Old National Bancorp Q1 2024 Earnings Call Transcript

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April 23, 2024

There are 9 speakers on the call.

Operator

Welcome to the Old National Bancorp First Quarter 2024 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived 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.

Operator

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.

Operator

Mr. Ryan, please go ahead.

Speaker 1

This morning, Old National reported its Q1 2024 results. Our peer leading low cost deposit franchise, above average deposit and loan growth, disciplined expense control and stable credit performance during the quarter drove these better than consensus results and sets us up favorably as we move into the Q2. Before I delve into the Q1 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 CapStar clients and team members to our Old National family.

Speaker 1

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 Q3. Let's focus on our Q1 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 Q1 and our adjusted EPS was 0 point 4 $5 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 to TCE for the quarter was 16.7% and our adjusted ROA was 1.1%.

Speaker 1

Our adjusted efficiency ratio was a low 53.4 percent 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 two zero one basis points. Year over year, we saw total deposit growth of 8% and total loan growth of 6%.

Speaker 1

Meanwhile, our tangible common book value grew 2% during the Q1 and 11% year over year. Our year over year trends once again demonstrate our consistent financial strength and quality returns. In summary, our Q1 results have set a solid foundation for 2024. Our strong deposit loan growth, stable credit performance and effective expense management demonstrate 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.

Speaker 1

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 ks that we filed on April 1. We will provide any updates in the future when appropriate. That said, we are focused on running our business as usual.

Speaker 1

As I said earlier in this call, we had a great Q1 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 call with us today are very seasoned and each has 10 years plus experience with us. John Moran, who 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 at a publicly traded bank holding company.

Speaker 1

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 Cary Goldfeder, our new Chief Credit Officer, who will join us on our quarterly calls from now on. Carrie, who came to us from Capital One and 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.

Speaker 1

Our addition to our leadership team further strengthens our commitment to excellence in all aspects of our operations. With that,

Speaker 2

I will now turn the call over to John. Thanks, Jim. Turning to slide 5, you can see our Q1 balance sheet, which highlights stability in our liquidity and capital positions. Our 1st 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%.

Speaker 2

We ended the quarter with a strong CET1 ratio of 10.76 percent 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.

Speaker 2

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 Q1. 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 $1,300,000,000 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 non interest bearing. Our broker deposits as a percentage of total deposits is now 3.2%, which remains well below peers.

Speaker 2

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 remained 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 costs 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 Q2. Overall, we remain very pleased with the execution of our deposit strategy, which continues to drive above peer deposit growth at below peer costs.

Speaker 2

Slide 8 provides our quarter end income statement. We reported GAAP net income applicable to common shares of $116,000,000 or $0.40 per share. Reported earnings include the following pre tax items: the $13,000,000 non cash expense associated with the distribution of excess pension assets with the resolution of the legacy First Midwest plan an additional $3,000,000 charge related to the FDIC special assessment and $3,000,000 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.

Speaker 2

Our low total deposit cost of 2 0 1 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 non interest income, which was $78,000,000 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 non interest 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.

Speaker 2

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 non performing 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 fourteen 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.

Speaker 2

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 2nd quarter with the inclusion of CapStar and then continue to modestly increase in the back half of the year.

Speaker 2

Our assumptions are listed on the slide, but I would highlight a few of the primary drivers. First, we assume 3 rate cuts of 25 basis points each consistent with the Fed dot plot. 2nd, we are anticipating additional late cycle deposit repricing that will result in a terminal beta of 40% by mid year and a non interest 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.

Speaker 2

Also closing CapStar 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 Q2 and 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 finalize these initial adjustments in the Q2.

Speaker 2

As you can see, our guidance is unchanged. In summary, we had a strong start to 2024 with the Q1 results better than our expectations and strong performance metrics. More importantly, we continue to demonstrate our ability to execute against our strategic priorities. 1st, we are organically funding our loan growth with deposits up 8% year over year, 200 basis points better than our loan growth. 2nd, our adjusted return profile remains top quartile against peers at nearly 17% on tangible common equity.

Speaker 2

3rd, we remain disciplined on operating expenses with an adjusted efficiency ratio of 53%. 4th, 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. We do have the full team available, including Mark Sander and Jim Sangre.

Operator

We are now opening the floor for question and answer Our first question comes from Scott Siefers from Piper Sandler. Your line is now open.

Speaker 3

Good morning, guys. Thanks for taking the question. Hey, I was hoping first maybe we could discuss some of those deposit pricing metrics, John, that you mentioned, sort of the late Q1 and then the spot rates as well. Just maybe overall competitive dynamics, what's kind of giving you comfort that it sounds like in places you're able to lower rates exactly, just maybe overall competitive and thoughts on your own positioning as well?

Speaker 2

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 makes sense, we'll continue to be focused on growing our deposits.

Speaker 2

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.

Speaker 3

Okay. Perfect. Thanks, John. 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.

Speaker 3

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?

Speaker 4

Yes. Hey, 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 and 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.

Speaker 4

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.

Speaker 3

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

Speaker 4

Thanks, Scott.

Operator

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

Speaker 5

Hi, good morning.

Speaker 1

Good morning, Ben.

Speaker 5

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

Speaker 4

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 that to 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 would suggest, than 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.

Speaker 1

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

Speaker 5

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

Speaker 4

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

Speaker 4

But certainly more

Speaker 1

of the growth is going

Speaker 4

to come in C and I where we think we're really well positioned.

Speaker 1

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

Speaker 4

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

Speaker 5

Got you. All right. Well, I appreciate it. Thanks for the time guys.

Speaker 1

Thanks, Ben.

Operator

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

Speaker 6

Hi, good morning. Thanks for taking my questions.

Speaker 1

Good morning, Jerry.

Speaker 6

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

Speaker 4

So I'll start, Terry. It's Mark. As we say at a manageable level, it's based on the data that we provided there. We have $2,800,000,000 coming due in the next 18 months. When we underwrite, we stress everything at a 300 basis point cushion.

Speaker 4

So that's why we show above 4% and less than 4%. So we have $400,000,000 of loans maturing in the next 18 months that would bump up against our underwriting parameters. I would say that $400,000,000 less than half of it is what we really have a keen eye on that might have some stress. So that's why less than $200,000,000 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.

Speaker 4

I don't know how to describe it better than that. We didn't have the highs that some of the coasts perhaps had. And so you're still seeing rent growth. It's modest rent growth, but it's after many years of really strong rent growth that has more than accounted for the increase in expenses that has happened over those years. So we feel really good about our multifamily portfolio.

Speaker 6

Thanks. And then as a follow-up, a question on security yields. They were up a basis point quarter over quarter. The portfolio was up and new money yields were 5.61. So I guess what's behind just the slight increase in security yields?

Speaker 2

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

Speaker 6

And just last, a quick one. The NII bottoming out in the Q1, John, is that with and without CapStar? I just want to make sure I understand that statement.

Speaker 5

Yes.

Speaker 6

Perfect. Thanks for taking my questions.

Operator

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

Speaker 4

Hey, thanks. Good morning.

Speaker 1

Good morning, John.

Speaker 7

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

Speaker 4

In every one of our lines of business. So in our consumer business, their primary objectives and goals is active checking accounts. And so it is literally gaining market share 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.

Speaker 4

And then our private banking team in wealth has done a really nice job with our money market promotions getting out there getting after it, I guess, nothing more than good old fashioned blocking and tackling with a really good team.

Speaker 1

John, I would just add, starting in the fall of 2022, 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 gatherers and that's been the mantra, which is I think helped drive our success.

Speaker 7

Okay. Good. Fair enough. And then on non interest bearing, I know there's some seasonal factors in there, but does it feel like that has bottomed or is close to a bottom that $9,000,000,000 and change?

Speaker 2

Yes, 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 saw outflows, some of that is seasonal. February, we saw stability and we actually started to grow in March. So we feel good about the guidance that we've got out there.

Speaker 2

We do think it will continue to kind of come down a little bit, but not much from here.

Speaker 7

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?

Speaker 7

Is it safe to assume they're going to continue to go up or is that the wrong read on that?

Speaker 4

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 to 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 it's going to go up from here, but certainly some of the criticized and classifieds will work their way through the pipe over these next 12 to 18 months.

Speaker 3

Okay. All right.

Speaker 7

Thank you, everyone. Appreciate it.

Speaker 1

Thanks, John.

Operator

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

Speaker 3

All right. Good morning.

Speaker 1

Good morning, Chris.

Speaker 5

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

Speaker 2

Chris, I'd say the biggest risk is probably just what happens in terms of non interest bearing. And again, we feel pretty good that we're bottoming out there based on the trends that we saw in the quarter. But that would be biggest downside risk. I think biggest upside risk might be for us on the fee line. We think capital markets was a touch soft this quarter, a few swaps one way or another can make a difference there.

Speaker 2

And it's hard to kind of get really too excited about mortgage, but pipelines there are up pretty solidly. So maybe we'll have a nice spring selling season here.

Speaker 5

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

Speaker 1

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 of 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 something that's a serious part of our conversation, unchecked capital grows pretty quickly.

Speaker 1

And so I think there'll be opportunities to think about capital a little differently than we have in the last couple of years.

Speaker 5

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

Speaker 1

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

Speaker 1

But they'll have a de minimis effect quarter in quarter out.

Speaker 5

Okay. Thanks, Jim. Thanks.

Operator

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

Speaker 8

Good morning, everyone, and thanks for taking my question. Good morning, David. I wanted to talk about the non performing loan line. You were up about 20% in the quarter. I think someone mentioned that maybe there's a few credits involved there.

Speaker 8

But specifically what happened there in the non performing loan line and to drive it up 20% in the quarter?

Speaker 4

David, it's Mark. I think it's just the ebb and flow, the natural ebb and flow of credit. It 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.

Speaker 4

And then we had 2 C and I credits that were not related, not symptomatic of any broader concern. So just episodic 3 credits.

Speaker 8

Got it. Thank you, Mark. 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?

Speaker 8

It seemed better than expected. Were there any you highlighted a few items that we took out. Anything else in the quarter that was maybe non recurring or expenses that maybe you missed out on this quarter?

Speaker 2

No, I wouldn't characterize anything as non recurring in there other than what we had called out separately. It was, as you know, sitting in Chicago, a milder winter. We moved less snow around this winter that helped. I mean, there's sort of 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 Q2 and that's reflected in the guidance.

Speaker 8

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

Speaker 1

Thanks, David.

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.

Speaker 1

Well, thank you, Ali. 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 with access code 3,992,332. This replay will be available through May 7. If anyone has additional questions, please contact Lonnel your calls at 812-464 1366.

Operator

Thank you for your participation in today's conference call and have a wonderful day.

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Earnings Conference Call
Old National Bancorp Q1 2024
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