Welcome to the Old National Bancorp Third Quarter 2023 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with SEC's regulations, 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 statements legend in the earnings release and presentation slides. The company's risk factors are fully disclosed and discussed [Technical Issues] provide appropriate comparisons. These non-GAAP measures are intended to assist investors understanding of performance trends. Reconciliation of these numbers are contained within an appendix of the presentation. And now to turn the call over to National's CEO, Jim Ryan for opening remarks.

Good morning. We're pleased to be with you today to share details about our strong third quarter performance. The strength of our franchise remains evident in the results outlined on slide four. This quarter was like our last; business as usual for Old National with growth in deposits, well-controlled funding cost, ample liquidity and stable credit quality. We also saw a slightly positive loan growth despite loan sales. We've reported an EPS of $0.49 for the quarter, adjusted EPS was $0.51 per common share with adjusted ROAA and ROATCE of 1.26% and 21% respectively. Importantly, we achieved significant year-over-year tangible book value growth. Our adjusted efficiency ratio remained under 50%. Total and core deposit balances were up 3% during the quarter as we compete effectively for new deposits. Our total cost of deposits was 161 basis points, and we maintained our deposit pricing discipline with a low-30% total deposit beta cycle-to-date. As a result, we beat our own margin expectations. Our credit quality remained stable. Net charge-offs were 24 basis points, 15 of which related to a single charge-off that we don't believe indicates a broader weakness in the portfolio. We remain diligent in managing the portfolio consistent with our past strong credit management practices. On the new business side, while our loan pipeline has declined, we continue to actively seek and win new loan business, where we can develop full relationships, meet hurdle rate returns and have a strong credit profile. Broadly, some competitors have seen significant appetite change creating new opportunities for us. As a result, we expect the loan portfolio to grow modestly for the remainder of the year. We also continue to hire top revenue-generating talents selectively albeit slower than previous quarters. With that, I will now turn the call over to Brendon to cover the quarter results in more detail.

Thanks, Jim. Turning to our quarter-end balance sheet on slide five. We continue to effectively navigate this challenging operating environment. Our focus on deposit acquisitions resulted in 3% growth this quarter and has led to a better funding mix stronger-than-expected net interest income and will allow us to take advantage of new lending opportunities, while many of our peers are pulling back. Our strong earnings improved all regulatory capital ratios and our tangible book value per share increased 3%, excluding the AOCI impact. On slide six, we present the trend in total loan growth and portfolio yields. Total loans grew in line with our expectations. We sold $389 million of non-relationship C&I loans at par during the quarter as we look to manage liquidity, while prioritizing lending to our clients with full banking relationships. Excluding these loan sales, total loans increased 1.7%. The investment portfolio declined in line with our expectations and the duration remained steady at 4.3. Cash flows from the portfolio are expected to be $1.4 billion over the next 12-months. Moving to slide seven, we show our trend in total deposits, which increased $1 billion, including approximately $300 million of normal seasonal public fund inflows. All three of our lines of business posted solid growth and client acquisition. Growth came mostly from the money market and time deposit categories, offset by declines in non-interest-bearing deposits, which continue to experience migration to higher-yielding products. Non-interest-bearing deposits as a percentage of total deposits was 28% at quarter-end. And we anticipate this downward trend to continue in the near-term, albeit at a slower pace. Market conditions continue to put upward pressure on deposit rates with interest-bearing deposit costs up 56 basis points to 2.22%. Total deposit costs were 1.61% for the quarter, which equates to a cycle-to-date total deposit beta…

That prepares our concluded -- our prepared remarks. So with any questions, please go ahead and ask. We're not getting any feedback from the operator here, so.

Thank you. [Operator Instructions] Your first question comes from the line of Scott Siefers of Piper Sandler. Your line is open.

Good morning, everybody. Thank you for taking the question.

Good morning, Scott. Sorry for the delay. And I'm glad you're back on top.

No problem. Me too. Thank you. Let's see. Was hoping to start on the deposit side. Maybe just some expanded thoughts on the way you're sort of thinking about the balance between growth and rate or cost on the deposit side. So you accelerated total deposit growth, which was greatm, but in some higher cost areas. So just maybe kind of philosophically, how you were thinking about things through the third quarter.

Yes, we think there's opportunities to continue to lend and building some dry powder through deposit growth, it makes a lot of sense to us at the rates we're able to do it. You think about growing deposits at a low four handle and be able to lend at out in mid-to-high 7s, I think gives you a marginal margin that is quality risk-adjusted return. So that's the thought process. So as long as we can continue to raise deposits to those levels and have lending opportunities in the high-sevens, we'll continue to do that.

And as we raise a lot of deposits, Scott, through money markets, a good chunk of that is new clients to the bank. And so we think there's opportunities to expand those relationships over time. So I think it's a -- and we've got room to do that. So it's a race on the market-competitive deposits right now.

Okay, perfect. And then, I know you talked about the nearly $3.5 billion in fixed-rate loans that would -- so repriced over -- or recast over the next 12 months. Do you think that'll be allow -- or will be enough to allow the margin to trough in the next quarter or two, if the Fed finishes its tightening cycle?

Scott, I think, it's still too early to tell. I can tell you that it does provide a lot of offset to the late-cycle SOFR pricing. If it's going to be enough, hard to say, but it's a meaningful amount. And then couple that with the $1.4 billion cashless from the invest portfolio, that's a meaningful offset.

Okay. All right. Perfect. Thank you.

Thanks, Scott.

Your next question comes from the line of Terry McEvoy of Stephens. Your line is open.

Hi, good morning, everyone.

Good morning, Terry.

I just had a question on capital, CET1 up to 10.4%, TCE 6.2%. So, can you discuss any near-term capital targets given what you call, market conditions here in the presentation. And essentially, what would you need to see to begin repurchasing stock again?

No, no. Hey, this is Brendon. No capital targets now, not thinking about turning on our share repurchase and no dividend actions considered at this time. We'll continue to kind of run the play and grow capital.

And a question for Jim. Could you just expand on the 2024 growth strategy that's right at the beginning of the press release? Maybe best markets to build share, opportunistic hiring, and then how does that play into your expense management for next year?

Yeah. I mean, great question. I think, it's more business as usual than not. We continue to find great opportunities to hire folks selectively. That pace has slowed down a little bit. We're not really considering any kind of new markets in terms of hiring, relate commercial relationship talent or wealth management talent. They may come along and we certainly see a fair number of those opportunities, but I think it's more business as usual for us and continuing to really execute on the teams and the folks we've already hired. And then I think there's still opportunities within our existing footprint to continue to add selectively in our key markets. So I would say it's more business as usual. We're sensitive to obviously, the demand on the expense base and we'll continue to look ways to be judicious in how we manage our expenses going forward, hopefully, to offset any incremental costs from those new hires.

And I'll squeeze one in. Brendon, any thoughts on expense growth for next year? Any targets in mind.

No specific targets, like, at this stature that we have, we have a good track record of making sure our expense base does not grow much beyond sort of a typical merit increase. And we have some levers there to pull. But as Jim said, it's not going to stop us from investing in ourselves, but we got to find ways to pay for that.

Thanks for taking my questions.

Thanks, Terry.

Your next question comes from the line of Jon Arfstrom of RBC Capital Markets. Your line is open.

Hey, thanks. Good morning.

Good morning, Jon. Good to hear from you.

Hey. Thank you. Brendon, just one for you, back on Scott's question. Your NII guide suggests a pretty big step-down in the fourth quarter in the margin. Can you just help us understand a little bit more some of the puts and takes there in terms of what's going on?

Yeah, largely that's kind of 3% to 4% decline in Q4 is almost entirely deposit cost related. Again, we're not getting a lot of help on the asset beta side at this point other than the fixed-rate repricing. But the question on the NII side is going to continue to kind of grow through that and help bolster NII. And that's the game plan.

Okay. All right. And then, I guess, on Slide 17, you talk about the exception pricing on deposits. How is that trending? Is that intensifying or easy enough at all?

Not intensifying. We're still less than 30% of our book of exception priced or promotional related. And again, those are in the very low 4% and we feel really good about that marginal funding opportunity that we have.

Okay. Good. The loan sale, I think, I understand it. But was that a -- the SNC that you talked about?

One of them was I shared in the script and the rest out of the capital markets book.

You're talking -- it is out of our capital markets book, which was a transactional book that we had used to soak up excess liquidity over time. And so all of the loan sales of $400 million came out of that book.

Okay. More to come on that or not?

At a lesser pace. If there is additional, it'll be at a lesser pace than that in the next couple of quarters, I would say.

Okay. Okay, good. And then you kind of touched on it, Jim, with Terry's question. But the pipeline change, it feels like maybe the market is slowing down, but you're seeing better opportunities, but can you just maybe touch on some of the elements of the pipeline change? Thank you.

I think the pipeline change is reflective of what's going on in the economy more broadly, as well as our selectivity that Jim alluded to. There's certainly less CRE activity overall in the marketplace clearly and even C&I has a little bit -- we're projecting little slower growth over the next couple of quarters than we saw the quarters before as an industry. We think we're still well-positioned to outgrow the industry. We think industry growth is going to be a little more muted going forward.

Yeah. I do think we've seen a significant appetite change out of some of our regional competitors, and that is creating new opportunities. We were with a client last night, would fall into that camp and I think that's going to create nice opportunities for us both on our ability to get the right credit profile picture, a full relationships and full pricing. So those are expectations. We're definitely open for business. We're still on the offense and still believe we've got room to continue to grow here.

Okay. All right. Thank you very much.

Thanks, Jon.

[Operator Instructions] Your next question comes from the line of Chris McGratty with KBW. Your line is open.

Hey, good morning.

Good morning, Chris.

Jim or Mark, the comment about the force downgrades of the certain relationships, maybe a little bit more color there. I presume that's the shared national credit book, but just a little bit of color on the regulatory guidelines you talked about. Thanks.

As Brendon alluded to, about half of our downgrades this quarter came from the SNC review, all credits in which we feel good about and as Brendon alluded to, we already sold one. Frankly, I think we'll sell another one this quarter at par. So we feel good about all those credits and yet, a little downgrade as the result of the exam. Other than that, you saw a little bit of risk migration but no concentrations. No -- nothing to point to, just kind of a reflective of what's going on in the broader economy.

Okay. And then maybe just Brendon on the balance sheet, you obviously have the ability to bring down borrowings. Not a lot on the books, but anything you're considering in terms of retooling the balance sheet into next year with the securities portfolio or plans to kind of reduce that you talked about the $1.4 billion 12 months cash flows.

Yeah, no major restructurings planned on the invest portfolio, but we'll continue to manage that portfolio appropriately and take appropriate action there, but no major restructuring planned.

Okay. Great. And then maybe the last one. Lot of questions this quarter for the industry about the trough in revenues, net interest income. How are you thinking -- without providing '24 full-year, how are you thinking about just the cadence of the NII for the next several quarters?

Yeah, as we talked about. So I think there is the 3% to 4% step-down. And then largely, I think this becomes sort of the fight for flat that we've kind of been talking about. I think that'll -- that's how we're going to be thinking about 2024. And if we get some rate cuts in the back-half, the four curve actually plays out, I think that's where you start to see some upside.

All right. That's helpful. Thank you.

Thanks, Chris.

Your next question comes from the line of Brody Preston with UBS. Your line is open.

Hey, good morning, everyone.

Good morning, Brody.

Hey, I just wanted to ask a question, it's a little bit in the weeds, but just the $3.4 billion of the fixed-rate loan repricing over the next 12 months, it doesn't quite put the call report bucket, I guess, like as I would have expected maybe in the three to 12 month. So I guess I wanted to ask kind of what's driving that difference. And then also is there any kind of lumpiness to that $3.4 billion, is it fairly evenly distributed?

Fairly evenly distributed. This is coming right out of our asset-liability management system, which will obviously include some prepaid fees assumptions in there, which is probably the biggest piece of what you see from a regulatory report versus what we're sharing.

Okay. Great. That's helpful. And I appreciated the additional SNC disclosure on Slide 14. I did want to ask though, if you could give us any color, I know it's a small book for you, but was there anything specific that drove the downgrades from the SNC review, like was it -- debt service coverage related? Like, just looking for a little bit of color there.

It was principally debt service coverage related. It was a half-dozen credits across with no concentration in industry, Brody. So -- and again, looked at off of '22 numbers. So I think there is a -- there is more to come as '23 plays out.

Got it. No. That's extremely helpful. I also wanted to ask -- I saw the titbit on the maturing CRE loans. And some loans underwritten at 300 basis points over the current market rate. So I just wanted to clarify, I think, on your previous slides you said you're originating stuff in the 7% to 7.70% range or something like that. Does that mean that you underwrote those loans that are coming due at the ability to perform at a 10% interest rate? Am I understanding that correctly?

So, Brody, what that note means 300 basis points above the rate at the time of origination. So if you have the forehand…

Got it.

Those are underwritten at 7%, which again helps gives us confidence. Given current market rates, most of those will have the ability to cash flow.

Got it. That's very helpful. And then the -- excuse me. On the deposit slide, you noted that 25% of total deposits are exception and special pricing with the weighted average rate of 4.17%. How would you expect those deposits -- the beta on those deposits to be if rate cuts did happen in the back half of 2024?

Yeah, we have the opportunity to reprice a lot of those in a hurry. Some of them are fully indexed. Many of them are related to teaser rates that will reset early back and middle of next year. So we’ll have the opportunity to bring those down in a hurry if we get rate cuts.

Got it. Thank you for that. And then just one follow-up on the SNC review. And I guess it's not as familiar with the process. That's for each individual bank, right? So different banks go through that at different points in the year. Is that accurate?

No. So it's done across universally, they’re reviewed at the agent bank. And then the other participants in those credit facilities have to adjust the rates at the time in addition to the agent bank. But it's all done at once.

Got it. Thank you very much. I appreciate it.

Thanks, Brody.

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

Well, thank you all for coming on this morning. We apologize for the technical difficulties we had this morning. Hopefully, you're able to get all your information and get all your questions answered. But as always, Lynell and Brendon and John and the whole team will be here to answer any questions you might have. We hope you have a great day. Thank you.

This concludes the 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 November 8. 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 your lines.