Old National Bancorp

NASDAQ:ONB

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to the Old National Bancorp First Quarter 2021 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, please go ahead.

[James Ryan, executive]

This morning, Old National reported its first quarter 2024 results, our peer-leading low-cost deposit franchise above-average deposit 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 1. 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 capture 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 4, 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 ROA TCE for the quarter was 16.7%, and our adjusted ROA was 1.1%. Our adjusted efficiency ratio was a low 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 a total deposit growth of 8% and total loan growth of 6%. Meanwhile, our tangible common book value grew 2% during the first quarter and 11% year-over-year. Our year-over-year trends once again demonstrate our consistent financial strength and quality returns.

In summary, our first quarter results have set a solid foundation for 2024. Our strong deposit loan growth, stable credit performance and effective expense management demonstrated our ability to excel in a challenging banking environment. As we progress into the year, we reiterate our steadfast commitment to sustainable growth, disciplined expense management and strategic talent acquisition. We are confident in our ability to navigate the market and deliver strong results.

Before turning the call over to John Moran, I'd like to briefly address our Chief Financial Officer position. As you might expect, we will not comment today, and I will refer you to the 8-K that we filed on April 1. We will provide any updates to the future when appropriate. That said, we are focused on running our business as usual.

As I said earlier in this call, we had a great first quarter and look forward to another strong year. We already have an exceptionally talented finance accounting and treasury team in place. For example, Mike Lloyd, our Treasurer, Angela Putnam, our Chief Accounting Officer, who are both on the call with us today are very seasoned and each has 10 years plus experience with us. John Moran, you already know from his tenure with us and as a Wall Street analyst covering banks like Old National has seamlessly taken on the interim Chief Financial Officer role.

In addition, John has been a CFO of a publicly traded bank holding company. He also was identified as a primary successor during our succession planning process. I have complete confidence in John and the entire team.

I'm also pleased to introduce Terry Goldfetter, our new Chief Credit Officer, who will join us on our quarterly calls from now on. Carrie, who came to us from Capital One had previously worked at GE Capital brings our leadership team a wealth of experience and expertise. Despite her relatively short tenure with us, she is already making a significant impact. Our addition to our leadership team further strengthens our commitment to excellence in all aspects of our operations.

With that, I will now turn the call over to John.

[John Moran, executive]

Thanks, Jim. Turning to Slide 5, 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 ended the quarter with a strong CET1 ratio of 10.76%, and 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 targeted 30% dividend payout ratio. Our liquidity and capital levels continue to provide a strong foundation, which positions us well into 2024.

On Slide 6, 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 7. We show our trend in total deposits, which grew 5% annualized from 4Q despite normal seasonal outflows in public funds and business noninterest-bearing. Our brokered deposits as a percentage of total deposits is now 3.2%, which remains well below peers. Dollar balances grew in both retail and commercial and new checking account production remained strong. We did experience upward pressure on deposit rates over the course of the quarter as we remain focused on better than industry growth in our deposit base.

That said, we did see a marked deceleration in deposit costs later in the quarter with total deposit cost for the month of March at 205 basis points, only 4 basis points higher than our 1Q average and a spot rate at March 31 that was down a few basis points from there.

As a reminder, the addition of CapStar is expected to increase our total deposit costs by approximately 5 basis points in the second quarter. Overall, we remain very pleased with the execution of our deposit strategy, which continues to drive above peer deposit growth at below peer costs.

Slide 8 provides our quarter end income statement. We reported GAAP net income applicable to common shares of $116 million or $0.40 per share. Reported earnings include the following pretax items: a $13 million noncash expense associated with the distribution of excess pension assets with the resolution of the legacy First Midwest plant, an additional $3 million charge related to the FDIC special assessment, and $3 million in merger-related charges. Excluding these items, our adjusted earnings per share was $0.45.

Moving on to Slide 9. We present details of our net interest income and margin. As expected, deposit repricing led to modest declines in both net interest income and margin that were in line with our guidance. Our low total deposit cost of 201 basis points remains a key competitive advantage. Again, we have put up better deposit growth at a lower cost than most banks.

Slide 10 shows trends in adjusted noninterest income, which was $78 million for the quarter. Our primary fee businesses performed generally in line with expectations with seasonally lower bank fees.

Continuing to Slide 11, we show the trend in adjusted noninterest expenses, which were favorable to our guidance due to better occupancy costs, the result of a mild winter for the upper Midwest, lower tax credit amortization and lower professional fees along with lower various sundry other expenses.

On Slide 12, we present our credit trends, which remain stable, reflecting the quality of both our commercial and consumer portfolios. The delinquency ratio declined slightly and the rise in nonperforming loans stems from the migration of 3 credits. Migration into adverse categories has slowed from prior quarters and as has historically been the case, we maintain a proactive approach to grading and resolution.

Total net charge-offs were a low 14 basis points and were split evenly between PCD and non-PCD loans. Our first quarter allowance, including reserve for unfunded commitments was unchanged at 103 basis points. There were no material changes to our model assumptions and the weighting on the Moody's S3 scenario remains 100%.

On Slide 13, we review our capital position at the end of the quarter. Improvements were seen in all regulatory capital ratios with the move in rates muting the impact of strong retained earnings on our TCE build.

Slide 14 includes updated details on our rate risk position and net interest income guidance. NII is expected to increase in the second quarter with the inclusion of CapStar and then continue to modestly increase in the back half of the year. Our assumptions are listed on the slide, but I would highlight a few of the primary drivers: first, we assumed 3 rate cuts of 25 basis points each consistent with the Fed dot plot; second, we are anticipating additional late-cycle deposit repricing that will result in a terminal beta of 40% by midyear and a noninterest-bearing deposit mix that falls to 23% by year-end; lastly, we assume the final CapStar acquisition accounting marks are consistent with those used at deal announcement.

We believe we have positioned the balance sheet well as we approach the end of this rate cycle with the work to achieve a neutral rate risk position behind us. Also, closing CapStar a quarter early modestly helped our neutrality.

In addition to the 3 cut scenario, we did run a forward curve, including 1.5 rate cuts and a static curve through our models. The results of each were not materially different from our 3 rate cut scenario, again, suggesting that we have effectively managed the balance sheet to neutral.

Slide 15 includes thoughts on our outlook for the remaining items for the second quarter in full year 2024. All guidance has been updated to include the CapStar close on April 1 and purchase accounting assumptions in line with our transaction modeling, which is subject to changes we finalized these initial adjustments in the second quarter. As you can see, our guidance is unchanged.

In summary, we had a strong start to 2024 with the first 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 are organically funding our loan growth with deposits up 8% year-over-year, 200 basis points better than our loan growth. Second, our adjusted return profile remains top quartile against peers at nearly 17% on tangible common equity. Third, we remain disciplined on operating expenses with an adjusted efficiency ratio of 53%. Fourth, we have a clean credit book with non-PCD net charge-offs of just 7 basis points. And finally, we are continuing to rapidly compound tangible book value per share, which was up 11% year-over-year.

With those comments, I'd like to open the call for your questions. And we do have the full team available, including Mark Sander and Jim Sandgren.

[Operator]

[Operator Instructions] Our first question comes from Scott Siefers from Piper Sandlers.

[Robert Siefers, analyst]

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 place as you're able to lower rates exactly, just maybe overall competitive and thoughts on your own positioning as well?

[James Ryan, executive]

Yes. 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 4 basis points higher than average, and our spot rate at March 31 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.

[Robert Siefers, analyst]

Okay. Perfect. And then I 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. Are you sort of seeing demand accelerate, decelerate, stay the same, just maybe overall dynamics, please?

[Mark Sander, executive]

Scott, it's Mark. Yes, 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.

[Operator]

Our next question comes from Ben Gerlinger from Citi.

[Benjamin Gerlinger, analyst]

I just want to touch base on the growth again. I get that you guys don't move your credit box, you have the market kind of comes in and kind of where your time to shine is. Is there anything that could be done to potentially exceed the growth guidance you had? I mean, from the years it's -- I clearly understand you're not changing credit, but like if the market offers because competitors aren't in the market as much, are you seeing first congestion yields, would you be able to grow loans faster than deposits or have the appetite to do so?

[Mark Sander, executive]

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 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 wouldn't suggest that we are. So I think it's possible, but we're -- our 5% to 7% organic growth is a little bit above what we think the industry average will be. .

[James Ryan, executive]

Ben, I would just add, we're going to continue to take advantage of the new talent we've acquired. Some of them are in 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 really should be getting after it and we're looking to have great growth coming out of Tennessee and Asheville.

[Benjamin Gerlinger, analyst]

Got you. And then the other question I had would be more on the high level on credit. You guys have always been a great job as to where you hang your hat to be honest. But -- when you think about just credit across your footprint, are there any geographies which are experiencing [indiscernible] of a bit of word frothy pricing maybe in commercial real estate? Or just -- are you in a pencils down mode at any CRE type lending products?

[Mark Sander, executive]

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 -- 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.

[James Ryan, executive]

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 in our terms, we will continue to take advantage of every opportunity that comes our way.

[Mark Sander, executive]

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

[Operator]

Our next question comes from Terry McEvoy from Stephens. .

[Terence McEvoy, analyst]

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 added, if you could comment on multifamily trends that you're seeing in your markets? .

[Mark Sander, executive]

So I'll start, Terry, it's Mark. As we say, manageable level, that -- it's based on the data that we provided there. We have $2.8 billion coming due 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 [indiscernible] 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 $100 million -- less than $200 million on our portfolio, we think, is very manageable, I guess, is the comment there.

To your question on multifamily, 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's happened over those years. So we feel really good about our multifamily portfolio.

[Terence McEvoy, analyst]

And then as a follow-up, a question on security yields, they were up 1 basis point quarter-over-quarter. The portfolio was up and new money yields were 561. So I guess what was -- what's behind just the slight increase in security yields? .

[John Moran, executive]

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

[Terence McEvoy, analyst]

And then just last 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. .

[John Moran, executive]

Yes.

[Operator]

Our next question comes from John Arfstrom from RBC Capital Markets.

[Jon Arfstrom, analyst]

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

[Mark Sander, executive]

In our -- 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 market share 1 by 1 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 after it, I guess, nothing more than good old-fashioned blocking and tackling with a really good team.

[James Ryan, executive]

John, 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 based off with clients or you're in treasury or you're in marketing, we are all deposit gathers and that's been the mantra, which is, I think, helped drive our success.

[Jon Arfstrom, analyst]

Okay. Good. Fair enough. And then on noninterest-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?

[John Moran, executive]

John, 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 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 will continue to kind of come down a little bit, but not much from here.

[Jon Arfstrom, analyst]

Okay. Good. And then 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?

[Mark Sander, executive]

I wouldn't assume that, John, as things -- 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 I wouldn't necessarily assume that that'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.

[Operator]

Our next question comes from Chris McGratty from KBW.

[Christopher McGratty, analyst]

Jim or John, maybe a question just on Slide 15, the outlook. If you kind of zoom out and look at the different line item, guys. Where do you think either the biggest opportunity or risk is relative to? Please lay it out for us.

[John Moran, executive]

Chris, I'd say the biggest risk is probably just what happens in terms of noninterest-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 off this quarter, a few swaps, one where [indiscernible]. And it's hard to kind of get really too excited about mortgage, but pipelines are up pretty solidly. So maybe we'll have a nice spring-selling season here. .

[Christopher McGratty, analyst]

Okay. And then maybe, Jim, thoughts on just capital return once you get through the integration and [indiscernible] back later in the year?

[James Ryan, executive]

Yes. 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 CapStar, kind of getting a better read on what we think the balance of the year looks like. And then as we get into 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 in the last couple of years. .

[Christopher McGratty, analyst]

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 why you could?

[James Ryan, executive]

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, then 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. .

[Operator]

Our next question comes from David Long from Raymond James.

[David Long, analyst]

I wanted to talk about the nonperformer nonperforming 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 happened there in the nonperforming loan line and to drive it up 20% in the quarter?

[Mark Sander, executive]

David, it's Mark. I think it's just the natural ebb and flow of credit. There was 3 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 2 C&I credits that were not related, not symptomatic of any broader concerns. So just episodic 3 credits. .

[David Long, analyst]

Got it. And then operating expenses seem 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 nonrecurring or expenses that maybe you missed out on this quarter?

[John Moran, executive]

No, I wouldn't characterize anything as nonrecurring 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 6 or 7 good guys in there that I would just kind of caution don't take 1Q and run rate it and add CapStar onto it. I think we have a little bit of lift here in the second quarter, and that's reflected in the guidance.

[Operator]

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.

[James Ryan, executive]

Well, thank you, Ellie. As always, really appreciate your participation. The whole team is going to be available all day today to take any questions you might have as follow-ups. Thank you so much.

[Operator]

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), an access code 3992332 this replay will be available through May 7.

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.