Q4 2021 Old National Bancorp Earnings Call
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Welcome to the old National Bancorp fourth quarter, and full year 2021 earnings conference call. This call is being recorded and has been 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 Dot 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 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 the SEC filings. In addition, certain slides contain non-GAAP measures, which management believes provide more appropriate conference.
Parison. These non-GAAP measures are intended to assist investors I understanding the performance trends. We conciliations for these numbers are contained within the App index of the presentation.
I'd now like to turn the call over to Jim Ryan for opening remarks, Mr. Ryan.
Good morning, and happy New year, we are pleased to host our call to discuss our 2021 results an update on our pending partnership with first Midwest Bank.
Let's start on slide four we are pleased to share our full year 2021 results I would categorize this year's results its better than plan 2021, EPS was $1 67, adjusted EPS was $1 73, with an adjusted net income of more than $286 million, our adjusted return on.
On average tangible common equity was north of 15% and our adjusted efficiency ratio was approximately 57% highlights include 7% commercial loan growth driven by record commercial production of $3 $9 billion, coupled with net recoveries of $4 8 million for the year.
We also saw record wealth management revenues in 2021.
I'm, particularly pleased that commercial loans are now up 20% in total from 2019 levels, excluding the impact of PPP that significant growth amid a global pandemic and we've maintained a consistently strong credit profile in the process. We've opportunistically leaned in when several of our competitors Roes and we continue to.
Benefit from that stance, taking share by doing what we do best consistent quality growth.
Moving to slide five our fourth quarter EPS was <unk> 34.
Adjusted EPS was <unk> 37.
We saw strong commercial loan production of $1 1 billion during the quarter and excellent credit quality. Our pipeline ended the year at a robust $2 $5 billion.
A quick update on hiring we opportunistically added significant talent during the quarter, especially on our commercial vault commercial and wealth management teams building.
Building upon our recent success in St. Louis we have hired two industry veterans to start an LPL in Kansas City, which should be operating at full strength later in the quarter.
We've also begun recruiting talent in Chicago, anticipating that Chicago, Minneapolis will be a significant focus in 2022.
In summary, our talent pipeline remains strong I am personally active and recruiting key team members and we will continue to make these vital investments throughout the year.
Moving to slide six which contains a quick refresher on some of our accomplishments and next steps with our partnership with first Midwest.
As you know both companies have tremendous integration history and experience and as a result of our work is going very well.
We have decision and communicated the organizational structure and leadership positions for all client segments in support areas. We've also settled out our core processing system at supporting applications. Our team member excitement our team members' engagement remains strong and as a result, we've seen minimal client facing roles.
Minimal attrition of our client facing roles.
Our combined leadership teams continue to meet and build a collective long term strategy developed tactics to celebrate.
Our combined growth.
While we are still waiting on federal reserve approval, we continue to have frequent and constructive dialogue with the fed staff, who are sure. If our application is complete and ready for review at the board level.
We expect we will hear positive news this quarter.
As soon as we hear we will move expeditiously towards the close with a more elongated than expected regulatory approval and the global pandemic related issues affecting the availability of labor and equipment. We now expect our systems conversion to occur in July .
Given the little aid systems conversion, we expect to achieve closer to 50% of the run rate savings we modeled in 2022.
We still expect to achieve 100% of the original model savings of $109 million in 2023.
Lastly, despite potential distraction from the lingering pandemic related issues and our transformational merger, we remain highly focused on serving our clients and communities.
I think our results for the quarter and the year illustrates the success of those efforts our success would not have been possible without one of the strongest teams in the industry.
I'm also grateful for the hundreds of team members, who are focused on the successful integration of the combined companies.
Thank you and I'll now turn the call over to Brendan.
Yeah.
Turning to slide seven our GAAP earnings per share was <unk> 34, and our adjusted earnings per share was 37.
Adjusted earnings excludes $6 $7 million in merger related charges.
As well as $400000 in debt securities gains.
Slide eight shows the trend in commercial loans and the related pipeline forgot contracts all excluding the impact of PPP loans.
Q4 represented our sixth consecutive quarter of organic loan growth with 2021 commercial outstandings, increasing over 7% with both CRE and C&I is showing solid growth.
Strong commercial production of $1 $1 billion was well balanced across all of our major markets.
Also pleased with the strong fourth quarter production did not have a significant impact on our pipeline, which ended the year at $2 5 billion the highest level on record.
Size and quality of the pipeline that includes almost $500 million in the accepted category supports our optimistic outlook on loan growth heading into 2022.
Turning briefly to pricing new money yields on C&I were $3, three 9%, which are now well above the portfolio yields new CRE production.
Yields were slightly lower for the quarter at 259% more than 80% of that production is indexed to short term rates with good threat, but relatively low absolute coupons.
While this has put some pressure on margin in the near term it does position us well for a rising rate environment.
The best portfolio increased this quarter as deposit growth once again outpaced total loans we continue.
To put much of the excess liquidity to work in our invest portfolio new money yields on investments improved to 18 basis points quarter over quarter to one 8% with portfolio duration shorter by a quarter year.
Moving to slide nine we again saw meaningful increases in both period end and average deposit balances quarterly growth came largely from our retail clients with clients drawing down on non interest bearing accounts.
Total cost of deposits for the quarter was five basis points, while total interest bearing liabilities was 28 basis points, both down one basis point from Q3.
Next on Slide 10, you will see details of our net interest income in market net interest income, excluding PPP decreased $300000, which was consistent with both our expectation and goal of maintaining stable NII throughout this challenging rate environment.
Net interest margin decreased 15 basis points from prior quarter to 277% and core margin, excluding accretion and Pvp declined 11 basis points to 259%.
Excess liquidity and interest collected on nonaccrual loans accounted for six basis points of the decline.
Slide 11 shows trends in adjusted noninterest income adjusted noninterest income for the quarter of $51 million was $2 million lower than Q3, largely due to seasonal declines in mortgage.
Our wealth line of business finished with a strong fourth quarter, which resulted in record revenue for the year, our capital markets business had another strong quarter and finished the year just shy of last year's record revenue.
Mortgage production was up slightly in the quarter, but a seasonal decline in the size of the pipeline resulted in a $3 $9 million decrease in revenue.
Next slide 12 shows the trend in adjusted noninterest expenses adjusting for merger charges and tax credit amortization noninterest expense was $123 million quarter over quarter increase was driven by additional lending incentives related to strong commercial and mortgage production.
Additionally increases in marketing and professional fees category were related to investments in Minnesota marketing efforts and the establishment of a new brand for our high net worth wealth division that we discussed last quarter.
Turning to PPP loans on Slide 13, you will see a roll forward of those balances, which stood at just $169 million a quarter in unamortized fees on the remaining loans totaled $6 $4 million. We anticipate most of the remaining loans will be forgiven in the first half of 2022 and the related fees recognized importantly.
Slide 14 shows our credit friends credit conditions continue to be benign benign in our commercial and consumer portfolios continue to perform exceptionally well delinquencies ticked up one basis point to end the quarter at a very low at 11 basis points. We were pleased to post a sixth consecutive quarter in a net recovery position, resulting in full year net recoveries of $4 8 million.
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The nonperforming loans to total loan ratio once again hit a new cycle love at 92 basis points and while this metric remains higher than peers. The net charge offs at NPL ratio is significantly better than peers. We believe our approach to downgrading troubled credits early and Ah patient approach to workout results in better outcomes for our clients and ultimately lower cost for the bank.
Sure.
On Slide 15, you will see the details of our fourth quarter allowance, which stands at $107 million a slight decline from Q3 credit loss expectations showed a slight improvement quarter over quarter, but the related reserve relief was largely offset by additional reserves for loan growth, while our outlook on credit remains optimistic we believe it is still prudent to maintain above <unk>.
Average levels of qualitative reserves, which stood at $37 million a quarter at a.
As a reminder, we also continued to carry $34 million in unamortized marks from a required portfolios.
As I wrap up my comments here are some key takeaways, we're very pleased with the fundamental results of the quarter and year strong commercial loan growth led to a stable core net interest income despite interest rate headwinds.
Our fee based businesses led by wealth mortgage and capital markets continue to perform well and provide a great launching point for 2022.
Expenses remained well controlled and our strong credit quality continues to keep credit costs low so.
Slide 16 includes thoughts on our outlook for 2022, we ended the quarter with a healthy $2 $5 billion commercial pipeline, which supports our favorable outlook on loan growth.
The historically low interest rate environment will continue to put pressure on net interest income, which should be mitigated through continued earning asset growth.
Rising short term rates will have a positive impact on earnings as we are gradually reposition the balance sheet to a more asset sensitive position.
The PPP loan forgiveness process continued for our clients. We expect the run off of most of the remaining balances and related fee recognition to occur in the first half of 2022 weeks.
We expect our fee businesses 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 mortgage revenue should follow the industry trend can be seasonally lower in the first quarter. Our other fee lines are expected to be stable in the near term.
Only be Standalone expenses are expected to rise, 2% to 3% in 2022 and should follow typical seasonal patterns.
And it includes an expectation of slightly higher merit increases related to inflation and continued strategic investments in both revenue talent and technology.
A brief update on taxes, we continue to expect a reduction in the volatility caused by our tax credits that we worked through the last of the remaining one year historical tax credit commitments in total we're expecting approximately $12 million in tax credit amortization for the year with a corresponding OMB standalone full year effective tax rate of approximately 17% to 18%.
The pro forma rent for the combined company would be in the range of 21% to 22%.
In light of the delayed close of our merger with FNB. We wanted to provide an update on the combined company expense expectations are June 1st announcement between 75% of the annualized cost synergies would be realized in 2022.
A first quarter close the deal and the corresponding July conversion date is now expected to reduce the 22 impact of approximately 50% of the total synergy synergies with the majority realized in the second half of the year that said, we are still confident we will realize 100% of the $109 million in targeted savings, which will help us deliver meaningful positive operating leverage now the work that Matt.
It gets you to the states is unchanged, but the timing is now elongated by 90 days.
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 also joining US. This morning is Mark Sander, President and COO of first Midwest Bank.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again that star one.
First question comes from the line of Ben Garlinger would hold the group.
Good morning, everyone.
Thanks.
I was curious if you could we could take a minute to talk kind of high level loan growth through the pandemic old national and.
First one was it a pretty solid job growing loans pretty consistently throughout the pandemic, especially when you compare it to like fed H eight data. So when you look at the fourth quarter old National was a little bit lower which makes sense for you to look over a four quarter run rate you guys have done a better job and then.
With the commentary about warrants you boding well for future growth.
Was curious kind of what you guys are seeing from kind of on the ground level in terms of your clients and their loan demand typically fourth quarter kind of pulls and two first quarters.
First quarter is usually flat so is.
Kind of a curious if you could just spend some time thinking out loud about how your clients are approaching their need for our loans.
What it might mean for you guys in the first half of 'twenty two.
Yes, Dan this is Jim Sandra and I think you nailed it.
Really strong production in the fourth quarter pipeline is down a little bit seasonally.
In the process of building those back up I will tell you I think from a grassroots our clients feel really optimistic in spite of the challenges that they continue to face around labor and supply chain, but the other thing that causes a little concern to the fourth quarter was a high level of pay offs again highest level that we've seen in a number of <unk>.
Years, and I don't know if that will continue in the first quarter or not but.
I do think the pipeline continues to reflect that our you know our customers are investing and growing.
If they can find the labor. So again, we think we'll get off to a good start I'm, just not knowing exactly where that those payoffs will continue to to land.
Mark would you like to add anything from your perspective.
I think it's very similar to what Jim said pipelines are strong.
Customers I think are optimistic there as there is still a fair amount of liquidity in the system of course and pay offs are elevated but our production is good and solid and should position us well for loan growth coming right out of the box in Q1.
Yes.
Great.
And then.
Brendan if you can kind of look at the yield curve expectations going forward I know that you have to balance sheets coming together you have a.
A margin that is near or at its floor. So if you if the markets kind of expecting that three to four hikes in.
'twenty two and beyond a couple more I was curious if you had any idea of where the margin might shake out as we end 'twenty two towards the two like kind of combining everything together.
Sure, Yes, and I think Youre right I think our short of of rate changes I think we're getting closer to Florida and I think we're all the way there yet I think there could be continue to be some margin compression without them. Some help from the fed we have looked at.
At both balance sheets at and the margin impact from from rate increases and how we like the model that up then as against the forward curve and so we think the only be stand alone is going to get some upward movement.
Moving to about 2% to 3% and NII on a standalone basis, and when we fold in F&B, which has a slightly more asset sensitive balance sheet.
Has a little more cash on hand, we think that's closer to a 3% to 4%.
Again, it gets a forward rate, which is now a kind of three and a half to four four rate hikes embedded in there.
Okay, Great. That's helpful. I'll step back so I would weight out of the year.
Thanks Ben.
Your next question is from Scott Sievers with.
Piper Sandler.
Good morning, Scott.
Hey, guys. Thanks for taking the question Brendan I wanted to follow on some of those rate sensitivity comments can you maybe talk a little bit about where you're most sensitive on the curve or I guess ideally.
We're on a pro forma basis, you'll be more most sensitive do you benefit must at the beginning of a tightening cycle or will it take a few hikes for you to feel the full benefit.
Now I think we benefit right out of the gate with short term Mike.
Nothing yes, it shouldn't be a significant difference from quarter to quarter.
Ultimately the long term impact of this will be what happens, where where does the middle and long into the curve shakeout from a from a long term perspective, but in this first few quarters that will benefit right out of the gate.
Okay, perfect and maybe how to do your thoughts on deposit betas fit into the equation.
Yeah. So what we modeled was I think a fairly conservative view of deposit betas that are a little below for the long term full cycle rate cycle, but in that 10% to 20%, which frankly could be very conservative assumption.
Given how we've reacted to that for the first three rate hikes last cycle I think we'll be able to manage deposit betas very low for the first year.
Okay perfect. Thank you and then just as it relates to.
The closure of that transaction.
How quickly would you guys be able to close after you do receive that approval I imagine you're pretty much. Good to go just sort of waiting on that that green light, but you know what what kind of a timeframe would be we'd be looking at.
Well, we need we need at least 15 days from whenever we receive approval and more than likely we would do it at the beginning or end of a into our bonds are beginning of the next month just to keep the accounting clean and smooth. So just depends on when we might hear and how close we are to the next you know kind of beginning of a month.
Scott.
But again.
Other than that we're ready to close.
Perfect.
Alright, good. Thank you guys very much.
Your next question is from Terry Mcevoy with Stephens.
Morning, Terry Hi, Good morning, everyone, Jim maybe start with a question for you.
Old national resolve that issue in Indianapolis kind of a day before the fed approved a few transactions.
You guys, obviously weren't on that list is there anything that I'm missing out there that maybe I just haven't picked up on and is there anything you can share with us that gives you confidence that the transaction can close here in the first quarter.
Well all I can say is we continue to have very constructive dialogue and I think it's just a matter of timing and as you can imagine there's a lot of priorities right now the fed you know we had two fed governors.
Just as recently as last week going through their confirmation hearings there just thinking a lot on their plate right. They got a lot of changes. So we are patiently waiting.
And those three prior announcements were ones that were in the queue longer than US right. So I have nothing no reason to believe we won't hear positive news and so we're just we expect that we'll hear that news here soon and we will move towards close like I said.
But nothing there's no outstanding questions or issues that we're aware of and feel like we're in good shape and ready for approval.
Great.
It seems like every week, a large bank announced announces a new deposit product to reduce overdraft fees could you maybe just talk about the old national.
Kind of overdraft structure and product how does that compare to first Midwest and whether you think you need to make any changes going forward when the two companies combined.
I would just say we are aligning our.
Process and process together as we come together during the conversion in July we've been spent a lot of time on that that probably means slightly lower income for the old National deposit service charge program.
And you know we are looking at like everybody else, what's going on in the industry. You know, we're not going to be immune from from those changes in the future I think it's a little early to know exactly how it's going to shake out for banks our size, but clearly the national banks are moving towards you know.
Our program. So we're going to we're going to continue to watch it we're going to continue to do the right things and and you know I would say our programs are kind of right in the middle with everybody else.
As we align the two programs and we'll just have to wait and see you know ultimately if there's a standard that gets that and how that might impact us in the future.
And then maybe if I could squeeze in one more you mentioned recruiting in Chicago is that because you see the pro forma company.
Just having the ability to have a larger kind of platform and the need for more lenders or do you expect some attrition and you want to fill some fill some holes so to speak in the in the company.
Really seen almost no or minimal attrition, so far and don't expect to have any I mean, our teams from day, one saw the opportunity right and were excited about what that might mean for them. I. Just think there is an opportunity to continue to invest we have a great story to tell when we get a chance to tell the story to two potential team members.
They like it.
They feel the energy they feel the opportunity that's in front of them and so it's it's being more opportunistic around that and you know I just believe theres always an opportunity to add talent.
And so we're just going to continue to go out and do that.
But but nothing nothing that we're worried about in terms of our existing team. We got great team members in Chicago today, who are completely capable of doing the work, but I do think there's more opportunity and we will have a bigger balance sheet and I think there'll be more middle market opportunities for us. It's just we combined the two companies and we'll continue to take advantage of that client set and it makes it.
We got team members, who can fill those needs.
Thank you Jim.
Thanks Terry.
Your next question is from Chris Mcgratty with K B W.
Chris.
Jim.
A question on just the balance sheet position to close and pro forma.
Brian maybe a question for you any any tweaks that you might be doing on either side.
On the balance sheet to kind of put your best foot forward pro forma.
Yeah, Chris Yeah, we're taking a look at that I guess, what we can tell you now is anything that we do will not be material to the overall balance sheet and uncertainty of anything we do will be looking to do and in EPS and capital neutral way.
Okay.
Then once you close.
Obviously youre in a very strong capital position what are the philosophical thoughts on a buyback.
All of us.
Well, obviously, you know don't want to do anything ahead of any kind of federal reserve approval. So I think once you know hopefully we received approval here soon I think we can look back at our capital and just make any actions going forward, we're obviously going to be at the low point.
Once we close them and Mark Mark the balance sheet.
And so we'll be looking at that and we'll be looking at a quite frankly as you know what's the best return of capital right and and so we'll just continue to do what we've always done.
You know, we we probably run a little more capital on average than some of our peers, especially given our credit quality.
But we'll make sure we do the appropriate thing for shareholders and managed capital.
And take a look at that but as Brendan said, it's still too early we're looking at the balance sheet and any potential actions, we might take but if we do anything it's going to be pretty minimal.
Okay, but post closing.
The message on a buyback is it's on the table, but it's.
It's balanced against you know the growth is that is that the right interpretation absolutely definitely okay, and then maybe maybe one more on deposits.
We as analysts continue to be surprised by the pace and the.
The stickiness of the deposits.
What are you seeing incrementally on deposit growth what are your expectations for.
Maybe the next six at six to nine months.
Yeah, Chris So I think we were a little surprised to see acceleration of the growth again here in the fourth quarter. It has slowed a bit in the third and pick back up pace and as we as we started this and look at past cycles. Our view is that that sticks around for longer.
And that growth may moderate a bit, but we don't see that at least in the near term. This is going to it's going to run out of the bank are very quickly that said. We are we are prepared we have a tremendous amount of asset liquidity. If this does get ahead of us I think we have a really strong balance sheet and great liquidity position to manage through that too.
Got it thanks, Thanks Brent.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question is from John Armstrong with RBC capital markets.
Hey, good.
Hey, good morning, everyone.
Maybe obvious here, but on slide 16, your NII guide.
Assuming that assumes no rate increases is that right Brendan.
That's that's that's correct that's exactly right yes.
Yes.
Okay. Okay. Good.
And then.
In terms of your expense guide the 2% to 3% how much of that is hiring versus just call. It natural pressures on expenses.
And technology.
Yes, I mean, those are the two biggest factors right and clear.
Our marriage processes more outsized than it has been in the past.
We anticipated.
We anticipated this and we try to get ahead of this a couple of years back, but we're also accelerating some of those increases, particularly at the at the lowest wage side.
And then obviously you know our hiring I think will be pretty consistent with what we did last year.
So that's kind of built into the run rate at some level, but but on average they are more expensive. The people. We're hiring today are more expensive.
Then they may be kind of our average team member today so.
I think like any other banks that I've seen so far we're not going to be immune from that you know historically, what it brought our expense growth would have been you know flattish year over year and today, we are saying its up two or 3% depending on kind.
Kind of those needs okay.
Okay.
And then if you're if you set aside the synergies from the merger safe to assume that we should expect similar type growth at first Midwest on their core.
Yes, similar Yep Yep, Okay, and then one more thing on.
On lending.
It's obviously picked up a little bit for the industry in terms of commercial you guys are certainly buck that trend and had better growth.
But do you expect the pipeline numbers to continue to increase is there anything different in terms of the loan growth story, that's emerging right now or is it just really more of the same.
Yeah, Josh I.
I would think that our pipelines will continue to rebuild and grow like they like they did last year, we haven't seen anything to the contrary, but.
Certainly staying very close to our customers, but again optimism for our customer base continues to be good in spite of the challenges that are facing them with supply chain and labor and that would also as you know some of our new talent coming online, John and and their ability to you know.
Run off their non competes and things like that I think gives us more confidence the team. We've just putting in place right now in Kansas City again, those will all be kind of net additive to the pipeline as we continue to hire new talent and get them ready place to be successful.
Okay, Okay, and any any theme on the new talent, you're hiring I mean is it just.
Big Bank fatigue wanting to come to a company like yours, but any thematic story behind that.
Yeah, I think it's a lot of it I think you know it's it's sometimes it's hard to do your job to serve your clients or of your communities are at some of the large institutions and you know I think they see a growth story here and entrepreneur little bit entrepreneurial story here and all of that it's pretty exciting to be a part of Wright and for better or worse some of those.
Largest competitors, we face in our markets that have lost the ability to do that and so.
But we feel really good about the story and clearly it's working.
You know, it's an interesting time right now, we're just kind of working through year end stuff in but I'm confident we'll continue to hire new talent as we entered the new year here and continue to to have lots of opportunities in front of us.
Okay alright, thank you.
At this time there are no additional questions.
Well, thanks, everybody for joining us and as you I know you've got a busy day in front of you have had you as usual well now John and Brian and myself are all here to take phone calls. So we appreciate it have a great day.
Thank you. This concludes the old National's call once again, a replay along with the presentation slides will be available for 12 months on the Investor Relations page of old National's website old National Dot Com a replay of the call will also be available by dialing 855859.
<unk> 056 conference I'd Code 3313815, again dial 8558592056 conference I'd code 3313815, this replay will be available through.
February the first.
Anyone has additional questions. Please contact <unk> Walton at 8124641366 again the number is 8124641366. Thank you for your participation in today's conference call you may now disconnect.