Q3 2021 Old National Bancorp Earnings Call
Okay.
Hello, and welcome to the old National Bancorp third 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.
Corresponding presentation slides can be found on the Investor relations page at old National Dotcom and.
It 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 and uncertainties and other factors that could cause actual results to differ from those discussed.
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 provides more appropriate comparisons.
The non-GAAP measures are intended to assist investors understanding of performance trends reconciliation for these numbers are contained within the appendix of the presentation.
And now I'd like to turn the call over to Jim Ryan for opening remarks, Mr. Ryan you may begin.
Good morning, starting on.
Slide four we are pleased to share our third quarter results and an update on our partnership with first Midwest Bank.
Categorize this quarter as a result is right on plan.
Earnings per share of a 43 net income was almost $72 million during the quarter commercial loans, excluding PPP loans grew at a strong.
Drawn seven 4% on an annualized basis with $1 billion of new production.
We also ended the quarter with a robust $2 7 billion dollar commercial pipeline.
Core deposits grew nicely by 327 million during the quarter.
Our net interest margin was stable capital markets and wealth management revenue.
Revenue was strong in mortgage revenue rebounded from last quarter.
Expenses were well managed and down slightly primarily due to one time benefits from incentive in real estate tax accruals.
Credit quality metrics remained benign with another quarter of net recoveries.
Adjusted ROA TCE was a strong 15, one six.
<unk> percent and the adjusted efficiency ratio was 55, 4%.
During the quarter, we worked hard with our clients on the PPP forgiveness process, 95% of round one loans have been forgiven by the SBA and we already have 51% of round two loans through the forgiveness process.
Remaining fees.
Total $14 million.
Most of our reported credit quality metrics improved during the quarter.
We have reduced our reserves consistent with our modeling as a result of the improving economic conditions, we still have approximately 32% of reserve supported by qualitative adjustments given the long term impacts from the pandemic.
Fees to expectations for higher inflation.
Persistent labor supply and supply chain challenges.
As we gain additional clarity around these issues, we may develop more confidence in moving our reserve closer to day, one seasonal levels.
A quick update on hiring we continue to add significant talent during the quarter.
<unk>, especially on our wealth management team. This was highlighted by three key individuals that joined our wealth team from the former Wells Abbott Downey group, including Jim Steiner, who started epic Downey and who will now assumed the role of our Chief investment Officer.
The team will help expand our high net worth and institutional services.
They opened a Scottsdale, Arizona wealth management office to better serve the growing number of clients in that area.
We also hired two new commercial relationship managers in St. Louis to build upon our recent success in that market.
Our talent pipeline remains strong and we will continue to hire talented team members.
Moving to slide.
Slide five which contains a quick refresher on some of our accomplishments and next steps with our merger with first Midwest.
Both companies have tremendous integration history and experience and as a result, our work is going well, we have decision and communicated most client segment and support areas organizational structures and leadership.
We've also.
It'll settle out our core processing system, along with the most of the supporting applications.
We remain on track for our second quarter 2022 system conversion.
You probably saw first Midwest earnings. This morning, the results for the quarter were strong and consistent with expectations.
We also received 90.
Set support from our special shareholder meeting at first Midwest shareholders provided a similar level of support.
We've also received OCC approval, our application with Federal reserve remains pending with the board in Washington D. C along with the merger applications and many other bank holding companies.
We stand ready to close quickly once we receive.
<unk> final fed approval.
You may have seen that we were sued by the fair housing Center Central Indiana, a nonprofit advocacy organization with a history of filing lawsuits alleging lending discrimination.
We strongly and categorically deny the claims in this lawsuit regarding certain of our lending practices old national has committed to engage.
Nine for fair and equal lending practices. A testament to this is that we have been named one of the world's most ethical companies for the past decade.
As is customary for us and many public companies I'm unable to comment further on this pending litigation.
Lastly, despite potential distractions from the lingering lingering pandemic related.
Gauging issues and 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 you Jim.
Turning to slide six our GAAP earnings per share and our adjusted earnings per share were both 43.
Adjusted earnings exclude $1 $4 million in early merger related charges, which were largely offset by $1 $2 million of debt securities gains.
Slide seven shows the trend in commercial loans and the related commercial pipeline and production trends all excluding the impact of PPP loans.
Q3 represents our fifth consecutive quarter of organic loan growth.
And over that year commercial outstandings have grown 11%.
Our strong commercial production of $1 billion was once again led by our Louisville, and Minnesota markets with all of the regions posting quarter over quarter growth.
On balance sheet production was also about balanced byproduct with a 60 40 split between CRE and C&I respectively.
Commercial activity remained strong throughout the quarter and we are heading into Q4 with a very healthy $2 $7 billion pipeline with almost $800 million in the accepted category.
Turning briefly to pricing new money yields on commercial loans decreased from prior quarter, which meaningfully narrowed the gap between new production and portfolio yields.
The invest portfolio increased $263 million this quarter as deposit growth once again outpaced total loan growth. We continue to put much of our excess liquidity to work in our investment portfolio with new money yields of 160% and a portfolio duration well within five years.
Moving to slide eight both period end and average deposits.
Posit balances increased nicely from Q2 levels with most of the growth coming from business clients in the noninterest bearing demand category total.
Total cost of deposits for the quarter was unchanged at six basis points, while total interest bearing liabilities declined one basis point from Q2.
Next on slide nine you will see details of our net interest income and margin net interest.
Income increased $1 $7 million quarter over quarter, excluding the impact of the PPP non interest income increased $1 $3 million, which is the third consecutive quarter. We have outperformed our stated objective appointing NII stable through earning asset growth.
Net interest margin increased one basis points to 292% from prior.
What are the core margin, excluding accretion and P. P. P declined just two basis points to two 7%.
Slide 10 shows trends in adjusted noninterest income adjusted noninterest income of $53 million in Q3 with $2 million higher than the second quarter.
Our wealth line of business continues to be a bright spot and is on pace for a record year.
Our capital markets business had another strong quarter and mortgage revenues rebounded nicely following the pipeline valuation decrease in Q2.
While mortgage production was down slightly in the quarter, an increase in the size of the pipeline and stabilizing value resulted in a $5 $4 million increase in revenue.
This increase was partially offset by a $2 million decrease.
And gain on sale income as margins continue to normalize.
Next slide 11 shows the trend in adjusted noninterest expenses.
Adjusting for merger charges and the tax credit amortization noninterest expense was $118 million.
Quarter over quarter improvement was driven by an accrual adjustment to incentives as well as the reduction in real estate taxes.
Both of these items are not expected to recur.
Turning to the P. P. P loans on slide 12, you will see a roll forward of those balances, which stood at $355 million a quarter end.
We continue to assist clients and forgiveness and approximately 95% of round, one and 51% of round two loans are now formally through the SBA forgive.
In this process.
Unamortized fees on the remaining loans totaled $14 million.
We anticipate half of the remaining loans will be forgiven and the related fees recognized in the fourth quarter of 2021.
Slide 13 shows our credit trends the quarter proved to be another good one from a credit performance perspective, 30, plus delinquent.
Liquids, he ticked up one basis point, but remained at a near cycle low of 10 basis points with respect to charge offs. We were fortunate again this quarter to be able to posting network recovery, mostly due to the resolution and full recovery of a previously written down senior living credit.
Nonperforming loans to total loan ratio was once again hit a new cycle low at.
94 basis points, while this metric remains higher than peers. The net charge off the NPL ratio is significantly better than the peers. We believe our approach to identifying troubled credits early and our patient approach to work out results in better outcomes for our clients and ultimately lower costs for the bank.
On Slide 14, you will see the details of our third quarter.
Quarter allowance, which stands at $108 million declined at $1.5 million from Q2.
The improving economic outlook and the positive trends in credit quality supported modestly lower reserve level.
And while our outlook on credit remains optimistic we recognize the economy has not fully recovered and it made the decision to maintain our higher level of qualitatively.
Reserves, which stood at $35 million a quarter ramp.
As a reminder, we also continue to carry $38 million in unamortized marks from our acquired portfolios.
As I wrap up my comments here are some key takeaways, we're very pleased with the fundamental results of the quarter strong commercial loan growth led to higher core net interest income despite interest rate headwinds.
<unk> our fee based businesses led by wealth mortgage and capital markets continue to perform well and in line with expectations.
Expenses remained well controlled and our strong credit quality continues to keep credit costs low.
Slide 15 includes thoughts on our outlook for 2021.
We ended the quarter with a healthy $2 7 billion dollar 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 through continued earning asset growth.
The PPP loan forgiveness process continues for our clients, we expect runoff of approximately half of the round two balances to occur in the fourth quarter.
With the recognition of the related unamortized fees to occur at that time.
We expect our fee businesses to continue to perform well we were encouraged by the momentum in our wealth business and the strong commercial activity should help maintain the high level of performance in our capital markets business mortgage revenue should follow industry trends and be seasonally lower in the fourth quarter.
<unk> our other fee lines are expected to be stable in the near term.
We would expect to see a $3 million increase in noninterest expenses in the fourth quarter, given the nonrecurring items impacting our third quarter performance.
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 with the remaining one year for store.
Credit commitments.
In total we're expecting approximately $6 million in tax credit amortization for the year, the corresponding full year effective tax rate of approximately 22%.
With that we're happy to answer any questions that you may have and we do have the full team here, including Jim Sandgren, Daryl Moore and John Moran.
Yeah.
Thank you ladies and gentlemen asked the question you will need to press Star then one on your telephone.
Withdraw your question press the pound key.
Again, its star one to ask a question. Please standby, while we compile the Q&A roster.
Okay.
Our first question comes from the line of Ben Garlinger Withhold group.
Your line is open.
Hey, good morning, gentlemen.
Yeah.
I just wanted to take a moment.
Let's assume that the deal closes in the fourth quarter, which probably will.
So there's going to be a lot of noise and integration over the next let's call. It six months. So are there any areas in which you feel like.
There's no low hanging fruits or opportunity to grow loans outside of Chicago, I know that the Minnesota Mercury was an area of pretty healthy growth in that playbook post those two deals a couple of years ago. It seems to be chugging right. Along so kind of curious if you could talk about some of the opportunities.
Change that you see that present themselves right away and kind of what you are focusing on that two to three year goal.
Either footprint wide or Chicago.
Chicago itself.
Yeah. Ben This is Jim Sandgren, Yeah, you're exactly right, Minnesota continues to be a.
A bright spot and we see that as opportunity.
To grow in the future Louisville, Kentucky continues to be really good for us Indianapolis and some of those markets I know, Jim talked a little bit about St. Louis which is a newer market for us which.
<unk> has seen some nice growth and then obviously with our our partners for first Midwest I mean, we'd see you know big upside when we get together with them in the Chicago area.
Are you a bigger balance sheet, so looking forward to really gorilla throughout the throughout the footprint.
Yeah, I think Ben you know one of the things that attracted us from first Midwest is a they have spent more time in there ahead of the game in terms of building out some some niche verticals I think those niche verticals help US you know we can export those across our footprint and maybe you can give us new opportunities.
We're looking at today.
And I think we can continue to use that bigger balance sheet across the entire footprint to create new opportunities for us.
Got you that's helpful and then in terms of the noninterest income it it seems like everything was moving in the right direction.
If you look at the momentum perspective, Morgans rebounded well continues to be strong.
I was curious is there any areas in which you were kind of doubling down in reinvestment I know that there were some recent hires in wealth management.
Capital markets continues to perform well.
Is there any areas in which it is.
Potentially punching above its weight, we could see some reversion to the mean or is everything kind of operating as is and we should expect similar results for the next year or so.
Well.
Long term, we continue to believe wealth management as a source for us as well as the Treasury management business, coupled with a strong commercial.
You know business, which which means capital markets as well I think those are the three areas that we continue to believe you know mortgage will just be cyclical in the way. It will just drive along with everybody else's mortgage business, but those three areas in particular, and we really haven't seen the benefits of our new hires in our wealth management business, yet we're carrying the cost for those new hires and it's not only the three you do.
We just talked about but we've been pretty consistently hiring in that area and so long term. We believe we're going to drive you know higher than our trend line kind of growth in those areas.
Gotcha. Okay. That's that's helpful color I will I'll step back in the queue congrats on solid quarter.
Great Good to see you got first again.
Thanks [laughter].
Thank you. Our next question comes from the line of Scott Cyphers with Piper Sandler Your line is I'm, sorry, sorry, Scott.
Jim Jim Jim.
The list of ways I'm disappointed people so [laughter].
[laughter] well no I appreciate you taking the question just the you know as we sort of look at this.
The strong loan growth you guys have been generating just curious if you could maybe make a comment or two about what your commercial lenders are seeing in terms of things like pricing and structure and how it how you guys are responding to that.
Sure Scott This is Jim again.
It's really competitive out there, but you know the good news is we've talked on a number of the last few quarterly calls is that we've been out calling and working with our customers and prospects and are building really strong relationships. So.
I would tell you credit structure is.
Getting a little crazy.
So we continue to stay disciplined there.
Pricing.
We're doing a good job meeting our pricing hurdles quarter over quarter. So it's tough right now there's no doubt about it but again I think because of the strong relationships, we've had and the fact that we've been out falling throughout the pandemic and as we came through it.
I feel like that's that's help kind of support the growth and I think we're set up and you know in the fourth quarter with a really nice pipeline and are in a nice accepted portion of that pipeline as well so pretty encouraged and Scott you know as well I mean, we'd gladly give up a few points of growth to stick to our discipline around pricing and structure. So.
I play the long game here make sure we stay true to our history and roots.
Perfect. Okay. Thank you and then just switching gears a little.
Hiring talent away from some of your competitors that has been a big part of the story over the last couple of years. Just was curious if you can maybe add some comments about.
So what youre seeing in terms of costs to attract new talent and if you could speak to sort of the notion of wage inflation overall within the bank.
Yeah. It's a good question you know, we're certainly not immune to wage inflation and at all levels and you know we intentionally raised our minimums.
A year ago, and so a lot of that cost is built into our current run rates and clearly going out and attracting high caliber talent away, it's more expensive than kind of the average price. We paid today. So but we think you know again. These are long term investments that we believe.
So we're going to pay high dividends and so we're willing to make those investments in.
Just be really thoughtful and deliberate about it and you know.
And we have got a great story to tell that story resonates, so well with so many people today, where they can see themselves being successful in our organization and being able to take care of the clients and really.
Do their best work and so we keep telling that story the price that we have to pay is not unreasonable and we think it's good for the long term health of our company.
Perfect Alright, Thank you guys very much I appreciate it.
Thanks Scott.
Thank you our next question comes from.
I believe Terry Mcevoy with Stephens. Your line is open good morning, Terry Hi, Good morning, everyone.
Jim maybe start with a question for you you've been involved in a lot of M&A transactions.
With your time at old National Bank could you just talk about the just the level of discussions with regulators.
How.
Hello, and depth are they as it relates to getting first Midwest closed just given the size and the structure and essentially what I'm getting at is maybe a soft way of asking what is the risk that the.
The Mou gets postponed given changes in the regulatory landscape.
It's really hard to tell Teri.
There is no outstanding questions.
<unk>, we have with any regulatory agencies and in particular, the fed obviously have OCC approval and I think like many other bank holding companies. We are in the queue and we're just waiting for that approval process. We think we've answered any questions they have for us.
I really don't have any other feedback and they're not waiting on any new information from us.
We're just going to continue to be patient and thoughtful I think the most important point, though is you know we continue to work on the integration efforts, which are really scheduled to happen in the second quarter. So none of that work stops we continue to build our relationships with each other and we continue to do strategic planning with each other so I don't know that really stops we just keep moving forward and we'll wait for.
So we'll wait for the final regulatory approval and then as soon as we get that will close shortly thereafter.
I appreciate that and then as a follow up but you used to provide the average loan size within the commercial portfolio. I'm. Just wondering has that changed following O N. The OMB way in industry verticals and are you competing.
Be patient kind of upmarket for larger deals that's contributing to some of the at least the dollar growth that we're seeing in the commercial portfolio.
Yeah, I'll give some high level commentary I'll, let Jim get into details, but it's certainly on average higher you know just as we entered larger metropolitan markets, most notably when we.
Entered Wisconsin, and Minneapolis, specifically I think we've just seen that trend to move higher even having said that I still think it's pretty granular on average and in today, Jim were running what was the average recently here. So for C&I, we're at about $300000 from a portfolio perspective in commercial real estate about little over nine.
<unk> so to your point still very granular.
Great. Thank you guys.
Thanks Terry.
Thank you.
Our next question comes from the line of Chris Mcgratty with K B W. Your line is open.
Morning, Chris.
Good morning, everybody.
Jim I think I want to start with.
100.
Typically when I'm always get announced.
There's a little bit of market apprehension about pro forma growth rate.
You guys had solid growth first of all first one west had a little bit of growth. This quarter. How are you thinking about the pro forma.
Profile of the company, especially with the economy recovered.
With loan growth.
I think both organizations can wake up every day go out talk to client service communities right.
And loan growth will be somewhat dependent on kind of the status of the economy right.
But I think the loan growth that we've been putting up and producing as the kind of loan growth, we ought to be able to put up and produce in a normal kind of economy or.
Or even slightly warm economy that we have today right. So so while we haven't given any specific guidance I think what you see is what we should continue to produce we do think there again, there's upside relative to the total balance sheet and our hold limits will potentially increase in the future plus leveraging those industry verticals.
So I think there is great.
Right opportunities for us to continue to grow the loan portfolio.
Okay, and then on the on the deposit growth you in some of your peers I think I've spoken about just a surprise factor of the deposits as seen on balance sheet and to continuing to come in with that confidence.
Can you speak to kind of the pace of investments and securities.
Investments you might make you've grown the bond book a little bit in last couple of quarters, just trying to see an outlook for that thanks.
Yeah, Chris we continue to put the excess cash to work, we actually sitting a little more cash this quarter than last quarter, and we'll be thoughtful as we put that to work given the outlook on rates.
But.
Our bias is to put more money to work then they're not.
Great and then maybe if I could sneak one in on once you close the deal.
You guys have a ton of capital maybe updated thoughts on returning capital through buybacks.
Yeah, our capital priorities.
Just look at the curb.
Valuation, we think there's a great opportunity to to return.
Return money to investors via share repurchase we have an authorization outstanding today and it'll take us through the end of the year and we'd be looking for an opportunity to make use of that.
Great. Thank you.
Thank you.
I'm showing no further questions in the queue.
Well. Thank you all for your support as usual, but now and Brendan and the whole team is available to take any follow up questions. Thanks, again and have a great day.
Ladies and gentlemen, this concludes old nationals call once again, a replay along with the president.
Presentation slides will be available for 12 months on the Investor Relations page of the old National's website <unk>.
National Dotcom.
A replay of the call will also be available by dialing 8558592056.
Conference I'd code is four two.
Two four to 648.
This replay will be available through November the second.
If anyone has additional questions. Please contact the nail Walton and 812464.
1366, that's eight one to 464.
1366.
Thank you for your participation in today's conference call you may now disconnect.
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