Old National Bancorp (NASDAQ:ONB) Q3 2023 Earnings Call Transcript

Old National Bancorp (NASDAQ:ONB) Q3 2023 Earnings Call Transcript October 24, 2023

Old National Bancorp beats earnings expectations. Reported EPS is $0.51, expectations were $0.49.

Operator: Welcome to the Old National Bancorp Third Quarter 2023 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with SEC’s regulations, FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for 12-months. Management would like to remind everyone that certain statements on today’s call may be forward-looking in nature and are subject to certain risks, uncertainties and other factors that could cause actual results or outcomes to differ from those discussed. The Company refers you to its forward-looking statements legend in the earnings release and presentation slides. The company’s risk factors are fully disclosed and discussed [Technical Issues] provide appropriate comparisons.

These non-GAAP measures are intended to assist investors understanding of performance trends. Reconciliation of these numbers are contained within an appendix of the presentation. And now to turn the call over to National’s CEO, Jim Ryan for opening remarks.

Jim Ryan: Good morning. We’re pleased to be with you today to share details about our strong third quarter performance. The strength of our franchise remains evident in the results outlined on slide four. This quarter was like our last; business as usual for Old National with growth in deposits, well-controlled funding cost, ample liquidity and stable credit quality. We also saw a slightly positive loan growth despite loan sales. We’ve reported an EPS of $0.49 for the quarter, adjusted EPS was $0.51 per common share with adjusted ROAA and ROATCE of 1.26% and 21% respectively. Importantly, we achieved significant year-over-year tangible book value growth. Our adjusted efficiency ratio remained under 50%. Total and core deposit balances were up 3% during the quarter as we compete effectively for new deposits.

Our total cost of deposits was 161 basis points, and we maintained our deposit pricing discipline with a low-30% total deposit beta cycle-to-date. As a result, we beat our own margin expectations. Our credit quality remained stable. Net charge-offs were 24 basis points, 15 of which related to a single charge-off that we don’t believe indicates a broader weakness in the portfolio. We remain diligent in managing the portfolio consistent with our past strong credit management practices. On the new business side, while our loan pipeline has declined, we continue to actively seek and win new loan business, where we can develop full relationships, meet hurdle rate returns and have a strong credit profile. Broadly, some competitors have seen significant appetite change creating new opportunities for us.

As a result, we expect the loan portfolio to grow modestly for the remainder of the year. We also continue to hire top revenue-generating talents selectively albeit slower than previous quarters. With that, I will now turn the call over to Brendon to cover the quarter results in more detail.

Brendon Falconer: Thanks, Jim. Turning to our quarter-end balance sheet on slide five. We continue to effectively navigate this challenging operating environment. Our focus on deposit acquisitions resulted in 3% growth this quarter and has led to a better funding mix stronger-than-expected net interest income and will allow us to take advantage of new lending opportunities, while many of our peers are pulling back. Our strong earnings improved all regulatory capital ratios and our tangible book value per share increased 3%, excluding the AOCI impact. On slide six, we present the trend in total loan growth and portfolio yields. Total loans grew in line with our expectations. We sold $389 million of non-relationship C&I loans at par during the quarter as we look to manage liquidity, while prioritizing lending to our clients with full banking relationships.

Excluding these loan sales, total loans increased 1.7%. The investment portfolio declined in line with our expectations and the duration remained steady at 4.3. Cash flows from the portfolio are expected to be $1.4 billion over the next 12-months. Moving to slide seven, we show our trend in total deposits, which increased $1 billion, including approximately $300 million of normal seasonal public fund inflows. All three of our lines of business posted solid growth and client acquisition. Growth came mostly from the money market and time deposit categories, offset by declines in non-interest-bearing deposits, which continue to experience migration to higher-yielding products. Non-interest-bearing deposits as a percentage of total deposits was 28% at quarter-end.

And we anticipate this downward trend to continue in the near-term, albeit at a slower pace. Market conditions continue to put upward pressure on deposit rates with interest-bearing deposit costs up 56 basis points to 2.22%. Total deposit costs were 1.61% for the quarter, which equates to a cycle-to-date total deposit beta of very low-30%. While it’s challenging to estimate the terminal beta, we have a strong history of managing deposit rates and are confident we can maintain our cost advantage through the remainder of the rate cycle. Our deposit promotions have been highly successful at bringing in new clients and we are actively working to deepen and expand those relationships. Slide 8 provides our quarter-end income statement. We reported GAAP net income applicable to common shares of $144 million or $0.49 per share.

Reported earnings include $6 million in pretax merger-related charges. Excluding these items, our adjusted earnings per share was $0.51. Our profitability continues to be strong with an adjusted return on average tangible common equity of 20.9% and adjusted return on average assets of 1.26%. Moving on to slide 9, we present details of our net interest income and margin. As expected, deposit pricing led to modest declines in both NII and NIM. We anticipate approximately $3.4 billion in fixed-rate loans to be replaced over the next 12-months and reinvestment rates approximately 260 basis points better than runoff yields. This should provide a considerable offset to late-cycle deposit repricing. Slide 10, shows trends in adjusted non-interest income, which was $81 million for the quarter.

All of our primary fee businesses performed as expected with a slight seasonal uptick in mortgage revenue. Continuing to slide 11 and we show the trend in adjusted non-interest expenses. Adjusted expenses were $239 million and our adjusted efficiency ratio was a low 49.7%. These results were generally in line with our Q2 guidance. On slide 12, we present our credit trends, which remained stable reflecting the quality of both our commercial and consumer portfolios. Delinquencies and non-performing loan trends were both within our normalized range. Net charge-offs were 24 basis points, with 15 basis points related to a single long-term C&I client that suffered operational challenges following a generational management succession. Our third quarter allowance, including reserve for unfunded commitment stands at $337 million or 103 basis points of total loans, and was largely unchanged from the prior quarter.

A reserve model assumption already reflect a material slowdown in the economy consistent with the Moody’s S3 scenario, which should limit reserve build to portfolio performance and loan growth. Shifting to key areas of focus on slide 14, you will see further details of our loan portfolio. We have no material change in our office portfolio, with less than 1% of total outstandings located in the central business districts. Our shared national credit portfolio was 7% of our total portfolio has above-average credit quality and continues to perform well. We did have some limited exposure to mandated regulatory downgrades this quarter, which accounted for half of our credit migration. That said, as part of our ongoing portfolio management, we were able to exit one of these credits at par shortly following the force downgrade announcement.

On slide 15, we provide highlights from our recent examination of fixed-rate CRE maturities over the next 18-months. We continue to believe given the small exposure and current performance that the refinance risk in this portfolio will be minimal. Slide 16 details our Q3 commercial production. Our slightly lower production and pipeline this quarter reflect moderating client demand and our focus on obtaining full banking relationships with new loan requests. On slide 17, we present further insights into our franchise leading deposit base, which is exceptionally granular and long-tenured. Please note, we reduced our broker deposit exposure this quarter, which stands at only 3.2% of total deposits, compared to the industry average of 10.6% last quarter.

On slide 18, we provide a comprehensive overview of our capital position at the end of the quarter. We observed improvements in all regulatory capital ratios and a modest decline in our TCE ratio, which was driven by rate-related increases in AOCI. Our above peer return on tangible common equity, coupled with our peer average dividend payout ratio should result in ONB accreting capital at a faster rate than most. Additionally, we anticipate 30% of our outstanding AOCI to accretive capital by the end of 2024. In summary, our strong third quarter performance exceeded our expectations. We have improved the efficiency of our balance sheet with strong core deposit growth, which has led to a better funding mix and better-than-expected net interest income.

We continue to demonstrate our ability to expand our customer base, while maintaining peer-leading deposit costs. Our strong liquidity also positions us well to take advantage of new lending opportunities. Our credit portfolio remains stable and our disciplined approach to managing expenses is evident in our quarterly adjusted efficiency ratio of 49.7%. Slide 20 includes thoughts on our outlook for the remainder of 2023. We believe our current pipeline should support fourth quarter growth in the low-single-digit range. We anticipate continued success in our execution of our deposit strategy and expect to meet or exceed the industry growth in the fourth quarter. We are expecting a 3% to 4% decline in NII in Q4, which equates to a 13% year-over-year increase, a slight upward revision from our Q2 guide than anticipated 12% year-over-year growth.

This updated guidance assumes no additional Fed actions, a through-the-cycle interest-bearing deposit beta of 46% by year-end and non-interest-bearing deposits falling to 26%. We expect fee businesses to be stable with typical seasonal patterns. Longer-term, we remain bullish on both TM and wealth as our investments in these areas build momentum. Our expense outlook for the fourth quarter should be consistent with Q3, excluding merger-related charges with some potential variability related to incentive accruals. Provision expense should continue to be limited to loan growth, portfolio changes in non-PCD charge-offs as we believe we have adequate reserves against the PCD book. Turning to taxes. We expect approximately $5 million 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 the call for your questions. We do have the full team available including Mark Sander, Jim Sandgren and John Moran.

Jim Ryan: That prepares our concluded — our prepared remarks. So with any questions, please go ahead and ask. We’re not getting any feedback from the operator here, so.

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Q&A Session

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

Scott Siefers: Good morning, everybody. Thank you for taking the question.

Jim Ryan: Good morning, Scott. Sorry for the delay. And I’m glad you’re back on top.

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

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

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

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

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

Scott Siefers: Okay. All right. Perfect. Thank you.

Jim Ryan: Thanks, Scott.

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

Terry McEvoy: Hi, good morning, everyone.

Jim Ryan: Good morning, Terry.

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

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

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

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