Old National Bancorp (NASDAQ:ONB) Q1 2024 Earnings Call Transcript

Old National Bancorp (NASDAQ:ONB) Q1 2024 Earnings Call Transcript April 23, 2024

Old National Bancorp isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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 and 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.

Jim Ryan: This morning, Old National reported its first quarter 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 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 1st. 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.

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 four, 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 ROATCE for the quarter was 16.7%, and our adjusted ROA was 1.1%.

Our adjusted efficiency ratio was a low of 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 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 demonstrate our ability to excel in a challenging banking environment.

As we progress into the year, we reiterate our steadfast commitment to sustainable growth, discipline 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 1st. We will provide any updates in 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 [ph], our Treasurer, Angela Putnam, our Chief Accounting Officer, who are both on a 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 likes 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. 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 Carrie 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. Her 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: Thanks, Jim. Turning to slide five, 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 entered the quarter with a strong CET1 ratio of 10.76%, and we continue to expect that we will accrue 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 six, 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 seven, 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. 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 four basis points higher than our 1Q average, and a spot rate at March 31st 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 five 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 eight 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 free tax items. The $13 million non-cash expense associated with the distribution of excess pension assets with the resolution of the Legacy First Midwest plan, 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 nine, 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 costs 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 non-interest 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 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.

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 three 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 bill. 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 assume three 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 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. Also, closing CapStar a quarter early modestly helped our neutrality. In addition to the three-cut scenario, we did run a forward curve, including one and a half rate cuts, and a static curve through our models. The results of each were not materially different from our three-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 and full year 2024.

All guidance has been updated to include the CapStar close on April 1st and purchase accounting assumptions in line with our transaction modeling, which is subject to change as we finalize 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 charges-offs just seven 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.

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Q&A Session

Operator: We are now opening the floor for question-and-answer session. [Operator Instructions] Our first question comes from Scott Siefers from Piper Sandler. Your line is now open.

Scott Siefers: 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 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 places you’re able to lower rates exactly, just maybe overall competitive and thoughts on your own positioning as well.

JohnMoran: Yeah. 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 four basis points higher than average. And our spot rate at March 31st 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.

Scott Siefers: Okay, perfect. Thanks, John. And then 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. You’re sort of seeing demand accelerate, decelerate, stay the same, just maybe overall dynamic split.

Mark Sander: Hey, Scott, it’s Mark. 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.

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

JohnMoran: Thanks, Scott.

Operator: Our next question comes from Ben Gerlinger from Citi. Your line is now open.

Ben Gerlinger: Hi, good morning.

Jim Ryan: Good morning, Ben.

Ben Gerlinger: I just want 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 can be done to potentially exceed the growth guides you had? I mean, from here — I completely understand you’re not changing credit, but like if the market offers because competitors aren’t in the market as much, are you seeing risk adjusted yields? Would you be able to grow loans faster than deposits or have the appetite to do so?

Jim Ryan: 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 to 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 our 5% to 7% organic growth is a little bit above what we think the industry average will be.

JohnMoran: 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, it really should be getting after it. And we’re looking to have great growth coming out of Tennessee and Asheville.

Ben Gerlinger: Gotcha. And then the other question I had would be more of this high-level on credit. You guys have always done a great job. It’s 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, for lack of a better word, frothy pricing, maybe commercial real estate? Or just are you in a pencil down mode with any CRE type lending products?

Jim Ryan: 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 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. But certainly more of the growth is going to come in C&I, where we think we’re really well positioned.

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

Jim Ryan: And with that same underwriting, our terms requires more equity.

Ben Gerlinger: Gotcha. All right. Well, I appreciate it. Thanks for your time, guys.

Jim Ryan: Thanks, Ben.

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

Terry McEvoy: Hi, good morning. Thanks for taking my questions.

Jim Ryan: Good morning, Terry.