Old National Bancorp Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 12 speakers on the call.

Operator

Welcome to the Old National Bancorp's Second Quarter 2023 Earnings Conference Call. This call is being recorded and has been 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

Speaker 1

would like

Operator

to remind everyone that certain statements on today's call may be forward looking in nature and are subject to certain risks, with 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 the 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.

Operator

Reconciliations for those numbers or contained within the appendix of the presentation. I'd now like to turn the call over to Old National CEO, Jim Ryan. Mr. Ryan, please go ahead.

Speaker 2

Good morning. We are pleased to be with you today to share details about our strong second quarter performance. Simply put, the quarter was business as usual for Old National with growth in deposits, solid liquidity and credit quality, with disciplined loan growth and well managed expenses. The strength of our franchise remains evident in the results outlined on Slide 4. We reported EPS of $0.52 for the quarter.

Speaker 2

Adjusted EPS was $0.54 per common share with adjusted ROA and and ROATCE of 133% and 22%, respectively. Our adjusted efficiency ratio was a low 49%. Tangible book value excluding AOCI also increased 15% year over year. Deposit balances were up with 4% during the quarter with growth in core deposits of 2% as we continue to compete for new banking relationships effectively. Our total cost of deposits was 115 basis points and we maintained our deposit pricing discipline with a low 23% with total deposit beta cycle to date.

Speaker 2

Our credit quality remains stable with 6 basis points of non PCD related charge offs. We remain watchful and consistent with other banks are focused on potential pockets of softness. Like our deposit portfolio, Our loan portfolio is granular and relationship driven, which should continue to serve us well. We remain confident in our client selection and underwriting. And as you know Old National has taken a proactive approach to managing credit.

Speaker 2

This approach has served us well in the past and you see evidence of that stance this quarter's work to address any credit deterioration aggressively. On the client side, Engagement reigned high in the quarter. We expect full relationships with our borrowing clients and to the extent that new or existing clients lack that potential, we will manage accordingly. We do, however, continue to expect disciplined loan portfolio growth in 2023. In other areas, it's more of the same.

Speaker 2

Our below peer deposit costs should drive a funding advantage. We expect to see organic growth of our wealth management client base and we continue to focus on disciplined expense management while building tangible book value. We also continue to invest in top revenue generating talent and expand into dynamic new markets within our footprint. We recently celebrated the opening of our 1st Metro Detroit area commercial banking office with a terrific new team and we announced 2 prominent commercial relationship managers have joined our NASHVILLE Wealth Management team. Before I turn things over to Brendan, I also want to take a moment to share that our old national family continues to recover and heal from the Louisville tragedy on April 10th that claimed the lives of 5 of our team members and impacted so many others.

Speaker 2

More than 3 months later, our O and B family continues to do our best to love, care for, and support one another. Additionally, in June, our Downtown Louisville team began serving clients at a new location in the heart of Downtown Louisville. Once again, I want to thank countless individuals and organizations who have cared for and supported our family during this challenging time. I also want to acknowledge and thank our team members for their resiliency and their commitment to supporting one another. With that, I will now turn the call over to Brendan to cover the quarterly results in more detail.

Speaker 1

Thanks, Jim. Turning to our quarter end balance sheet on Slide 5, We continue to effectively navigate the challenging operating environment, achieving a more efficient balance sheet. We improved our earning asset mix with cash flows from our investment portfolio reinvested in loans, while our funding mix improved through higher deposit balances and lower borrowings. As a result our loan to deposit ratio improved by 100 basis points while strong earnings bolstered our capital levels and contributed to tangible book value growth despite facing AOCI headwinds. On Slide 6, we present the trend in total loan growth and portfolio yields.

Speaker 1

Total loans grew by 2%, in line with our expectations. We sold approximately $300,000,000 of non relationship C and I loans at par during the quarter as we look to manage liquidity while prioritizing lending to our clients with full banking relationships. The investment portfolio decreased by 2%, mainly due to portfolio cash flows and declines in fair values. Despite rate shifts, the duration remains steady at 4.4 years and is not expected to extend further. Cash flows from the portfolio are expected to be $1,200,000,000 over the next 12 months.

Speaker 1

Moving to slide 7, we show our trend in total deposits, with increased $1,300,000,000 or 4 percent quarter over quarter. Core deposits grew approximately $800,000,000 including $490,000,000 of normal seasonal public inflows. The trend in average deposits reflects the continued mix shift away from non interest bearing accounts into money markets and CDs. Market conditions continue to put upward pressure on deposit rates, with interest bearing deposit costs increasing 57 basis points to 1.66%, resulting in a cycle to date interest bearing deposit beta of 33%. Total deposit costs were relatively low at 1.15%, which equates to a cycle to date total deposit beta of 23%.

Speaker 1

While it's challenging to estimate the terminal beta, we have a strong track record of managing deposit rates and are confident we can maintain our funding cost advantage throughout the remainder of the rate cycle. Our disciplined approach to exception pricing has allowed us to successfully defend deposit balances and our targeted promotions have resulted in above peer deposit growth. Slide 8 provides our quarter end income statement. We reported GAAP net income applicable to common shares of $151,000,000 or $0.52 per share. Reported earnings include of $6,000,000 in pretax merger related and other charges.

Speaker 1

Excluding these items, our adjusted earnings per share was $0.54 our profitability continues to be strong with an adjusted return on average tangible common equity of 22.1% and adjusted return on average assets of 1.33%. Moving on to slide 9, we present details of our net interest income and margin. Both metrics surpassed our expectations as we reported a linked quarter increase in net interest income and experienced lower than anticipated margin compression. Our strong performance was bolstered by the quarter with the Fed in May and are better than expected deposit growth. Furthermore, we continue to make progress towards achieving our targeted neutral rate risk position by the end of the rate cycle, while prudently adding protection against any sudden reversal in Fed rate policy.

Speaker 1

Slide 10 shows trends in adjusted non interest income, which was $82,000,000 for the quarter. Our primary fee businesses remained stable, but we did benefit from a $4,000,000 increase in other income that we would not anticipate in our run rate next quarter. The items driving that increase were company owned life insurance revenues, a recovery from a prior charged off asset and positive derivative valuations associated with the transition from LIBOR to SOFR. Continuing to slide 11, we show the trend in adjusted non interest expenses. Adjusted expenses were $241,000,000 and our adjusted efficiency ratio was a low 49.4%.

Speaker 1

Our expenses were well controlled and consistent with the previous quarter, excluding a $5,000,000 increase in incentive accruals related to our strong year to date performance. This would equate to a Q3 run rate of $237,500,000 on slide 12, we present our credit trends, which remain stable, reflecting the strong performance of both our commercial and consumer portfolios. Delinquencies have decreased and net charge offs have remained steady at a modest 6 basis points, excluding the 7 basis point impact from PCD loans. The rise in non performing loans primarily stems from the anticipated migration of PCD credits as we maintain an aggressive approach to resolving these loans. While charge offs from this portfolio are expected to remain elevated in the short term, we expect minimal impact on provision expense given that we currently carry a $39,000,000 or approximately 4% reserve against this book.

Speaker 1

Our 2nd quarter allowance, including reserve for unfunded commitments, stands at $338,000,000 or 104 basis points of total loans. The modest reserve increase was largely driven by loan growth, partially offset by adjustments in our economic forecast. We continue to rely on a 100% weighted Moody's S3 scenario that projects peak unemployment of with 7.2% and negative GDP growth of 3.1%. Barring any significant deterioration beyond these economic assumptions, we expect provision expense to remain limited to portfolio performance and loan growth. Shifting to key areas of focus on slide 14, you will see further details on our loan portfolio.

Speaker 1

Our commercial loan book, which constitutes approximately 70% of our total loans, is granular and well diversified. Our non owner occupied CRE is also well diversified across various asset classes and geographies. Regarding non owner occupied office properties, The majority of the portfolio is comprised of suburban or medical offices with a significant portion of credit tenant leases. Only a negligible percentage less than 1% of total loans is attributed to properties located within central business districts that are geographically dispersed across 11 Midwestern Cities in our footprint. On Slide 15, we provide highlights from our recent examination of fixed rate CRE maturities over the next 18 months.

Speaker 1

Less than 1% of total loans that are non owner occupied CRE mature within 18 months and carry a note rate of less than 4%. Our approach to underwriting CRE includes a 300 basis point margin over the current rates at the time of origination. While these maturing credits have surpassed with the original underwriting stress coupon. We have observed improved net operating income from higher rents. This improvement has been sufficient to uphold debt service ratios in line with our underwriting guidelines, and we believe the refinance risk in this portfolio to be minimal.

Speaker 1

Slide 16 details our Q2 commercial production. The $1,900,000,000 of production was well balanced across all product lines and major markets. As discussed on last quarter's call, we have tightened our pricing standards, enhanced our credit structure and reinforced with our RMs the importance of acquiring a full banking relationship for new loan requests. As a result of these actions and strong Q2 production, our pipeline has decreased to $3,100,000,000 and is consistent with low to mid single digit loan growth we expect in the back half of the year. On slide 17, we present further insights into our deposit base.

Speaker 1

With our average core deposit balances meaningfully lower than peers. 81% of our accounts have less than $25,000 on deposit and carry an average balance of just $4,500 It's important to highlight that we maintain strong enduring relationships with our deposit customers, 50% of which have been with the bank for over 15 years. Our top 20 deposit clients represent only 5% of total deposits and have a weighted average tenure of greater than 30 years. Lastly, our broker deposits were 3.5% of total deposits at the end of the quarter, which we expect to be well below peer average. On slide 18, we provide a comprehensive overview of our capital position at the end of the quarter.

Speaker 1

We observed improvements in all regulatory capital ratios and maintained stability in our TCE ratio, despite facing the negative impact of increasing AOCI. Our above peer return on tangible common equity, coupled with our peer average dividend payout ratio should result in us accreting capital at a faster rate than most. Additionally, we anticipate 30% of our outstanding AOCI to accrete to capital by the end of 2024. We did not repurchase any shares in the quarter and do not intend to do so in the near term as we focus on capital growth. In summary, our strong second quarter performance marked the successful conclusion of the first half of twenty twenty three with results slightly exceeding our expectations.

Speaker 1

We have improved the efficiency ratio of our balance sheet through a better earning asset mix, strong core deposit growth led to a better funding mix, and we grew tangible book value per share by 15%, excluding OCI impact. Despite the challenging rate environment, our net interest income grew quarter over quarter, largely due to the strong execution of our deposit strategy. We have demonstrated an ability to both expand our customer base while maintaining peer leading deposit costs. Our credit portfolio remains stable and our disciplined approach to managing expenses is evident in our quarterly adjusted efficiency ratio of 49.4%. Slide 20 includes thoughts on our outlook for the remainder of 2023.

Speaker 1

We believe our current pipeline should support second half twenty twenty three loan growth in the low to mid single digit range, with full year growth in the mid to high single digit range. We continue to target atoraboveindustrydepositgrowth, and we are reconfirming our guide on 9% to 12% year over year net interest income increase with a stronger conviction towards the higher end of this range. The key assumptions in this guidance include one more rate hike and a through the cycle interest bearing deposit beta of 43% to 53% by year end and non interest bearing deposits falling to 28%. We expect fee businesses to be stable in the back half of twenty twenty three with the with the exception of the $4,000,000 in non run rate items we noted earlier. Our expense outlook is adjusted to approximately $949,000,000 for full year 2023, excluding merger related charges and property optimization related expenses.

Speaker 1

This reflects our with prior guidance of $939,000,000 adjusted upward by $10,000,000 for higher incentive accruals. Dollars 5,000,000 of this has already been accrued at quarter end. Provision expense should continue to be limited to loan growth, portfolio changes and non PCD charge offs as we believe we have adequate reserves against the PCD book. Turning to taxes, we expect approximately $8,000,000 in tax credit amortization for the remainder of 2023 with a corresponding full year effective tax rate of 25% on a core FTE basis and 23% on a GAAP basis. With those comments, I'd like to open up the call for your questions.

Speaker 1

We do have the full team available, including Mark Sander, Jim Sandgren, and John Moran.

Operator

Thank you. At this time, I'd like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. To the question and answer session. Okay, we'll take our first question from Ben Gurlinger with Hovde Group. Please go ahead.

Speaker 3

Hey, good morning, everyone. Good morning, Ben.

Speaker 4

I hate to do a modeling question upfront, but you guys gave a lot of guidance with both The left and right side of the balance sheet, more specifically to the cost of liabilities and deposits going forward. The one piece that I think was missing and I kind of just backed into it a little bit was the average earning asset yield or what you might see an uptick in terms of the next rate hike. So putting it all together, I'm coming up with a margin of around 3.4 kind of at year end. I might be off by a couple of bps here and there, but is that do you think that's a fair assumption? And then What would be some possible factors that could be above or below that?

Speaker 5

Yes. I think you're in the ballpark, Ben. I think what we need to think about is what is the velocity of deposit pricing going forward and how well can we do against that deposit beta guide we got. I can tell you today the velocity does seem to have slowed. I know we're 1 month into the 3rd quarter.

Speaker 5

I think there's some potential upside there. And we do have a still significant amount of fixed asset repricing Fixed pricing assets that will reprice for the next 12 months, it's meaningful. It could and should to help defer a lot of this kind of late cycle deposit repricing that we have. So I think those are the 2 items that probably offset with margin pressure going forward.

Speaker 4

Got you. And then just kind of following up on that. Is it just airing on the side of conservatism? Because you guys do have a really healthy deposit Because you guys do have a really healthy deposit franchise that your beta kind of that doesn't whipsaw nearly as much as some of the lower Quality peers, I guess you could say. So, like, is it more just, you know, elongation?

Speaker 4

It just seems a little conservative to me, but You guys probably have a

Speaker 6

better vantage point.

Speaker 5

I think our through the cycle deposit beta that we put out there, I think That range I think seems reasonable. Time will tell. But what we can we continue to say whatever their positive beta is due for the industry, we think we outperform it at the end of the day. That's our best guess today in this environment. And will we try to outperform it?

Speaker 5

Absolutely. One thing I we're certainly confident is we can be better than peers.

Speaker 4

Gotcha. That's great. And then one more kind of just changing topics a little bit. You guys kind of historically modeled for with the worst case scenario based on Moise, the S3. And with that as the backdrop, if you guys are slowing loan growth, does that kind of negate The economic factors associated with CECL or is it more bad could get worse in their modeling, therefore you go lower?

Speaker 4

What I'm really getting at here is that you're slowing loan growth, should the provision come down as well assuming there's no credit events?

Speaker 5

See, our provision should be generally limited to loan growth and non PCD charge offs. And so if loan growth moderates a little bit that should moderate provision expense going forward.

Speaker 4

All right. Sounds good. Appreciate it. Great quarter. Hope with the rest of your continuous trend.

Speaker 3

Thanks, Ben.

Speaker 7

Okay.

Operator

Next, we'll go to Scott Siefers with Piper Sandler. Your line is open.

Speaker 4

Good Good morning, guys. Thank you

Speaker 8

for taking the question. Just wanted to ask a question on NII. So obviously, really good performance and glad to see the sturdy guide. Brendan, maybe if you could offer just sort of any thoughts you might have or be comfortable with on sort of when and why you would see NII ultimately bottoming? And to the extent possible, what would happen to it thereafter?

Speaker 8

Presumably, it becomes a function of loan growth and sort of back book repricing, but maybe just sort of nuances of upcoming ebbs and flows in NII in the aggregate.

Speaker 5

Scott, yes, I think it's impossible to predict with any level of kind of precision when on a high bottoms out and at what level. I can tell you that we continue to run an asset on the balance sheet, so the next rate hike will help offset any deposit headwinds. As we've talked about a little earlier, I think The pace of deposit repricing has slowed a little bit. So I don't want to call the end, but certainly there's more probably downside pressure than upside opportunity at this point.

Speaker 4

Okay.

Speaker 8

And as it relates to the non interest bearing deposits, which I so I think we have them going down to or assume they go down to 28% from roughly 30% today. Maybe just sort of the background as to what you guys are thinking that leads you to believe that's the right number. In other words, what are sort of the risks, But also what you're seeing that suggest they will settle out fairly soon.

Speaker 5

Yes. We're monitoring the pace of that transition at a non Higher interest bearing account. It's probably maybe the most aggressive of the assumptions in there, but probably has maybe the smallest impact in of our guys. So I don't think it moves around our NII guidance significantly, if we miss that by a couple of percentage points. But Scott, honestly, it's our best guess.

Speaker 5

That's a tough one to call, but we're monitoring the behaviors and we feel comfortable with that level now and we'll update you if that changes.

Speaker 4

Okay. Perfect. All right. Thank you very much. Thanks, Scott.

Operator

Thank you. And next, we'll go to David Long with Raymond James. Your line is now

Speaker 3

open. Good morning, everyone. Good morning, David.

Speaker 9

Let's stick with the deposit discussion here. And the The question I have is, it seems like June there was a lot of competition as banks wanted to show deposit growth in the quarter. Is your sense that maybe deposit competition has eased in July? And then as a second part of that, throughout the Q2 and into here in July. Where are you seeing the biggest competition?

Speaker 9

Is it the GSIBs? Is it the regionals? Is it the community banks? Where is it most competitive? Thanks.

Speaker 6

Yes. I don't think that David, it's Mark. I don't think that competition has eased. I would say the pace of increases has eased is what Brendan was trying to convey. So we stay competitive.

Speaker 6

We're staying in the upper half of the market in terms of our rate positioning. And I just think there's still fierce competition and where is it coming from? Frankly, everywhere. And so more of the midsized banks than anything else. The SIFIs don't have to compete as much as, but All of our markets have plenty of competition and I think it's still pretty healthy out there.

Speaker 9

Got it. Cool. Okay. And then Secondly, I wanted to ask about your appetite to hire additional commercial bankers. I know you guys have had a lot of success over the last year or 2 in that.

Speaker 9

Are you still looking to hire within your footprint? And if so, what does the commercial banker that's attractive to you look like?

Speaker 6

The answer to your question is yes. So we'll always stay in the market. We've got a long term view and we've said a lot, but we'll repeat it. Good revenue Producers pay for themselves quickly even in this environment. We're building a model for the long term and People, we've got a good story to tell and we want to take advantage of that when people are looking to make a move and frankly be with people who might not be looking to make a move.

Speaker 6

We have slowed the pace of hiring this year, largely because we don't Need to add folks. We just are being opportunistic. But we still hired 9 revenue producers across Wealth and Commercial in Q2, And we'll continue to look for it. The prototypical profile is a seasoned 10 to 15 or more year banker relationship banking within our markets, I guess, is the best way to put it.

Speaker 9

Got it. Thanks, Mark. Appreciate it. Thanks, everyone.

Speaker 2

Thanks, David.

Operator

Next, we'll go to Chris McGrady with KBW. Your line is now open.

Speaker 7

Good morning. How are you guys doing?

Speaker 2

Good morning, Chris. Good.

Speaker 7

Hey, Brendan, maybe another one for you. I think market consensus is that we stay higher for longer after this week's Fed move. If that plays out to the earlier comments on margins, should the narrative get A little bit harder next year, or is it kind of a balancing act where you can kind of hold margins?

Speaker 5

I think it's a balancing act, right? It's that fight to hold margin, which we all play. And I think we have an advantage over most others given our the quality of our deposit franchise. But the velocity of deposit costs can slow. Like I said, we have a lot of earning assets at fixed rates that are going to reprice meaningfully higher.

Speaker 5

Our fixed rate book is going to reprice 180 basis points above Kind of run out deals, our invest portfolio that we're reinvesting into loans is plus 400 basis points. So yes, I think we have the tools and the balance sheet to help Flight for flat, in a long higher for longer rate environment.

Speaker 7

Okay. That's helpful. And then in terms of capital, Jim, you talked just about everything's kind of on hold given the environment. What are you looking forward to kind of make a switch to returning more capital.

Speaker 2

There's an awful lot to play out here with Back to the economy, the last rate move, I think like all investors, right? I mean, I think we're trying to answer those questions. And then I think we get more comfort in how do we think about returning capital in which form. So I I think we get more clarity as the year continues to progress and would have better optics heading into next year.

Speaker 7

Okay. And maybe if I could just sneak one more in. Brandon, the I think you mentioned $4,000,000 of kind of non run rate Fees, so that would put you kind of $78,000,000 $77,000,000 kind of ballpark for quarterly fees. I want to make sure I understood that. And then given the tax benefit in the quarter.

Speaker 7

I know you gave it full year guide, but do you have what the back of the envelope is for the back half of the year with that adjustment?

Speaker 5

Yes. So I think that 78.75% is the right number for fees going forward given sort of mortgage and capital markets of headwinds. And then on the tax rate, I think that full year guide is probably approximates the back two quarters.

Speaker 4

All right, perfect. Thanks.

Speaker 2

Thanks, Chris.

Operator

Thank you. Next, we'll go to Terry McEvoy with Stephens. Your line is now open.

Speaker 10

Hi. Good morning, everyone.

Speaker 2

Good morning, Terry.

Speaker 10

Maybe the decline in the loan pipeline, the to $5,400,000,000 to $3,100,000,000 How much of that is internal focus on the full relationship and just tightening of things up versus just less market demand out there.

Speaker 6

Yes, Terry, it's Mark. I won't put percentages on it, but more is driven by our internal our focus than it is external. I mean certainly CRE markets have Retracted a bit and are not as active. So there is some of that, but more of it is frankly our rationing our balance sheet. And as Jim and Brendan both alluded to our comments.

Speaker 6

We're a relationship bank, and we always are that way. But occasionally, you in the past, you've had times where you lead with credit. In this environment, We're not doing that. Deposits have to come day 1 and if the pipeline didn't have reflect that, we moved them out of the pipeline. So we've rationed our pipeline down proactively.

Speaker 10

Thanks. And then just overall managing the size of the balance sheet, what's your appetite for additional with loan sales and will the cash flow from the securities portfolio be utilized to fund loan growth?

Speaker 5

Yes, Terry, this is Brendan. Yes, we will actually use the investment portfolio to continue to fund loans. And I think to the extent that deposits continue to grow To fund our loan growth, we'll use that. If it doesn't, there's opportunities to continue to pair, but it won't be significant or sizable.

Speaker 10

And maybe just one last one. I mean, the expense guide, I just want to make sure it fully captures with what Jim talked about in terms of the Southeast Michigan and Detroit build out, what you're doing in wealth management, what you're doing in Nashville. You've got a lot of growth initiatives, but you've really been able to self fund it and haven't raised the expense guidance, which I think has been a real positive surprise. I'm just making sure all those initiatives you feel like are captured in that in the expense guide for this year.

Speaker 5

Yes, Terry. Absolutely. It's all captured in it.

Speaker 2

That's the goal, right? I mean, I think we have continued opportunities to invest in people and any technology needs, but at the same time we got to figure out ways to self fund that. And so we want to be incredibly disciplined around what that looks like.

Speaker 10

I totally agree. Thanks for taking my questions.

Speaker 2

Thanks, Terry.

Operator

Thank you. Next, we'll go

Speaker 5

to Brody

Speaker 4

Preston with UBS.

Speaker 3

Your line

Operator

is open. Hey, good morning, and with UBS. Your line is open.

Speaker 11

Hey, good morning, everyone.

Speaker 2

Good morning, Brody.

Speaker 11

Hey, I just wanted to follow-up. Brennan, I think you said that there might be some, I think, upside on NII or maybe it was Jim that said that just depending on what happens with the velocity of the deposit beta guide. I think the spot rate in the deck, excuse me, you said was 198. And so I guess, how has the velocity changed From that $198,000,000 level?

Speaker 5

It slowed materially, but it's early days in the quarter and so we don't want to declare victory and say permanent change of velocity, but we have seen some positive trends on that front and obviously we'll continue to watch it.

Speaker 11

Got it. And I saw the uptick in brokered deposits quarter over quarter and it looked like it was Fairly spread out between the front end and the back end. But I wanted to ask just like just given NIBs came in a bit better than what I expected. Are you guys planning on maybe slowing the pace of broker Is there potential for you to pay brokered deposits back and would that kind of feed into maybe A slowing of the increase in the deposit cost trajectory?

Speaker 5

Yes. It's all about core deposit growth trajectory to the extent that we Continue to grow core deposits at rates better than brokered. We'll continue to do that and deemphasize our use of broker.

Speaker 11

Okay. Okay. And then the last one for me, just in terms of with the loan pipeline. I'm sorry if I missed it. Do you have a sense for, I guess, what portion of it is Kind of fixed rate versus floating rate at this point and what kind of new fixed rate origination yields are?

Speaker 6

Yes, we do. It's about 75% floating and 25% fixed. Okay.

Speaker 11

And is there a difference between what the origination yields are on the fixed rate versus the floating rate?

Speaker 5

Yes, we actually put in the slide deck, our floating rate just in June was 7.61% and fixed was around Just above 6%. That could move up a little bit given the potential, obviously, rate hike coming here shortly.

Speaker 11

What drives that delta, Brendon, between commercial fixed and commercial floating being 100 and 50 to 160 basis points kind of difference at this point in the rate cycle?

Speaker 5

Yes, it's a swap curve. You think about the average tenure of these 6 rate deals 5 years, that 5 year swap curve is about that below.

Speaker 11

Got it. Got it. Okay. Great. Well, thank you very much for taking my questions.

Speaker 11

I appreciate it.

Speaker 2

Thanks, Brody.

Operator

Next, we'll go to John Arstrom with RBC C Capital Markets. Your line is open.

Speaker 3

Hey, thanks. Good morning.

Speaker 2

Good morning, John.

Speaker 3

A couple of follow ups. Just on the margin, Brendan, To just put it all together, do you feel like is the margin inflecting now? I mean, if the Fed is done this week, is it inflecting imminently in your mind?

Speaker 5

As I said, I think there's probably more downward pressure than upward opportunity in this, but it's so dependent on again the velocity of And there's opportunities to continue to grow NII on the earning asset side because of Fixed rate, assets repricing. Is it enough to offset it? We just don't know yet.

Speaker 11

Okay.

Speaker 3

Slide 14, this is great because it's you don't have exposure to Central Business District. I think the banks that don't have the exposure tend to talk about it more openly, but you're in a lot of big cities. What are you seeing in terms of Central Business District Office Real Estate. Is it do you feel like it's as big as a problem as we make it out to be on the outside? Just curious what you're seeing.

Speaker 6

I think you just answered your own question. I think it's not as big of a problem as it's made out to be and yet we all have our eye on it. It's not like it's robust and there aren't Much in the way of new opportunities certainly, but the risk there exists. I think it's perhaps a little overly stressed in the media. I think we have ours well circled and to the extent we need to well reserved for the couple opportunities that where there are issues.

Speaker 6

Okay.

Speaker 3

Okay. Good. And then Jim, one for you. Anything on regulatory that concerns you? I know you're well under $100,000,000,000 but with anything that you're hearing that you think would have an over outsized impact on Old National?

Speaker 2

I think obviously we're paying really close attention to what's being said out there. And we have always been in the position of with having good regulatory relationships. And this is now not the time to reduce any emphasis on the work you do, Right. And so we just got to continue to improve at every single thing we do to meet regulatory expectations, exceed regulatory expectations. But as I see those things, I think that the toughest one seem to be aimed at banks north of $100,000,000,000 and obviously there's a lot of distance Where we're at today and that number.

Speaker 2

So I think we're in a great spot. I actually think we're in the sweet spot for kind of profitability in terms of Bankstar size, where we have the scale to go off and hire and invest in technology. And yet we'll maybe miss some of the toughest things that come to our industry. So I think we're in a really strong spot to be for the next few years.

Speaker 3

Yes, I agree. Returns look really good.

Speaker 6

So, all right. Thank you. Appreciate it.

Speaker 4

Thanks, John.

Operator

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

Speaker 2

Well, as always, we appreciate your participation. Thanks for the 1 or 2 questions that I actually got and that weren't directed towards Brendan and Mark. Lonnel and John and Brendan, the whole team are here to answer any follow-up questions. So once again, thank you for all your participation and support.

Operator

This concludes Old National's call. Once again, a replay along with 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 5,258,325. This replay will be available through August 8. If anyone has any additional questions, please contact Lynelle Walton at 812-464-1366.

Operator

Thank you for your participation.

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Key Takeaways

  • Strong second quarter performance with EPS of $0.52 (adjusted $0.54), adjusted ROATCE of 22.1% and a 49.4% adjusted efficiency ratio, driving 15% year-over-year growth in tangible book value excluding AOCI.
  • Core deposits rose 2% (total deposits +4%) at a 1.15% total deposit cost and 23% cycle-to-date beta, reflecting disciplined pricing and a lasting funding cost advantage.
  • Credit quality remained stable with just 6 basis points of non-PCD net charge-offs, a 104 basis point allowance-to-loans ratio and proactive, relationship-driven underwriting.
  • Net interest income and margin surpassed expectations as investment portfolio cash flows were reinvested into loans, margin compression was limited and progress was made toward a neutral rate-risk position.
  • Full-year 2023 guidance includes mid-to-high single digit loan growth, a 9–12% net interest income increase, approximately $949 million of adjusted expenses and controlled provisions given ample reserves.
AI Generated. May Contain Errors.
Earnings Conference Call
Old National Bancorp Q2 2023
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