long-term relationships, and we're very much open for business. And so I'd say the answer to your question is more dependent to some degree on how other competitors, if they have that same kind of view. Some people are a little more closed, I would suggest, than we are. So, I think it's possible, but our 5% to 7% organic growth is a little bit above what we think the industry average will be.

Ben, I would just add, we're going to continue to take advantage of the new talent we've acquired. Some of them are new markets and some of them are existing markets, but each one of them are varying degrees of being onboarded and running through any obligations they have. So, I think there's great opportunity for us to get traction there. And then add on, the closing of our partnership in Tennessee, we think that just offers great opportunities to accelerate their growth, our growth in that marketplace. Obviously, we've got through some systems conversions and things to get through, but the back half of the year, it really should be getting after it. And we're looking to have great growth coming out of Tennessee and Asheville.

Gotcha. And then the other question I had would be more of this high-level on credit. You guys have always done a great job. It's where you hang your hat, to be honest. But when you think about this credit across your footprint, are there any geographies which are experiencing, for lack of a better word, frothy pricing, maybe commercial real estate? Or just are you in a pencil down mode with any CRE type lending products?

No, we're not penciled down, Ben, in any products. Obviously, with the rate environment right now, the numbers just don't work for the same level of -- at the same level that they used to. So CRE volume across our footprint is down just by market dynamics, not because we've changed our underwriting. We're still selectively adding new clients in CRE as well. But certainly more of the growth is going to come in C&I, where we think we're really well positioned.

I would just add, Ben, too, that that comes with full pricing, full relationships as usual. Obviously that discipline has been an important part of how we've been successful. But it's ever so more present today that, we need to ensure that we get our terms. And at our terms, we will continue to take advantage of every opportunity that comes our way.

And with that same underwriting, our terms requires more equity.

Gotcha. All right. Well, I appreciate it. Thanks for your time, guys.

Thanks, Ben.

Our next question comes from Terry McEvoy from Stephens. Your line is now open.

Hi, good morning. Thanks for taking my questions.

Good morning, Terry.

Maybe start with slide 17. Could you just expand on the comments, manageable volume of loans subject to refinance risk? I'm guessing a part of it is multifamily. And maybe while you're at it, if you could comment on multifamily trends that you're seeing in your markets.

So I'll start. Terry, it's Mark. As we say, a manageable level, that it's based on the data that we provided there. We have $2.8 billion come into in the next 18 months. When we underwrite, we stress everything at a 300 basis point cushion. So that's why we show above 4% and less than 4%. So, we have $400 million of loans maturing in the next 18 months that would bump up against our underwriting parameters. I would say of that $400 million, less than half of it is what we really have a keen eye on that might have some stress. So that's why less than $200 million on our portfolio we think is very manageable, I guess, is the comment there. To your question on multifamily, the multifamily in our markets is holding up really well. I don't know how to describe it better than that. We didn't have the highs that some of the coasts perhaps had. And so you're still seeing rent growth. It's modest rent growth, but it's after many years of really strong rent growth that has more than accounted for the increase in expenses that has happened over those years. So we feel really good about our multifamily portfolio.

Thanks. And then as a follow-up, a question on security yields. They were up a basis point quarter-over-quarter. The portfolio was up and new money yields were 561. So I guess what's behind just the slight increase in security yields?

Yeah. The more modest increase was really a chunk of very short-term U.S. Treasuries that matured in the quarter.

And just last, a quick one, the NII bottoming out in the first quarter, John, is that with and without CapStar? I just want to make sure I understand that statement.

Yes.

Perfect. Thanks for taking my question.

Our next question comes from Jon Arfstrom from RBC Capital Markets. Your line is now open.

Hey, thanks. Good morning.

Good morning, Jon.

Hey, good morning. Where are you guys finding opportunities to grow deposit balances and relationships? Can you touch on that?

In every one of our lines of business. So in our consumer business, their primary objectives and goals is active checking accounts. And so it is literally gaining market share one by one on a daily basis and seeing that new accounts opened, exceeding what runs out the door. In commercial, as we said earlier, just we're still very much open for business. So that's when your whole focus is on long-term relationships that require the deposit balances to come with it, it partially self-funds itself. And then our private banking team in wealth has done a really nice job with our money market promotions, getting out there -- getting after it, I guess. Nothing more than good old-fashioned blocking and tackling with a really good team.

Jon, I would just add, starting in the fall of '22, I personally was around the entire company pounding the table saying we are all deposit gatherers. And I don't care whether you're faced off with clients or you're in treasury or you're in marketing, we are all deposit gatherers. And that's been the mantra, which has, I think, helped drive our success.

Okay, good. Fair enough. On non-interest bearing, I know there's some seasonal factors in there, but does it feel like that has bottomed or is close to a bottom, that $9 billion and change?

Yeah. Jon, I feel like we're getting close. It's probably a little early to call the bottom. But what we saw this quarter was January was saw outflows, some of that is seasonal. February, we saw stability and we actually started to grow in March. So we feel good about the guidance that we've got out there. We do think it'll continue to kind of come down a little bit, but not much from here.

Okay, good. And just one more on credit. Thank you for the provision guide. I think that helps. But how do you guys expect the NPL balances to progress throughout the year? Is it safe to assume they're going to continue to go up or is that the wrong read on that?

I wouldn’t assume that, Jon, as we work things through the pipe. We're certainly looking to move things out of NPAs as well and will, I think. So it's hard always to predict when someone isn't going to pay you. But I think we're well ahead of that view, if you can, as much as you can with our quarterly problem asset reviews. So yeah, I wouldn't necessarily assume it's going to go up from here. But certainly, some of the criticized and classifieds will work their way through the pipe over these next 12 to 18 months.

Okay. All right. Thank you, everyone. Appreciate it.

Thanks, Jon.

Our next question comes from Chris McGratty from KBW. Your line is now open.

All right. Good morning.

Good morning, Chris.

Jim or John, we have a question just on slide 15, the outlook. If you kind of zoom out and look at the different line item guides, where do you think that either the biggest opportunity or risk is relative to what you've laid out for us?

Yeah. Chris, I'd say the biggest risk is probably just what happens in terms of non-interest bearing. And again, we feel pretty good that we're bottoming out there based on the trends that we saw in the quarter. But that would be the biggest downside risk. I think the biggest upside risk might be for us on the fee line. I think capital markets was a touch soft this quarter. A few swaps one way or another can make a difference there. And it's hard to kind of get really too excited about mortgage, but pipelines there are up pretty solidly. So maybe we'll have a nice spring selling season here.

Okay. And then maybe, Jim, thoughts on just capital return once you get through the integration? Any thoughts on buyback later in the year?

Yeah. Great, great question. And certainly a topic of conversation around here. I think you're right. I think we're focused on getting through the integration of CapStar, kind of getting a better read on what we think the balance of the year looks like. And then as we get to the back half of the year, I think that could be something that's a serious part of our conversation. Unchecked capital grows pretty quickly. And so I think there'll be opportunities to think about capital a little differently than we have the last couple of years.

Okay. And then maybe final one on a lot of discussion from your peers about derisking. You guys don't have the concentrations. Is there anything in the portfolio that might be being considered to accelerate, just move on and kind of derisk while you could?

From a high level, from my perspective, there's nothing that we need to do different in our portfolio management. Obviously, it's a constant source of conversation around optimization. But usually it means slowing things down, turning things up, than it is about, moving assets off the balance sheet. So while there's always ongoing portfolio management discipline around that, on the margin, we'll continue to have conversations around asset classes. We think we can get the best return for our capital allocation, and we'll make those decisions. But they'll have a de minimis effect quarter in, quarter out.

Okay. Thanks, Jim.

Thanks.

Our next question comes from David Long from Raymond James. Your line is now open.

Good morning, everyone, and thanks for taking my question.

Good morning, David.

Wanted to talk about the non-performing loan line. You were up about 20% in the quarter. I think someone mentioned that maybe there was a few credits involved there, but specifically what's what happened there in the non-performing loan line and to drive it up 20% in the quarter?

David, it's Mark. I think it's just the natural ebb and flow of credit. It was three credits that drove it. The largest was a multifamily property that I'm not worried about, candidly, at all. I don't think there's risk of loss there. And then we had two C&I credits that were not related, not symptomatic of any broader concern. So just episodic three credits.

Got it. Thank you, Mark. And then operating expenses seemed very well managed in the quarter. I know you have CapStar coming on here. But ex-CapStar, what's going on just with the core operating expenses? It seemed better than expected. Were there any -- you highlighted a few items that we took out. Anything else in the quarter that was maybe non-recurring or expenses that maybe you missed out on this quarter?

No, I wouldn't characterize anything as non-recurring in there other than what we had called out separately. It was, as you know, sitting in Chicago, a milder winter. We moved less snow around this winter. That helped. I mean, there's sort of six or seven good guys in there that I would just kind of caution, don't take one Q and run rate it and add CapStar on. I think we have a little bit of lift here in the second quarter, and that's reflected in the guidance.

Got it. Thanks, John. Thanks for taking my questions, guys.

Thanks, David.

Thank you. There are no further questions. At this time, I'd now like to turn back the call to Jim Ryan for closing remarks. End of Q&A:

Well, thank you, Ellie. As always, really appreciate your participation. The whole team's going to be available all day today to take any questions you might have as follow-ups. Thank you so 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 website, oldnational.com. A replay of the call will be also available by dialing 800-770-2030 with access code 399-2332. This replay will be available through May 7th. If anyone has additional questions, please contact Lynell Durchholz at 812-464-1366. Thank you for your participation in today's conference call, and have a wonderful day.