Q2 2021 Old National Bancorp Earnings Call
Yeah.
Welcome to the old National Bancorp second quarter 2021 earnings Conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC's regulation FD.
Bonding presentation slides can be found on the Investor relations page at old National Dot Com and will be archived there for 12 months.
Management would like to remind everyone.
That certain statements on todays call maybe forward looking in nature and are subject to certain risks uncertainties and other factors that could cause actual results to differ from those discussed.
The company's growth 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 our performance strength.
Reconciliations for these numbers are contained within the appendix of the presentation.
Now, let's turn the call over to Jim Ryan for opening remarks, Mr. Robert Thank you and good morning, starting on slide 5 we are pleased to share our second quarter results and an update on our recently announced partnership with first Midwest Bank.
I would characterize this quarter's result is right on plan adjusted earnings per share were <unk> 41.
Adjusted for specific merger charges, Oh wouldn't be way cost and debt securities gains during the quarter commercial loans, excluding PPP loans grew nicely at 11%.
Our net interest margin was stable capital markets and wealth management revenue was stronger and mortgage revenue was down by consistent with our expectations with a lower pipeline valuation and a smaller gain on sale margin.
Especially for well manage it was slightly higher primarily due to merit increases and higher incentive accruals credit quality metrics remained benign adjusted.
Adjusted return on average tangible common equity was a strong 14, 6% and the adjusted efficiency ratio was just under 58 per cent.
During the quarter, we worked hard with our clients on the SBA forgiveness process 83 per cent of round, 1 loans hasn't forgiven by the SBA and we've already have 18 per cent of round 2 loans through the forgiveness process.
Most of them are reported credit quality metrics improved during the quarter, we have reduced reserves consistent with our modeling as a result of day better than he can better expected economic forecast and the massive stimulus programs.
We still have approximately 30% of our reserve supported by qualitative adjustments given the higher than average level economic uncertainty that exists today.
Further we move beyond the pandemic economic shock the more confidence we will have in taking a reserve closer to day 1 seasonal.
A quick update on hiring we continue to add significant talent during the quarter. The cost of the increased investment and talent will start impacting our expenses slightly in the back half of the year.
Our talent pipeline remains strong we have a fantastic story to tell and we have strong interest from new team members wanting to join.
Moving to slide 6 which contains a quick refresher on some of the more salient details of our merger with first Midwest I will not bother reading the slide, but I will share that I'm reminded each time that I'm with our first Midwest colleagues, how much our cultures are aligned and how strong our strategic for truly is.
Additionally, conversations with investors and sell side analysts confirmed they understand and agree with our strategic rationale.
Moving to slide 7.
Both companies have a tremendous integration history and experience and our work is off to a good start.
We have made the appropriate SEC filings and regulatory applications.
Kendra Van Zone, Jeff NUKEM has been appointed to lead the merger integration efforts and we have assembled a group of over 350 team members from both companies to help with the integration.
We have met with client facing and support team members from both companies and they're all excited and engaged.
Additionally, the management team and outside advisor are deeply involved in making technology selections, which we hope to finalize this summer.
We also expect a special meeting of shareholders to be held in the third quarter for each company.
And lastly, despite the ongoing distraction from the pandemic and now our transformational merger. We have remained focused on serving our clients and communities and I think our results illustrate the success of those efforts.
Now I'll turn the call over to Brendan Thank.
Thank you Jim.
Turning to slide 8 our GAAP, earning per share was 38 times, while our adjusted earnings per share was 41.
Adjusted earnings exclude $6.5 million in early merger related charges.
$7 million of debt securities gains and the last of our OMB way related charges of <unk> $4 million.
Slide 9 shows the trend in commercial loans and the related commercial pipeline and production trends all excluding the impact of P. P. P line.
Q2 represents our fourth consecutive quarter of organic loan growth and over that year commercial outstandings have grown more than $1 billion.
Q2, commercial production of $1.1 billion with the second highest on record, resulting in a $250 million increase in outstandings over prior quarter.
Commercial activity continues to be strong throughout the footprint and we're heading into Q3 with a very healthy $2.6 billion dollar pipeline.
Turning briefly to pricing absolute coupons on new business continues to be impacted by the low rate environment and the high percentage of floating rate versus fixed rate production.
Never spread and risk adjusted returns are strong and have remained consistent throughout this rate cycle.
The investment portfolio increased slightly in the quarter as deposit growth. Once again outpaced total loan growth. We are taking a disciplined approach of putting excess liquidity to work in our investment portfolio with new money yields of 1.550 per cent any portfolio duration well within 5 years.
Moving to slide 10 average deposits increased 11%, while the growth in period end balances is moderating.
Total cost of deposits for the quarter with a low 6 basis points, a 1 basis point improvement over Q1.
Next on Slide 11, you will see details of our net interest income and margin.
Net interest income increased $1.8 million per quarter over quarter, largely due to our strong commercial loan growth.
Clothing, the impact of PPP interest income increased $2.4 million, which was slightly better than expectations at the impact of earning asset growth more than offset the decline in asset yields.
Net interest margin declined 3 basis points for $2.91 per cent for prior quarter, primarily due to the low rate environments impact on asset yields core margin, excluding accretion M. P. P. P declined just 2 basis points to $2.72 per cent.
Slide 12 shows trends in adjusted non interest income adjust.
Adjusted noninterest income of $51 million from Q$2.4 million lower than the $55 million, we recorded in the first quarter.
The decline was primarily driven by lower mortgage banking revenue that was partially offset by quarter over quarter improvement in all of our other major fee categories.
Finally mortgage revenues reflect the macro headwinds impacting the industry a day.
While mortgage production was largely flat from Q1, a decline in both the size and value of the secondary pipeline resulted in a $5.6 million decrease in revenue.
I would also remind you that Q1 was positively impacted by a $1.2 million recapture of prior year's MSR impairment charge.
Next slide 13 shows the trend in adjusted non interest expenses.
Adjusting for merger charges only related charges and tax credit amortization noninterest expense was $121 million.
These results were consistent with their expectations and our Q1 guidance.
Turning to PPP loans on Slide 14, you will see a role for it at those balances, which stood at $721 million a quarter at.
We continue to assess TPP clients for forgiveness with approximately 83% of round, 1 and <unk> 18 per cent of round 2 loans, formerly through the SBA forgiveness process.
Unamortized fees on the remaining PPP loans totaled $26 million. We continue to believe that most of the remaining loans will be forgiven and the related fee income recognized in the second half of 'twenty 'twenty 1.
With that I will turn it over to Darryl to discuss credit for it.
Thank you Brendan because he presented in the past this quarter slide 15 reflects the performance of our loan portfolio. Both on a current quarter and historical trend basis. Total 30 day delinquencies continued their improving trend for fourth consecutive quarter for went to 9 basis points at the most recent quarters and.
As our commercial delinquencies have historically been on the low side the improvement we've seen over the past several quarters has been concentrated in retail portfolio with lower than historic delinquency rates in the 1.4 family residential mortgage indirect auto and HELOC portfolios.
Government payments and higher levels of savings due to reduced spending during the pandemic have almost certainly any contributing factor to the lower retail delinquency numbers, while the effect of these payments will diminish over time many of our borrowers will benefit from the child tax credit payments, which began last week and will continue at a minimum at least through the end of the year.
All that being said these extremely low levels of delinquencies are in my opinion unsustainable in the long run net.
Net charge offs continued well contained with the 300000, a recovery posted in the quarter, while total recoveries were slightly lower than last quarter and at the lowest level posted over the last 6 quarters gross charge offs were less than $1 million, which led to the net recovery for the period.
Nonperforming loans fell for the second consecutive quarter, mainly on the reduction of non accrual loans in the period as you can see the GAAP between old national than its peers. In this particular metric his favorite for narrowed over the last several quarters.
We continue to perform well and net charge offs and nonperforming measurement category with net charge offs as a percentage of nonperforming loans being well south of 5% over the last 6 years. This as you can see is significantly lower than peer levels over the time period.
As a closing comment I would say that the challenges. Our borrowers are currently facing are much different than what we might have imagined 15 months ago on.
On the C&I side, the most significant challenges many of our clients seem to be facing our supply shortages and the lack of dependable adequately trained labor.
Additionally, we may see impacts on margins going forward with borrowers who are unwilling or unable at the present time to pass along higher input costs for customers on the commercial.
Real estate portfolio front, we think all banks continue to work to see what long term impacts for the pandemic might have on the retail and office portfolio segments.
Comments I'll turn the call back over to Brendan.
Thank you Darryl.
On Slide 15, you will see the details of our second quarter allowance, which stands at $109 million decline of $4.6 million from Q1 day.
Proofing economic outlook and the positive trends in credit quality supported modestly lower reserve level.
That said, we recognize that not all sectors of our economy have recovered and the threat of future Covid related disruption for CIT. As a result, we believe it is prudent to maintain a larger than normal qualitative reserve until we have greater clarity on the economic outlook.
I'd also like to remind you that we continue to carry $41 million in unamortized Mark from our acquired portfolios.
These marks were not directly offset charge offs any remaining mark will accrete through margin upon resolution.
As I wrap up my comments here are some key takeaways, we're very pleased with our fundamental resolved for the quarter double digit commercial loan growth led to higher for net interest income despite interest rate headwinds.
Mortgage revenues were down due to pipeline valuation normalizing margins.
Now all of our other fee businesses posted quarter over quarter improvements.
<unk> remained well controlled and our strong credit quality continued to keep credit costs low.
Slide 17 includes thoughts on our outlook for 2021.
We ended the quarter with a healthy $2.6 billion commercial pipeline, which supports our favorable outlook on loan growth.
This historically low interest rate environment will continue to put pressure on net interest income, which should be mitigated from continued earning asset growth.
The PPP loan forgiveness process continues for a round 1 and round 2 clients.
Net runoff of round 2 balances to occur in the latter half of 'twenty 'twenty, 1 and the recognition of most of the related $26 million in unamortized fees to occur at that time.
We expect our fee businesses to continue to perform well we are encouraged by the momentum in our wealth business and a strong commercial activity should help maintain a high level of performance in our capital markets business.
While mortgage revenue will continue to follow the industry trend.
Current production levels and gain on sale margins should support quarterly revenue consistent with Q2 throughout the remainder of the year.
Our other fee lines are expected to be stable in the near term.
Our outlook on expenses is consistent with our prior guidance, we expect a modest increase in the back half of the year as our efforts to attract top revenue kind of picks up momentum.
Lastly, a brief update on taxes, we continue to expect a reduction in the volatility caused by our tax credits as we worked through the last of the remaining 1 year historical tax credit commitments and.
Total, we're expecting approximately $5 million in tax credit amortization for the year with a corresponding full year effective tax rate of approximately <unk> 21 per cent.
With that we're happy to answer any questions that you may have and we do have the full team here, including Jim Sandgren and John Moran.
If you would like to ask a question. Please press Star then 1.
So for your question has been answered and you'd like to remove yourself from the queue. You May press the pound key.
First question comes from Ben Girl Linger.
Hub group your line is open.
Hey, good morning, good morning.
Good morning.
So to start off with just wound growth from generally you guys seem to have pretty consistently beat both mid western national peer growth trends over the past call. It let's call. It 4 quarters or so I know you guys have done a great job getting out in the markets. I was wondering if you could shed a little light on too.
The secret sauce, if you will what old national is doing to not only fix.
C P.
Peers, but also have prices.
Stephen will growth really for the past 4 quarters.
Yeah. Ben This is Jim Sandgren, I don't know if there's any secret sauce, obviously, we're up for a strong relationship bank, we've been out calling on customers really for the last 12 months, what many other banks, obviously were working from home and so that's that provided us an opportunity to serve our clients. We brought in a lot of new prosper.
So I think we're pretty opportunistic.
As other banks might have changed kind of their credit stances. So I, just think it's kind of blocking and tackling to get out helping our customers when they need us and so that mentality has carried through throughout the year and has certainly helped us as we've started the first half of this year, obviously pipelines look good for the for the back half for you.
And so again I think.
I don't know if there's any secret sauce I think the fact that we you know restructure through that you wouldn't be way in a line skill sets of our relationship managers with the client needs I think that's.
Played a major role as well, but I just think it's it's the fact that we were you know out in building strong relationships and being there for our clients and being opportunistic opportunistic for those are new new relationships as well you know Ben I would just add it's all hands on deck, you know I'm going to spend the next few days and in northern Indiana, all calling on clients.
So it's all hands on deck, we're all locked arms and you know we continue to believe we're doing building.
Building quality relationships for the long term health and success of our company and it's a it's a primary focus of our entire leadership team.
Okay great.
From a softball question, so the harder 1 would be.
Your new production yields are a little lower than your net interest margin today.
And then even even though you have a great deposit base and it's very low cost I was wondering how you weigh continued growth against the net interest margin every day when you put on it should be a little dilutive today I get that they're floating so I was wondering how you manage balance sheet growth relative to maintaining that Tim.
Yeah. Ben This is Brendan Yeah, you know, we we look very closely at the pricing we have pretty strict risk adjusted return hurdles for all of our losses and as I said in my comments earlier are our spreads have held in throughout this rate cycle. The bench strong do you think about that floating rate production today relative to LIBOR that's too.
Hunter plus basis points over LIBOR for that floating rate production I think that so we will continue to put on line with at that rate and and feel really good about it.
Okay, Great I will step back from getting too.
Thanks Ben.
Our next question comes from Scott <unk> with Piper Sandler Your line is open.
Good morning, Scott Good morning, guys How're you doing good maybe maybe you didn't get up as early as some others. This morning, but for me.
Anyways.
Man you just couldn't couldn't let it pass.
Sorry, Scott.
No worries I'll get up earlier next time honestly there you go.
I'm, just thankful that I dialed the Wright from Nomura.
Let's see but thanks for taking the question just wanted to sort of follow up on the environment for commercial lending I feel like last year, you guys capitalize so well on them you know some of your larger competitors in particular, I kind of shutting down for for the year.
To what degree have you noticed that there, especially the larger guys a day sort of back in the market in a in a bigger way number 1 and then number 2 how if at all is that impacting the competitive dynamic as you see it.
Yes, Scott this is Jim saying Theres no question that really everyone's back in the market now so competitive pressures are certainly heating up.
Again, we're staying very disciplined as we think about credit structure, but.
Yeah, we're still getting a lot of at bats, our pipeline I think remains robust as we pointed out so still feel good about the back half and you know there'll be deals that we're going to walk away from because there's there's certainly some structures out there that are getting stretched and that's okay, but are you.
Overall, I say clients feel really good about their opportunities to be successful in the back half of the year and into 2022. So.
You know, it's it's always going to be competitive out there and I think we like our chances given our relationship banking model. So.
Okay perfect. Thank you and then I guess just a question on the.
The the merger principal price.
Didn't buy it and they put out that executive order a couple of weeks ago have you guys seen any any impact in discussions with our regulators on the approval process I mean, the order kind of left a lot to the imagination.
So just I'm curious how the conversations are going and if there's any change vis vis what you might have thought prior to seeing the order.
No changes no no additional feedback from any of our regulators.
Obviously, we're curious we're not sure if it applies to us or our maybe our biggest our biggest brother and out there. So time time only tell as we go through the regulatory approval process, but really no no indications of any different just for full steam ahead.
Okay perfect Alright. Thank you guys very much I appreciate it thanks.
Thanks Scott.
Our next question comes from Chris Mcgratty with VW Your line.
Good morning, Chris.
Hey, Jim how you doing.
I wanted to ask about the bond portfolio.
Given the back down and the move down in rates lately, Yeah, obviously arent growing it too dramatically, but interested if you're a bit more cautious about growing that near term and maybe what what reinvestment rates are today versus the.
The 153 that you gave in the quarter.
Yeah. So we'll continue to grow that investment fully to the extent, we have excess liquidity that we can't put to work in the loan portfolio. You know new business rates are probably down a little bit marginally from from you know from the average for the quarter, but not dramatically. So at this point, but we will continue to be disciplined and.
Our hope is that we continue to grow loans at the pace of our growing.
And as we talked about the end of period deposits, that's sort of moderated that growth has moderated a bit. So hopefully that we can continue to drive a better earning asset mix through the back half of the year.
Okay and on the auto loan growth.
You know historically the origination has.
It has been it's been quite granular I'm interested if any of the growth this quarter was.
A deviation from that or or if it continued.
No it's still pretty granular credits I mean average flow new production still continues to grow over time and I think we're still just a little bit over I think a million bucks. So that again, that's grown over the last few quarters, but still fairly granular.
Okay, and then maybe just 1 last 1.
For Daryl I mean, I'm looking at your slide on the on the reserve I'm trying to I think we're all trying to figure out where were reserves bottom, but with our with the improvement.
Now you think yeah around 30% of your reserve qualitative, but do we get to.
Do we breached our seasonal day 1 this year if the economy continues to.
To improve it to pay for this.
Hey, Chris This is Brendan I'll take that 1 look but what I'll tell you is the is as this credit portfolio is actually a better quality than it was pre pandemic a day once seasonal that said we are going to be very very judicious in bringing that reserve that until we get some clarity around the economic outlook.
We look for that day. It is a it's a possibility and we'll measure it we'll measure our portfolio interface for reserve based on the model when it's time for them.
Great. Thank you very much.
Our next question comes from Terry Mcevoy with Stephens. Your line is open.
Good morning, Terry Hi, good morning, everyone.
Maybe the first question your outlook for expenses you talk about the investment in new revenue generating talent positions I'm. Just wondering if you could expand on certain markets, where you're hiring talent in and what areas of the bank.
Yes, Larry this is Jim Sandgren you.
You know, we're really focusing in really on primarily on wealth and commercial and we've had some really good talent in both those areas and up in the Minnesota region. We've added some talent in our loan production office there in St. Louis as well.
Recently added some great talent in Louisville, So it's really a cross across the footprint, we're being again opportunistic when we can find great talent, we're adding them to the team and we were going to continue to do that I would also like we actually put a couple of key hires in our I T and data areas here recently too which are you know too.
As a function of us getting bigger I spoke to you getting better at some of that those you know technology needs and so while it's a much smaller part of the total we are we are investing in some key support areas as well.
Thanks, and then maybe Jim Brian a question for you what's been the feedback from your customers and say, Michigan, Indiana and the twin cities, where there's just no overlap with first Midwest I'm just curious from their perspective.
Is there any reason for them to expect or worry about changed at all or are they may be excited about the merger given what it could bring to the table.
Yeah, I think by and large I would characterize as the team members and our clients are excited about the prospects of just being bigger and being able to bring more product for the table more services to the table I think everybody just kind of generally excited and and obviously you know we don't know if if there'll be any impact to those individual clients but.
I think generally everybody is really excited about the prospects of of just being having a bigger balance sheet as well.
Great. Thank you.
Thanks Terry.
Our next question comes from Jon <unk> with RBC capital markets. Your line is open.
John Hey, good morning, Good morning couple.
Couple of follow ups Terry's question on some of the new hires and you.
You're flagging that as maybe some a bit of an expense headwind later in the year how material do you expect for hiring to be in terms of the expense impact.
Yeah, not material, you know I'm thinking about $1 million to $2 million range per quarter pretty consistent with what we said you know as we were heading into the year about about building that type that pipeline of talent in $1 million to $2 million approximately okay.
Brendan question for you on the or maybe Jim on the deposit growth slowing a bit.
It's a little bit different than peers kind of like your loan growth was a little bit different than peers, but.
Why do you think that is for you and does that potentially make you a little more optimistic on the.
The ability to hold the NIM later in the year. If this continues.
Yeah, we will see I think the excess liquidity has been has been.
So without sort of certainly outside of killing largely driven by stimulus.
So I know I know, Jim and the team are still after their gathering deposits still it's still a focus of ours.
I think the standard stimulus generated excess liquidity seems to moderate in relation or in our footprint of our portfolio today and as I talked about earlier I do think it'll be helpful to margin as we are able to put that put that back to work in the loan portfolio rather than the best portfolio.
Okay and.
And is it is it too simple to say that you know maybe some of your commercial clients are using.
Some of their deposits and you're seeing some of this maybe pull through in terms of loan growth or is it is it just a stimulus slowdown.
Yeah like I said, so core deposits still did grow quarter over quarter, just not at a rapid pace that they agree before and actually our business actually grew up more than our retail deposits.
Last quarter.
<unk> funds are starting to get drawn down a bit, but we're still holding a lot of PPP money is still on deposits today.
Okay.
And then Darryl 1 for you you touched on.
Commercial real estate retail and office.
Any changes in terms of your thinking there or any new concerns or any information you can share.
No John I don't think they are I think that has to play out as leases expire right. So you've got people in those.
Office buildings today and in the in the retail structures that are still paying lease payments for real decision, making comes windows leases expire and what they do do they do they vacate those buildings do they renegotiate much lower rates. So you know we're all concerned about her watching it but I think we still got probably 12.24 months before that at all.
And it plays out and we see the trends.
Yeah.
Alright.
Thanks for the questions are for the answers I appreciate it thanks, Jeff.
As a reminder to ask a question. Please press Star then 1 our next question comes from David Long with Raymond James Your line is open.
Good morning, David.
Good morning, everyone.
First question is related to credit and maybe this is more for Darryl, but as you were going through the process. The due diligence process with first Midwest I'm sure you got to look at a lot of their loan book.
Are you having constant discussions with them pre closing about about the bone makeup and how they're thinking about their ratings or is that something that will really happen until after the deal closes.
Yeah, David Darryl.
We're not having extensive conversations only because there is for 2 banks put there.
Books together, there is very very little different from the way we approach loans the way we look at risk.
So the.
The transition with the 2 banks is going to be probably as easy as any merger. We've done a partnership we've been up to this point in time. So you know we're getting policies together, we're looking at those we're tweaking those were communicating a lot, but there's not a lot of kind of arm wrestling about you know youre doing this right you're doing this wrong.
Pretty much the same.
Got it. Thank you Darren I appreciate that and then.
As far as I T spending goes.
In the near term prior to the close the deal does do you guys or just how you're spending or how are you thinking about spending and then you know any changes in your longer term spending strategies once the deal does close.
Yes, David this is Brendan.
I think as we talked about in the call I think both both banks had a really robust road map, we're going to continue to complete those roadmaps and make and make incremental investments where it makes sense at the time it goes but no material change in the run rate of or Ikea spend that's been contemplated, but we think we have plenty of plenty of room to 2 inch.
Best in some technology.
Investments that are that are being meaningful to the to the combined organization going forward. David I would just debt you know that the war for talent will continue on our side you know, we're going to continue to ramp up talent Oh at.
And all of our markets, and especially doubling down in Chicago, and Milwaukee and places like that so I would just add that you know where to continue to invest I'm.
Convinced that the key to our success.
And our story resonates really well right now and we're going to take advantage of that and to make sure we invest in a lot of great talent.
Got it. Thank you guys appreciate it.
Yeah.
There are no further questions at this time.
Well great again, we appreciate all your support and as always we are here to answer any questions. When you have follow up questions have a great day everyone.
Yeah.
This concludes old nationals call once again, a replay along with the presentation slides will be available for 12 months from the Investor Relations page of Ultimate News website old National I'm, sorry old National's website old National Dot Com a replay of the call will also be available by dialing 855859 Tuesday.
For 5.6 sometimes I D code 7.4 for 7.6 for certain this replay will be available through August.
If anyone has additional questions. Please contact <unk> Walton at 81246 for 1366. Thank you for your participation in today's conference call.