Q1 2022 Old National Bancorp Earnings Call
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[music].
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Good morning, welcome to the old National Bancorp first quarter 2022 earnings conference call. This call is being recorded and has been made accessible to the public in accord.
<unk> with the SEC 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 Manny.
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 understanding of performance trends reconciliations for these numbers are contained within the appendix of the presentation I would now.
I'd like to turn the call over to Jim Ryan for opening remarks, Mr. Ryan.
Thank you Andrew good morning.
Pleased to discuss our first quarter results and update you on our transformational merger with first Midwest.
Let's start on slide four.
First I would like to highlight our recently published ESG report, which you can find on our website.
Second <unk> was recently recognized for the 11th consecutive year by Ethisphere Institute as one of the world's most ethical companies.
Old National didn't just start thinking about corporate social responsibility recently, we have a long standing practice of being ethical.
Constraining good corporate governance.
<unk>, our communities being equitable inclusive and being committed to sustainability I invite you to learn more about our commitment by reviewing the ESG page on our website.
Moving to slide five.
We were pleased to close our merger with first Midwest on February 15th.
All reported results include the impact of the merger since closing.
Our systems conversion a branding changes will take place in July and we just completed our first successful mock conversion over the weekend.
We are planning to more mock conversions, which should give us even more confidence as we head into July .
As outlined in our slide deck for this call. We are on track to achieve our modeled merger synergies of $109 million.
And we are already starting to realize some of those benefits.
Brendan will fill you in on the details.
I'm, particularly pleased with our strong retention of client facing talent and the growth of existing and new client relationships in the Chicago footprint.
There is strong energy and excitement amongst the team and we've started to hire some top revenue generating talent in the market.
Later, you will see that this energy and excitement translate into more robust results.
Our expected growth and strong return profile should lead us to above peer performance as we realize more of the merger benefits.
Moving to slide six as we anticipated we reported a GAAP loss for the first quarter of <unk> 13 per share.
The first quarter included pre tax charges of $96 million in the initial provision expense and $52 million of merger expenses.
Excluding these charges from the quarter adjusted EPS was <unk> 40 per common share.
We saw strong full quarter combined commercial loan growth over 8% during the quarter.
Excellent credit quality, and our pipeline more than doubled to a record $5 4 billion.
Our adjusted return on average tangible common equity was 15%.
And our adjusted efficiency ratio was approximately 58%.
We are pleased with the strong operating metrics and we expect them to improve further from the merger benefits and higher rates.
An update on hiring more broadly we had significant success and hired 16, new commercial relationship managers, including three in Chicago and.
In Minneapolis, and three Indianapolis.
This is a quicker pace for new hires than we've previously seen.
Our talent pipeline remains robust and we will continue to make these investments throughout the year.
Lastly, based on recent visits I am excited to report that our two latest <unk> in St. Louis and Kansas City are off to solid starts.
I'll now turn the call over to Brendan for the further details.
Thanks Kim.
Turning to the quarter's results on slide seven as anticipated we reported a GAAP net loss of $30 million or <unk> 13 per common share.
Reported earnings were impacted by $96 million in day, one provisioning and $52 million and other merger related charges.
Alluding these items as well as debt securities gains our adjusted earnings per common share was <unk> 40.
Slide eight shows the trailing total loan growth on a full quarter historical combined basis, excluding both PPP loans and purchase accounting adjustments.
Q1 represents our seventh consecutive quarter of organic loan growth with total loans, increasing 6% on an annualized basis driven by strong performance in commercial which grew 400, which grew $405 million or 8% annualized.
<unk> loans were flat as higher portfolio mortgage production I will set $190 million of runoff from the legacy F&B transaction book the balance of that transactional book was approximately $1 8 billion at quarter end.
The investment portfolio increased this quarter as a result of the merger with the overall mix remaining largely unchanged.
Yields improved significantly to $2, one 4% with new money yields of 252% portfolio duration was stable. Despite the dramatic shift in the yield curve with new money purchases focused on the shorter end.
In addition, we did proactively moved $2 billion of securities to HTM to mitigate future OCI impact.
Slide nine provides further details of our commercial loans and pipeline is strong fourth quarter growth was led by C&I, which grew 14% annualized. We're also pleased that in spite of the strong first quarter production. Our pipeline ended the quarter at a record $5 4 billion.
20% higher than the combined Q4 pipeline.
Turning briefly to pricing.
New money yields on C&I were three 4%, which are now well above portfolio yields new CRE production yields were significantly higher quarter over quarter at 314% with 72% tied to short term rates.
The heavy floating rate production mix is welcomed as we enter this rising rate cycle.
Slide 10 shows details of our Q1 commercial production by product end market.
The $1 5 billion production with well balanced across all products and major markets.
We are particularly pleased with the results from our Chicago market from day, one our Chicago team understood. The strategic logic of the merger and as it remained focused and engaged taking care of both new and existing clients.
Moving to slide 11 deposits were stable quarter over quarter on a historical combined basis, although we did see some mix shift as an increase in consumer accounts were offset by seasonal declines in commercial and public.
Total cost of deposits in the quarter was unchanged at five basis points, while other borrowing costs were down eight basis points quarter over quarter.
Next on Slide 12, you will see details of our net interest income and margin.
Net interest income of $227 million was consistent with expectations and supported by strong loan growth.
Net interest margin increased 11 basis points from prior quarter to 288%.
Our margin, excluding accretion and PPP income increased six basis points to 265% note. This increase was largely due to the higher asset yield from F&B. The legacy loan book with the impact of the March rate hike still to come.
Slide 13 provides additional details on our asset liability position Andrew activity.
A large cash position high percentage of floating rate loans and industry, leading deposit beta should lead to an add or above peer average NII benefit from future rate hikes.
Slide 14 shows trends in adjusted noninterest income, which was $65 million for the quarter again. This was largely in line with expectations.
Mortgage production on a full quarter combined basis was on plan at $634 million.
However, normalizing gain on sale margins and a higher percentage of portfolio production did impact revenues this quarter.
Pipeline for strong at $688 million at the end of the quarter, but we expect the portfolio a high percentage of mortgage production in the near term, which will help offset transactional book runoff.
Also we did see a $4 million increase in the value of our MSR that is not reflected in mortgage revenue as we account for our MSR on a lower cost or market basis, rather than fair value.
Next slide 15 shows the trend in adjusted noninterest expenses adjusting for merger charges and tax credit amortization noninterest expense was $173 million and our adjusted efficiency ratio was 57, 7%.
We are now running slightly ahead of our planned cost synergies and expect the majority of saves to be realized in the back half of the year.
The merger charges are also tracking in line with our diligence estimates with approximately $100 million remained.
Slide 16 provides further details on our path to achieving the cost savings of $109 million, we previously announced.
With our July systems conversion on track, we expect to realize 85% of the cost synergies on an annualized basis by the fourth quarter and the remainder in early 2023.
Slide 17 shows our credit trends at both historical old National and first Midwest credit conditions continue to be benign and our commercial and consumer portfolios continued to perform exceptionally well we ended the quarter with better than peer results in all key credit metrics net charge offs were a modest five basis points with the majority related to purchased credit deteriorated loans that had an <unk>.
Allowance established at acquisition.
On Slide 18, you will see the details of our first quarter allowance, which stands at $281 million up from $107 million at the end of Q4 seven.
$79 million of PCE related allowance was established as part of the acquisition and $96 million a day. One allowance is established on non PCV loans through provision expense.
Reserves related economic forecast and portfolio assumption changes were offset by lower qualitative factors in net charge offs in the quarter.
While our outlook on credit remains optimistic we're maintaining elevated levels of qualitative reserves, given the geopolitical unrest and potential economic hard landing following this rate tightening cycle.
In addition to the $281 million in total reserves. We also carry a $162 million in credit marks $132 million of which is related to our F&B merger.
Slide 19 provides details on our capital position at quarter end as expected regulatory capital ratios declined due to merger related items asset growth and share repurchase activity.
Goodwill came in slightly higher than we anticipated driven by larger unrealized losses on F&B is available for sale investment portfolio than we initially modeled the higher purchase accounting discount will flow through earnings and allow us to build back capital quickly overall.
Overall, our capital position remains strong with a CET one ratio of 10%.
As I wrap up my comments here are some key takeaways, we're very pleased with our first quarter performance advocate in 2022, the integration activities remain on track, we had a strong commercial loan growth quarter credit remains benign and we are tracking ahead of our planned cost synergies.
Slide 20 includes thoughts on our outlook for 2020, we ended the quarter with a record commercial pipeline, which supports our favorable outlook on loan growth NII and margin will benefit from continued loan growth and fed rate increase is consistent with the asset sensitivity we outlined earlier.
We expect our fee businesses continue to perform well despite headwinds, we expect solid organic growth in our wealth business, but hey, AUM will be under pressure from market fluctuations in both equities and fixed income.
Mortgages following industry patterns with fee revenue under pressure from normalizing gain on sale margins as well as a higher percentage of portfolio production.
Strong commercial activity should support higher capital markets revenues and lastly, we expect pressure on deposit service charges consistent with industry trends.
A brief update on taxes, our income tax benefit was $4 9 million in the first quarter, resulting in a 15, 2% FTE tax rate.
First quarter included $2 $1 million in benefits related to the vesting of share based payments and post merger re measurement of deferred tax assets were expecting approximately $8 million in tax credit amortization for the remainder of the year with a corresponding full year effective tax rate of approximately 21% to 22% on an FTE basis, and 18% to 19% on a.
GAAP basis.
For some final comments I will turn the call back over to Jim Ryan. Thank you Brendan as we wrap up on slide 21, I would like to share a few closing thoughts as we look forward Brendan shared our 'twenty two outlook, but I would also like to highlight a key a few key differentiators and the deep discount relative to peers or more broadly the trs.
As indicated throughout our call. This morning, the combination of old National in first Midwest is going very well and is progressing according to our plan.
We ended the quarter with strong commercial production momentum as illustrated by record commercial pipeline, reflecting strong client retention and growth of new client relationships. We have a tremendous recruiting story of our top revenue producing talent as evidenced by our 16, new hires and we will continue to hire more.
With our industry, leading historical betas, and our well positioned balance sheet, our ability to benefit from rising rates is better than most.
We have a strong track record of meeting or exceeding our model merger synergies and expect timely brand and systems conversions like in previous mergers.
We will be disciplined in our underwriting and maintain adequate loan loss reserves and capital when you combine the allowance for loan losses and the credit marks we have 156 basis points of coverage with historically lower level of net charge offs.
We know transformational mergers take time to recover the discount inherent and the uncertainty of any combination.
Still we have more tailwind than most and a strong track record of successful executions.
I am very excited and optimistic about our future and my money is on us.
Lastly, despite potential distractions from our transformational merger, we remain highly focused on serving our clients and communities I think our results for the quarter illustrates the success of those efforts.
I'm also grateful for the hundreds of our team members engaging the systems and branding conversion along with those that are laser focused on serving our clients and communities each day.
With that said Brendan Mark Sander, Jim Sandgren, John ran and I are all here to answer any questions.
Thank you we will now begin the Q&A session.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
We'd like to remove that question. Please press star followed by Keith.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question. We will pause briefly ask questions are registered.
Our first question comes from.
Scott Cyphers with Piper Sandler.
Scott Your line is now.
Good morning, Good morning, guys, Congratulations way to return back to your minority position.
Thank you I'm tired of tired of being embarrassed by my slow trigger familiarity and outside.
We appreciate the acknowledgment.
Got into Q I appreciate it.
Yes. Thank you.
I appreciate you guys taking the question.
I wanted to ask Brendan maybe first for you.
If we pull out the PPP and so the underlying margins running around $2 $65 or so would you say thats an appropriate launching quite for the combined company in other words does it.
Accurately reflect the combined balance sheet or is there just a bit more upside simply based on we will have a full quarter of <unk>.
Yes, I think if you actually if you pull out accretion PPP and add back.
45 days F&B I think your loss rates, a little higher than that 265 closer to $2 72, I think thats the right place to think about the asset sensitivity, we've talked about so 6% annualized based on the forward curve, that's the right place to grow that crop.
Okay. Good thank you.
And then along those lines, so it's 6% asset sensitivity.
Maybe a thought on.
Sort of how the margin trajectory at the beginning of the cycle versus later on in other words out of your assumptions changed for a 100 basis points or so.
<unk>.
Fed fund rate hikes versus a little later in the cycle.
Yes. Good question it should grow a little faster early and slowed down consistent with the path of the path of the rate hikes are expected to get if we get a 50 basis point rate hike here in may.
And a slowdown over the rest of the next 12 months, it's a little early perfect.
Got it alright, perfect. Thank you guys very much.
Thanks Scott.
Thank you Scott.
Our next question comes from.
Thank you all again with <unk>.
Thank you your line is now open.
Good morning, Beth and good morning, everyone.
I was curious if we can kind of talk about the the hiring front to some degree unknown.
You laid out a few numbers there in Chicago ones.
Positive, which I think is.
Clinical listen to the entire store and definitely shows.
Continuation with no real hiccups here from the combined entity.
Or do you think about hires going forward.
Across the footprint is there any areas you are looking to.
Grow more than the others, and then kind of juxtapose that against that with rate.
<unk>.
Raising inflation expectations for wages kind of how do you balance the two.
Good question Ben.
I'd like to think about this where there is always room for top revenue generating talent right. We have an unending appetite for that type of talent and it's at market rates whenever market rates are at those times. So even if even if what were paying is on the higher end. Because we are we are literally hiring the best in the market.
And that comes at a cost we will continue to make those investments I believe.
It's a great opportunity right now we have a great story to tell.
Theres plenty of unhappy people out there and so we need to take advantage of and continue to hire and it will be primarily in the commercial and wealth management spaces.
Those were our conversations continue and again it doesn't mean that we aren't looking for top talent.
In the it space and some other key a key support areas but.
But we will continue to be really focused in on particularly in our major metropolitan markets, where I think they have the biggest opportunity.
And probably the most talent to go after.
Well set a benchmark I just would add its not like we have gaps to fill were just opportunistic and frankly strategically opportunistic meaning again as Jim said good revenue producers pay for themselves quickly. So we want our folks in the market talking to top talent all the time.
Yeah.
Gotcha, Okay, and then kind of a bigger picture here when you think about shareholder value through tangible book.
Historically old national has kind of done.
Deal year, roughly like pre pandemic and then this one is obviously much larger than I'm sure it'll take a little bit more time to adjust so when you're thinking about tangible book value longer term should we think about a deal a year, obviously with a bigger balance sheet. It takes a little bit more to move the needle or is the.
Our plan to grow earnings tangible.
Opportunistic with share repurchases.
Higher sense of clear managing that capital intangible going forward.
Yes, great question strategically I believe we're going to do fewer deals probably more meaningful deals, mostly because we have to do a more meaningful deal than we've done historically just in order to have the impact to accretion.
But I would suggest there'll be fewer and it won't be because we have a lack of opportunities I think they're going to be plenty of opportunities for us will continue to be disciplined in how we approach that particularly as it relates to any kind of tangible book value dilution.
But fewer deals going forward, but maybe more meaningful ones.
Okay, that's great.
Great start to the year.
Congrats.
Thanks, Bill I appreciate your support.
Thank you Ben.
Our next question comes from.
Terry Mcevoy with Stephens.
Good morning, guys. Your line is now open.
Thanks, Good morning, everyone.
Good morning Jared.
Hi, Jim maybe a question for you I just wanted to understand I understand the message on the bottom of page six correctly, where it says merger benefits are ahead of plan.
Is that connected to the expenses and achieving 85% by the fourth quarter or is that along the lines of recruiting and some of the revenue growth initiatives that you've talked about.
Yes, and yes, and yes, yes.
I think the message to takeaway today is everything is going according to plan.
We feel really good about our combination.
We had a rally for our commercial RMS recently.
The energy in the room was just palpable and I think you could see from the results. We saw excellent results across every single one of our markets against all of the commercial portfolios and so I would say it's going according to plan. We are starting to realize the synergies like we expected our systems and branding conversion going well.
Client retention has been strong team member retention has been strong so to sum it up I think we couldnt be more happy with where we stand today with the current set of results.
And then a question on just the rate sensitivity that 6% is a static kind of balance sheet, how should we think about loan growth deposit growth from here.
Is there any.
Lans for portfolio run off like we like we had in the first quarter.
Yes, so that transactional book up I'll answer the last part first transactional loan book, we will likely have that around with us for a while opportunities.
Opportunities to do anything or dispose of that given the rate environment will be difficult. So that $190 million run off will likely to continue that said, we're going to continue to portfolio a significant out of mortgage yourself offset some of that headwind.
But we are still very optimistic about loan growth loan growth will help us expand NII going forward.
And when it comes to deposits I think it's anybody's best guess I can tell you that we have a pretty rate insensitive.
The franchise and I bet on absent and ours will stick around longer than most others.
Okay.
And maybe just one last one for Mark and feel free to push back on the question.
How is your team in Chicago handling a more conservative underwriting philosophy.
I think it's I think underwriting philosophies are more similar than you than you think.
<unk>.
Terry.
I don't think there really is a pushback there I think we kind of speak each other's language a little bit frankly again it speaks to the cultural fit we thought about from this all along I think the credit cultures are actually quite similar so there is a couple of portfolios, where perhaps we could run more risk in some of the consumer stuff. We did with biologics credit cultures are very similar.
Jerry I would just second that there are a few areas as we went through the policies that quite frankly, we were we were a little bit.
More had more risk in and there were some areas they have a little more risk in and so we're just taking the best of both of those policies and it's really worked out really nicely.
As the credit teams come together I think more importantly is the teams are energized our lending teams are out they're energized and growing relationships.
And they see a pathway forward to do that regardless of the underwriting standards that are in front of them. So I think I think there is genuine excitement about our ability to do that.
I think the results in the pipeline kind of speak to that pretty well when you look at what we did in Q1. The loan growth was a lot of it came out of the Chicago team with absolute combined are critical too.
I appreciate it thanks, everyone.
Thanks, Eric.
Thank you Jerry.
Our next question comes from.
Chris Mcgratty with K B W. Chris Your line is now open.
Good morning, Chris.
Hey, good morning.
Historically old National has gotten a lot of their right.
Great sensitivity from the deposit base and then F&B is well too can you just remind us what the mix of retail and commercial deposits are.
Pro forma.
It's about Christmas January at 53% retail.
40% of the balances public funds.
Okay.
Okay, great. Thanks, guys.
And in terms of the operating leverage you talked about the efficiency ratio in the quarter and we can we can plug in the math for the.
For the savings.
Kind of at a high level thoughts on kind of where you think the efficiency ratio can go given inflationary pressures, but also cost save.
Yes, I think we have room to depth that down lower as you said you can do the math, but we're definitely on a really good July .
Opportunities in the back as we get into 2023 continue to to make our back office more efficient and there is plenty of opportunities to drive to drive revenue.
To help that numerator as well.
Economics.
Okay, Great and then maybe Brian and by having the comment on the MSR can you just repeat.
The comment on the write up in the quarter.
Yes, the MSR.
Value actually increased $4 million, but we did not that did not flow through revenue Chris.
We account for that at a lower of cost or market. So I know some of the some others account for that in fair value and that was helpful too to their mortgage revenue and Thats why that didn't show up in our in our revenue line.
Okay. Thank you very much.
Thanks, Chris.
Thank you Chris.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
Our next question comes from.
John Kim with RBC capital markets John .
John Your line is now open.
Thanks, Good morning, everyone.
Hey, good morning.
Thank you.
Can you talk a little bit more about the pipeline I think in the prepared comments you guys talked about being up 20% on a combined basis.
Curious what you would attribute that to and do you feel like loan growth is accelerating at this point above the kind of the pace you saw this past quarter.
Yeah, Hey, John It's Mark I'll take a stab and then maybe Jim.
To add a little bit too I'd attributed to the teams stay in business as usual and externally focused and as simple as that sounds I mean, I think that is it.
Really have not missed a beat its the pipeline is up 20% across all categories across all the teams from about four and a half at a at the end of the year to 504, So Jim anything you would add.
And just our clients are doing really well right now in spite of labor challenges supply chain I think they'd be doing even better if they could find labor, but theres still a lot demand are still willing to invest in.
We're really optimistic about <unk> in the second half of the year at this point so until things changes. Our team is laser focused on taking care of clients and they've done a great job.
Okay. Good.
And then Brendan maybe for you.
You guys highlighted your cash balances that you have on the balance sheet and.
Talk a little bit about your plan for putting that to work and then.
Give us an idea of what you guys transferred to held to maturity kind of the profile of that.
Yes.
We transferred really longer dated munis.
<unk> HCM.
So $2 billion of that.
And in terms of putting new money to work, we had about $1 5 billion of cash we're going to continue to put that to work overtime.
So I would expect that cash balance to continue to slowly come down over the next the next quarter or two.
Okay.
And then.
It seems like the revenue environment.
We've talked about that quite a bit and it seems pretty positive and I guess maybe.
Maybe a simple question, but your your guidance.
Guidance on expenses or are you just telling us it's as simple as saying $223 million is what you expect for fourth quarter expenses or are there is there are there any other puts and takes you want us to be aware of thanks, John Yes.
Got it.
Okay.
Okay. Good that's what I wanted to you never know right but.
But thats all great.
The clarification.
Okay.
Okay. Thanks, that's all I had.
Yeah.
Thank you John .
This concludes 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 or national Dot Com a replay of the call will also be available by dialing 866813.
9403 access code seven to nine 800.
This replay will be available through maintenance if anyone has additional questions. Please contact <unk> Walton at 8124641366.
You for your participation in today's conference call.
Okay.