Welcome to the Old National Bancorp's Second 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 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 disclosed. 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 provides more appropriate comparisons. These non-GAAP measures are intended to assist investors' understanding of performance trends. Reconciliations for these numbers are contained in the appendix of the presentation. I'd now like to turn the call over to Old National's Chairman and CEO, Jim Ryan, for opening remarks. Mr. Ryan?

Good morning. Earlier today, Old National reported our second quarter 2024 results. Our earnings per share exceeded expectations due to better-than-expected revenue growth and lower expenses, which led to positive operating leverage. These strong second quarter results were driven by our investments in new markets and talent in our footprint, supported by our peer-leading low-cost deposit franchise, solid credit performance, and ample capital. We remain focused on the acceleration of our wealth management, treasury management, and capital markets businesses. Before moving to our second quarter highlights, I also want to provide you an update on our previously announced partnership with the Nashville-based CapStar Bank, which closed on April 1, and expanded our franchise to several strong and vibrant southeastern markets. I'm pleased to share that last week, we successfully completed all banking center and systems conversion for this partnership. As of July 15, all former CapStar branches have been converted to Old National banking centers, and all legacy CapStar team members are now operating in the Old National network. The success of our partnership would not have been possible without our team members' hard work, passion, professionalism, and collaboration, and I want to take this opportunity to acknowledge and thank everyone involved in the integration for a job extremely well done. Now moving to our second quarter highlights on Slide 5. We reported GAAP earnings of $0.37 per common share, and our adjusted EPS was $0.46. These adjusted earnings per share results exceeded consensus estimates by $0.02 or 5%. Our adjusted return on average tangible common equity for the quarter was 17.2%, and our adjusted ROA was 1.12%. Our adjusted efficiency ratio was a low 52.6%. Excluding deposits and loans assumed at the CapStar transaction, our total deposit growth was 2.4% annualized during the quarter, and our loan growth was 5.9% annualized. Including CapStar, deposits were up a total of $2.3 billion, and loans were up $2.6 billion in the quarter. Our total cost of deposits for the quarter remains at a low 216 basis points. At the same time, we remain focused on growing our tangible common book value per share, which grew 10% from a year ago. In summary, our second quarter 2024 earnings evidenced another strong on-plan quarter for Old National. We exceeded expectations due to our strong deposit franchise, disciplined loan growth, solid credit quality, and ample capital. With that, I'll now turn the call over to John.

Thanks, Jim. Turning to Slide 6, you can see our second quarter balance sheet, which highlights continued stability in our liquidity and our capital position. Our balance sheet also reflects the close of the CapStar transaction on April 1. Total deposit growth over the last year has again allowed us to organically fund loan growth while holding borrowings flat. Additionally, we were able to grow our tangible book value per share by 10% over the last year. Given its relative size and our strong retained earnings in the quarter, the addition of CapStar was essentially capital neutral, with our CET1 ratio unchanged despite closing the deal. We continue to expect that we will accrete capital at a faster pace than most through the combination of a better-than-peer return profile and a 30% dividend payout ratio. Our loan-to-deposit ratio ticked up modestly due to planned deposit runoff of approximately $400 million at CapStar. Our liquidity and capital levels continue to provide a strong foundation, which positions us well as we enter the back half of 2024. On Slide 7, we show the trend in total loan growth and portfolio yields. Total loans grew $2.6 billion, with $2.1 billion attributable to CapStar. Excluding CapStar, total loans grew 5.9% annualized from last quarter, in line with our expectations. We remain focused on full relationships and structures at prices that meet our risk-adjusted return requirements. New loan production rates are in the high 7% range, and marginal funding costs are in the mid-4% range support our expectation that net interest income will grow modestly for the remainder of 2024. The investment portfolio increased 3% in the quarter due to the CapStar transaction. Shortly after closing, we repositioned CapStar Investments, which improved our total portfolio yields. Overall, fair values and duration were effectively unchanged. As we've mentioned in past calls, new money yields continue to run 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 8, we show our trend in total deposits, which grew $2.3 billion, with $2.1 billion attributable to CapStar. As mentioned earlier, we intentionally ran approximately $400 million of higher-cost deposits out of CapStar at closing. Excluding CapStar, total deposits grew 2.4% annualized, with normal seasonal outflows in commercial and retail deposits, offset by increases in public funds and broker deposits. Our broker deposits as a percentage of total deposits are 4.6% and remain well below peer levels. We did see a 15 basis point increase in deposit rates compared to the prior quarter, with CapStar driving approximately 5 basis points of that upward pressure. That said, deposit costs leveled out at 216 basis points and were steady over the course of the quarter, which was consistent with our spot rate at June 30. Overall, we remain pleased with the execution of our deposit strategy, and we believe we are stabilizing with respect to both total cost and the noninterest-bearing mix. Slide 9 provides our quarter-end income statement. We reported GAAP net income applicable to common shares of $117 million or $0.37 per share. Reported earnings include the following pretax items: $19 million in merger-related charges and $15 million of CECL day 1 non-PCD provision expense. Excluding these items, our adjusted earnings per share was $0.46. Moving on to Slide 10. We present details of our net interest income and margin. Spread revenue and margin were both slightly better than forecast, primarily due to higher asset yields and accretion. Our low total deposit cost of 216 basis points remains a key competitive advantage. Year-over-year, we again showed deposit growth that essentially kept pace with asset generation while maintaining a low total cost of funding. On Slide 11, we show trends in adjusted noninterest income, which was $87 million for the quarter, with CapStar contributing $7 million. Our primary fee businesses performed well, with bank fees in line with our expectations, mortgage benefiting from seasonality and modest improvements in production and pipelines, and capital markets returning to more normalized levels. Continuing to Slide 12, we show the trend in adjusted noninterest expenses of $264 million for the quarter, with CapStar contributing $18 million. Expenses were in line with our guidance and remain very well controlled. On Slide 13, we present our credit trends, which remain stable, reflecting the quality of both our commercial and consumer portfolios. The delinquency ratio remains stable, and the nonperforming loan ratio decreased by 4 basis points. Total net charge-offs were 16 basis points and a low 11 basis points, excluding 5 basis points related to PCD loans. Our second quarter allowance for credit losses to total loans, including reserve for unfunded commitments, was 108 basis points, up 5 basis points from the prior quarter. There were no material changes to our model assumptions and awaiting on the Moody's S3 scenario remains 100%. It is also worth mentioning that our allowance for credit losses plus the discount remaining on acquired loans to total loans now stands at 161 basis points. Slide 14 presents key credit metrics relative to peers. As you can see, our proactive approach to credit monitoring has led to above-peer levels of NPLs, but delinquency and charge-off ratios that are well below peer averages over long periods of time. We have long practiced conservatism here, and we believe the results speak for themselves. With CRE remaining in focus, we have enhanced disclosure in this quarter's presentation. I'll turn it over to Mark on Slide 15.

Thanks, John. Given the heightened focus on credit and CRE, in particular, this quarter, we decided to dive deeper into our loan portfolio and specifically expand on certain segments that we have been watching more closely for some time. Slide 15 breaks down our $36 billion portfolio, which is well diversified across our desired and actual mix of approximately 40% C&I, which includes owner-occupied CRE, given it is underwritten as C&I, 30% investor CRE, and 30% highly rated consumer. Investor CRE of $11.7 billion is well diversified across subsegments, the most noteworthy of which I will talk about in a minute. Importantly, owner-occupied CRE represents $4.3 billion of our portfolio, with a modest risk profile in line with the rest of our C&I book. Lastly, on this page, our diversity is reflected geographically across our footprint as well, with modest out-of-market exposures driven almost entirely by in-market relationships. We have presented looks similar to Slide 16 many times. So to briefly reiterate, we believe our pending maturity schedule is extremely manageable. We have always stressed our CRE loans in underwriting at 300 basis points over current rates, such that the vast majority of our pending maturities have interest rates still within that range. We have only about $400 million maturing over the next 18 months, which are at rates outside of this underwriting cushion, and most of those have since seen rent growth well beyond our originally underwritten levels. CRE office has been of concern industry-wide for some time, so we thought more color was warranted, as seen on Slide 17. Though sometimes the segment gets painted with the same brush, not all office loans are alike. With an average loan size of $2.9 million, our portfolio looks a great deal like the picture on the left, which is generally lower risk than the one on the right. Our office exposure is well diversified by loan size and geography. The lowest risk segments in this space, investment-grade tenants and/or medical office buildings, comprise over 40% of our office exposure, and the highest risk segment, central business districts, is less than 14%. The credit metrics overall of our office portfolio are strong, with an average debt service coverage of nearly 1.5 times and a weighted average loan-to-value of 64%. As in all of our portfolios, we are well disciplined around maximum individual credit exposures. In this case, the largest is $50 million and the top 10 dropped dramatically from there. On Slide 18, we cover multifamily, our largest segment in investor CRE at $5.5 billion. Our multifamily lending trends much more towards middle-income tenants than Class A high-rises in major metro markets. This book is also well diversified and granular, with an average loan size of just over $5 million. Overall, this asset class remains stable in our markets, although prolonged higher interest rates have impacted some more recent projects. Here again, we have strong credit metrics in terms of debt service coverage ratios and loan to values, and the portfolio is well diversified by dollar exposure and location. Our largest exposures are well within our moderate-risk tolerance, represent long-tenured relationships, and tend to have stronger credit metrics. I'll now turn the call back to John.

Thanks, Mark. On Slide 19, we review our capital position at the end of the quarter. As expected, ratios were essentially unchanged from the first quarter, with the impact from the close of the CapStar transaction absorbed by strong retained earnings. Slide 20 includes updated details on our rate risk position and net interest income guidance. NII is expected to increase modestly in the third and fourth quarters. Our assumptions are listed on the slide, but I would highlight a few of the primary drivers. First, we assumed 2 rate cuts of 25 basis points each, consistent with the forward curve. Second, we are now anticipating a declining rate deposit beta of approximately 30% in a noninterest-bearing deposit mix that falls 22% by year-end. We continue to believe that we have positioned the balance sheet well as we reach the end of this rate cycle, and we have achieved a neutral rate risk position. In addition to the 2 cut scenario, we did run a 3 cut scenario and a static curve through our models. The results of each were not materially different from our base case scenario, again, suggesting we have effectively managed the balance sheet to neutral. Slide 21 includes thoughts on our outlook for the remaining items in the third quarter and the full year 2024. As you can see, our guidance is essentially unchanged, with a modest increase in NII reflecting this quarter's results and a slightly wider provision range. That range reflects loan growth and annual charge-offs that are unchanged, although second half charge-offs are expected to run modestly higher than the 15 basis points we have experienced in the first half, we remain comfortable with the full-year outlook of 15 basis points to 20 basis points. In summary, we had an excellent first half of 2024, with second quarter results better than our expectations and strong performance metrics. More importantly, we continue to demonstrate our ability to execute against our strategic priorities. First, we continue to organically fund our loan growth. Second, our adjusted return profile remains top quartile against periods at 17% on tangible common equity. Third, we remain disciplined on operating expenses, with an adjusted efficiency ratio below 53%. Fourth, we have clean credit with non-PCD net charge-offs at just 11 basis points, along with a well-diversified and granular loan book. And fifth, we are continuing to rapidly compound tangible book value per share, which was up 10% year-over-year. With those comments, I'd like to open the call for your questions.

Your first question comes from Scott Siefers with Piper Sandler. Please go ahead.

I guess I wanted to ask on just sort of the beta assumption. Maybe, John, when you think of the 30% down beta, can you provide some insight on why you're thinking that's the right number? And maybe some thoughts on how that would trend after Q4 '24? Presumably, there's some catch-up later on as time marches on. But I'm just curious how that would flex into 2025 as well?

Yes. Thanks, Scott. So I think most of what we're going to get the down beta from is really out of the exception price book. That book today is $12.3 billion, 31% or so of total deposits, 38% of our total transaction deposits. And that's at the quarter, sort of 4:30 was the cost on that book. We think we'll be able to drop that pretty quickly. I mean I think that will be close to 85% kind of beta on the way down. So that's where most of it will be. And then depending on the path, the short-term rates into 2025, I think that will sort of influence what we're able to do with the exception price book. 2025, I think, is more about fixed asset repricing though and shape of the curve.

And then maybe switching gears for a second to the loan growth. Maybe just a broad thought or two on where that growth is coming from. In the context of it, it's been a very weak backdrop for the rest of the industry, yet you all seem to be outperforming. Could you share where that growth is coming from? And do you see trends getting better or worse over the next several months and why might that be the case?

Scott, it's Mark. The loan growth this quarter was broad across the footprint. It was about evenly split between CRE and C&I. CRE, we had some construction draws that helped boost it a bit. In C&I, some of the hires we've made over the last few years in our expansion markets give us some outsized growth. In this quarter, we had a really nice performance from our business banking team. That's our core business that's full relationships, and so it's nice to see them grow nearly $100 million this quarter. So it was widely diversified.

Your next question comes from the line of Brendan Nosal with Hovde Group. Your line is open.

Maybe to start off on kind of the outlook overall at a top level. I mean you broadly reiterated the guide for the rest of this year. However, it feels like a fair bit of change environmentally since April, especially with respect to the rate outlook. I guess I'm just wondering if you have a bias or a feeling, better or worse, about the outlook you're offering now versus the past two quarters? What are your thoughts?

Yes. Look, I think the balance sheet is neutral. So net interest income, I mean, we've been saying for a couple of quarters now, it doesn't really matter what happens with short rates. If there were perhaps some room for upside, I'd point to the few lines where we continue to invest in wealth management; those investments are starting to bear some fruit. Mortgages are bouncing along the bottom but were seasonally better in Q2 than we might have expected. That would be where I think we might have a little bit of upside to the guidance out there.

Maybe one more for me before I step back. Can you help us unpack the NII guidance for the rest of the year in terms of how you see margins trending in the back half, especially in light of the core margin firming up this quarter?

Yes. I think it's a couple of basis points one way or another in the third quarter, and then in the fourth quarter, we'd expect to see things start to improve.

Your next question comes from the line of Jared Shaw with Barclays. Your line is open.

Maybe just sticking with the NII and margin. Can you share with us what the accretion was this quarter and what the expectation is for accretion as we go into the third and fourth quarters?

I would say the difference in accretion versus the last quarter was about $5.5 million that came in from CapStar, rough top; a 3 basis point helper. I'd expect that to be pretty flat for the balance of this year.

So stable at this, let's call it, 116 basis point in second quarter?

Yes.

And then any color on credit migration within criticized, classified, and how you're looking at those trends?

Yes, Jared. It's Mark again. In this quarter, we saw about $75 million coming to criticized and classified from CapStar, which is what we expected. Then multifamily drove the bulk of the rest of the migration this quarter, which is not unexpected. You had some properties with a little slower lease-up, and so the excess cash flow has tightened a bit, but we still feel really good about those properties. They're really solid properties, strong sponsor support, and very low loss content, we believe.

And then looking at the debt service coverage ratio on office, it looks like that improved or increased this quarter. Any color on what was driving that? And is that sort of a stable level, do you think, for the category?

I think that remains to be seen, but we haven't seen the deterioration in those ratios generally at this point. The best insight we have is what's happening right now, and it seems to be stabilizing.

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

Thanks for Slide 17 and 18; I always like pictures. Maybe a question on how do you fund 5% to 7% annualized loan growth? What are your assumptions on deposit growth and use of wholesale funding for Q3 and the back half of the year?

Yes. So certainly, Terry, the mission around here has been for a really long time, but we probably got even more focused on it last year. We are all deposit gatherers. The intention would be to fund our asset generation with core deposits. We've been able to do that so far. If you look year-over-year, our asset generation has basically kept pace with our deposit generation. That would be the plan going forward; to the extent that we have a quarter that deposits are a little bit lighter than the asset generation. We have plenty of capacity on brokered and a lot of capacity on wholesale as well if we chose to...

And I would remind you, we said this publicly before, but we're going to remain on the offense. To the extent that there are banks that will continue to be aggressive as rates fall, we will remain on the offense. We just believe this is a good long-term play for us. I look forward to that opportunity if it presents itself.

And from prior conversations, you've been real conscious of the TCE ratio, which is, call it, 7%. I guess my question is, where would that ratio need to be today before you think about share repurchase?

Terry, this is Jim. Certainly, it's a tool we're very conscious of. Clearly, the TCE ratio is in a better spot post our partnership in Chicago. Obviously, the stock price, we're sensitive to earn back. If you look at today's stock rents, which we're very pleased to have that earn back extended out. It's a little less attractive than it once was. We'll continue to evaluate each day to see if the tool makes sense to use. At this point in time though, I don't think we need to rush into anything and just let the back half of the year play out.

Maybe just stepping out of the earnings model. Could you talk about kind of synergies in the Nashville market between wealth and banking and vice versa and maybe retention in that market now that the deal has been closed for 3 to 4 months?

Let me give you a high-level view, and I'll let Mark or John jump in as well. I have to tell you, I was just down there not too long ago and met with a bunch of different clients. We're bringing our Board meeting down there in August, and so we'll have a client event down there with 150-plus clients and have a chance to interact and really talk about the future of Nashville, the future of the Southeast for us, as we evaluate the opportunities. I continue to be blown away by the opportunities that present themselves to us. There are no shortage of good banks down there, but that doesn't mean we can't compete effectively. We have a great team down there. There's just so much organic growth, which is going to present opportunities for us. While we've always been bullish on that opportunity, every time we're down there, we get reinforced that the opportunities are endless with us in terms of our team members that are down there completely engaged, as well as the new business opportunities.

Retention has been really high, Terry, and it's early, but I would say this team is really excited to join Old National. I think they look at the cultural fit and the capabilities that we bring to the table, and they're enthusiastic about it. To your first part of the question, we haven't begun to tap the wealth opportunities there. This wasn't something that CapStar did much of candidly. I think we've got a really strong capability. We've got a strong team that was already there, if you recall. Both sides of that equation are very excited.

Your next question comes from the line of Chris McGratty with KBW. Your line is open.

Jim, any thoughts on tweaking any exposures in the back half of the year, either post deal? I mean there's not a CRE problem, but there's decent liquidity for certain assets. Is there anything on the books that might not be core going into '25?

Well, I think all banks retain a certain amount in their balance sheet that has flexibility around. While we have no specific plans for significant changes, I think we need to continually look to optimize the balance sheet. We must continue to bring core funding to support new growth. One thing is for sure; we're going to continue to acquire new relationships. When those relationships are full relationships, we have a huge appetite to continue to grow. You can clearly see we've demonstrated that. One of the challenges, as you've followed us for a long time, was our ability to grow. That is clearly not a challenge today. We've got great markets, great people, and great growth opportunities ahead of us. To the extent that there are non-core assets on the balance sheet or limited relationships, there may be opportunities for us to continue to optimize, but nothing big or wholesale in nature would dramatically change what you'd expect to see in the back half of the year. But it's something we've got to continually challenge ourselves to look at.

Maybe dovetailing on the buyback question. Any change in how you're thinking about strategic M&A in '25? I know organic is the focus, but any change there would be great.

Yes. I really don't see any change. I think there will be plenty of opportunities that will present themselves to us in the coming years. Our appetite, as I would express, is very limited right now. Given the organic growth opportunities, the execution we have in our core markets, and the markets we've added through talent and obviously now in Tennessee and North Carolina, I think we owe it to ourselves and our shareholders to continue to focus on that. As we've talked about previously, the idea of compounding tangible book value at a double-digit clip for the next few years is really appealing and attractive and may ultimately drive the highest reward for our shareholders.

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

Maybe start with you, John. You talked about the high 7% on new origination yields in mid-4 funding costs. Would you say the new production is margin accretive at this point? Or is it margin neutral?

Margin accretive.

On the deposit costs, Slide 8, I see that flat deposit cost, the 216 at the end of the quarter. What do you think that looks like in a quarter or two? What's the message you're trying to send there? Is the pressure stopped?

I think the pressure has largely moderated. I do think it's still competitive out there. As long as we can continue to do margin-accretive business, we're going to stay on our front foot. Right? If you were to go out to Old National's website today, you'd see us running specials that are very competitive. I mean, we are open for business, and we're going to fund this bank. I think that it's moderating. The worst of it is clearly behind us. Could we see a little drift up in the third quarter? Yes, that's possible.

Tying into that, the noninterest-bearing guide of 22% by the end of the year. Do you feel like that's it? Or do you think that continues to leak lower naturally? Or do you believe we're getting to the bottom on that percentage?

I think we're getting there. I think we're towards the bottom. Part of the secret around here, as you know, is just the granularity of the book. About 80% of the relationships here are less than $25,000. The average on that book is around $4,500. At some level, there's still probably a little bit of cash sorting that needs to happen, but I think we're through most of it.

And then just to wrap up. You feel like a cut or two isn't necessarily beneficial to your outlook, but maybe just the new production is beneficial to the margin outlook. Is that a fair way to look at it, or am I misreading that?

Yes. No, that's a fair way to look at it, Jon.

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

Well, thank you for your support today. As always, the team will be here to answer any follow-up questions you have. I hope you will have a great day.

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 2973663. This replay will be available through August 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.