Q4 2022 Old National Bancorp Earnings Call
Okay.
Hello, everyone and thank you for standing by the old National Bancorp fourth quarter 222 earnings call, we'll be beginning shortly thank you for your patience.
[music].
Welcome to the old National Bancorp fourth quarter 2022 earnings Conference call. This call is being recorded and has been made accessible to the public in accordance with SEC's regulation FD.
Corresponding presentation slides can be found on the Investor relations page of old National Dot Com and will be archived after 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 or outcomes to differ from those discussed.
The company refers you to its forward looking statements legend in the earnings release and presentation slides the companys risk factors. So you disclosed and discussed within its SEC filings.
In addition, certain slides contain non-GAAP measures, which management believes provides more appropriate comparisons. These.
These non-GAAP measures are intended to assist investors' understanding of performance trends reconciliations for these numbers are contained within the appendix of the presentation.
I'd like to turn the call over to old National's CEO , Jim Ryan I think remarks, Mr. Ryan. Please go ahead. Good morning earlier. This morning, we reported strong fourth quarter earnings, which put an exclamation point on an incredible year for old national.
One that saw the closing of our transformational merger with first Midwest successful completion of all related systems conversions tremendous client growth and strong talent retention and attraction the.
The strength of our combined franchise is evident in the results outlined on slide four.
Adjusted EPS was <unk> 56 cents per common share, representing a 10% increase quarter over quarter with a strong adjusted ROE and ROA TCE, 1.46% and 26, 5% respectively.
Our efficiency ratio was a record low of 47, 5%.
Pleased to share that we achieved a quarterly expense run rate necessary to fulfill our $109 million of modeled merger expense savings.
Moving to slide five we reported GAAP earnings for the entire year of $1 50 per common share.
Our adjusted EPS was $1 96 per common share representing a 13% increase over 2021.
These robust quarterly and annual results with peer leading returns were driven by focused execution on our successful merger, maintaining our strong low cost deposit franchise growing loans with consistent strong credit standards and disciplined expense management.
We were also pleased the deposit balances remain relatively flat for the year. Excluding the recent sale of our HSA deposits, while maintaining our deposit pricing discipline with a low 12% deposit beta cycle to date.
Another highlight of the year as our continual investment in top revenue generating talent across our footprint.
Our story resonates well with these individuals and our sales pipeline remains robust.
You may have seen our recent press release last week with the official launch of our AC 30 for high net worth wealth management brand. This is a fantastic opportunity to leverage our combined franchises strength in recent talent investments.
We are already adding new clients to 18 to 34.
As we look forward, we feel good about 2023 and expect loan portfolios to continue to grow, albeit not at 2022 pace.
In other areas and it should be more of the same below peer deposit cost that drive a funding advantage.
Organic growth of our wealth management client base.
Continued focus on disciplined expense management.
While we don't see anything meaningful on the horizon that gives us cause for concern on credit we know that our granular portfolio attention to client selection and consistent underwriting guidelines as well as our active approach to credit management will serve us well with the economy turns worse in.
In other words, we intend to stay on the offense, but we are well positioned withstand any new challenges that lie ahead. Thank.
Thank you I will now turn the call over to Brendan for further details. Thanks, Kim turning to the quarter's results on slide six.
We reported GAAP net income applicable to common shares of $197 million or 67 per share reported earnings include a $91 million pre tax gain from the sale of our HSA business, which was partially offset by $27 million in pre tax property optimization charges and $20 million in pretax merger related.
<unk> charges.
Excluding these items as well as debt securities losses, our adjusted earnings per share was <unk> 56.
Slide seven shows the trend in total loan growth excluding PPP loans.
Total loans grew $606 million led by commercial growth of $438 million and consumer growth of $168 million.
Both commercial and consumer grew an annualized 8%.
The investment portfolio decreased by 1% quarter over quarter due to reinvestment of portfolio cash flows in support of loan growth.
We expect $1 $1 billion in total investment cash flows over the next 12 months.
Slide eight provides further details of our commercial loan pipeline the strong fourth quarter growth was well distributed with 8% annualized growth in C&I, and 7% and CRE Q.
Q4 production puts some pressure on the pipeline, but loan demand remained healthy and we expect continued organic loan growth in the mid single digit range.
Turning briefly to pricing new money yields on C&I increased 92 basis points from Q3 to $6, two 1% with new sea of reproduction yields up 131 basis points to 586%.
We've maintained our pricing discipline throughout the rate cycle and are pleased that our spreads have remained stable.
Slide nine shows details of our Q4 commercial production there.
$2 $7 billion of production with well balanced across all product lines and major markets. In addition, all of our product segments posted quarter over quarter balance sheet growth.
We are pleased with the contribution from our newest LTE on markets with contributed almost $200 million in production this quarter.
Moving to slide 10 average deposits, excluding the HSA sale were down 1% quarter over quarter with the mix of our noninterest bearing deposits stable at 35%.
End of period deposits were impacted $382 million related to the HSA sale and an additional $400 million in seasonal public fund outflows.
End of period deposits also reflects the beginning of the mix shift from interest bearing transaction accounts into time deposits.
Our loan to deposit ratio combined with wholesale funding capacity and asset liquidity in the form of our investment and indirect book provides us flexibility in this competitive deposit market.
That said, we are actively defending deposit balances through competitive rack rates and pricing exceptions.
We are also playing offense through various deposit specials throughout our footprint. We are pleased with our execution of this strategy today, and we have been able to generate new deposits sufficient to maintain stable overall balances.
Market conditions have put upward pressure on deposit rates with average total deposit cost of 22 basis points quarter over quarter to a still very low 34 basis points.
Interest bearing deposit cost increased to 52 basis points, resulting in an industry leading cycle to date beta of 12%.
Our granular low cost deposit base should continue to give us a funding advantage throughout the remainder of this rate cycle.
Next on Slide 11, you will see details of our net interest income and margin.
Both metrics exceeded expectations largely due to the outperformance of our deposit beta assumption.
Net interest margin expanded 14 basis points quarter over quarter to 385% with core margin, excluding accretion up 30 basis points to 375%.
Slide 12 provides additional details on our asset liability position and projected margin range.
Core margin for Q1 is expected to be in line with Q4, taking into account the six basis points of margin decline related to day count.
Our outlook assumes deposit betas, increasing from 12% today to our cycle to date beta in the first quarter of 20%.
The assumptions in our outlook also include a fed funds target rate of 5% and a 4% yield on 10 year treasuries at the end of the first quarter.
Specific margin guidance is challenging beyond Q1, but assuming that that cost us in Q2 and deposit repricing persists, we would expect pressure on margin in the back half of 2023.
Also while we remain well positioned for rising rates, we have been proactively, adding downright protection, including an additional $400 billion of new hedges this quarter with an average floor strike of 4%.
Slide 13 shows trends in adjusted noninterest income, which was $74 million for the quarter.
This was generally in line with our expectations as market conditions continue to put pressure on mortgage and wealth revenues.
The linked quarter decrease was also impacted by lower capital markets fees, which reflect lower demand for interest rate swap products given the rate environment.
These were also impacted by one month of service charge enhancements implemented in December that were discussed last quarter again, we estimate approximately $5 million annual impact from service charge enhancements.
Next slide 14 shows the trend in adjusted noninterest expenses.
Adjusting for merger charges property optimization charges and tax credit amortization noninterest expense was $230 million and our adjusted efficiency ratio with an historically low 47, 5%.
Expenses decreased $7 million quarter over quarter, due to lower salaries and data processing expenses.
Sensors were higher than anticipated due to $5 million quarter over quarter increase in incentive accruals given our strong earnings performance for the year exclude.
Excluding incentive adjustments. We are pleased to report that we've achieved a quarterly expense run rate consistent with our model of cost synergies.
We thought it would be helpful to provide additional detail on our 2023 expense outlook, we believe $225 million at the current quarterly run rate to build off for your 2023 models.
From this $900 million annualized base, we anticipate annual impact of $14 million in tax credit amortization $11 million for merit and incremental increase in FDIC expenses of $9 million and approximately $10 million in strategic investments in both talent and technology enhancements.
These investments will be partially funded with approximately $5 million of expense saves from the real estate optimization actions taken in Q4.
Slide 15 shows our credit trends.
Our special assets team is continuing to work through our PCV loans and expect charge offs from this portfolio to increase but with variability from quarter to quarter. The provision expense impact of this effort should be minimal as we carry $59 million or.
Approximately 5% reserve against the PCB book.
On Slide 15, you will see the details of our fourth quarter allowance, including reserve for unfunded commitments, which stands at $336 million up $8 million over Q3.
Note that during the quarter, we reclassified both current and prior quarter allowance for unfunded commitments from noninterest expense to provision allows.
Allowance for credit loss totaled and metrics now include the allowance for unfunded commitments, providing a more complete view of our allowance levels.
This accounting treatment is also more consistent with peers and should aid in comparability.
Reserve build was driven primarily by strong loan growth with relatively small increases due to portfolio mix.
Offset by improvement in our economic forecast the.
The financial health of our clients remained strong and while credit metrics are stable. We believe it is prudent to maintain elevated reserves given the uncertainty in our base case economic outlook.
Our current reserves reflect a relatively severe economic scenario, including negative GDP of three 6% and unemployment at seven 2%, which is at the top end of our supportable range.
Unless the economic outlook deteriorates materially 2023 provision expense should be limited to portfolio performance and loan growth.
In addition to the $336 million in reserves, we also carry $102 million in acquired loan discount marks.
Slide 17 provides details on our capital position at quarter end capital ratios improved across the board. Our CET one ratio grew to a very healthy, 10% and our TCE ratio increased 36 basis points to six 8%.
Total OCI was stable quarter over quarter, but its still impacting our TCE ratio by 155 basis points.
We continue to monitor our balance sheet for economic stress and feel very comfortable with our capital levels.
As I wrap up my comments here are some key takeaways, we ended a transformational year for OLED with fantastic full year result, and an even better fourth quarter. Adjusted EPS grew 10% and tangible book value per share grew 8% in the quarter.
Key profitability ratios also improved from very strong Q3 result, with an adjusted return on tangible common equity of 26, 5% and return on average assets of 146%, we posted another solid quarter of quality organic loan growth and defended our deposit base well.
Net interest income improved $15 million with 30 basis points of core margin expansion and an industry leading cycle to date deposit beta of 12%.
We are also pleased to have achieved a quarterly expense run rate consistent with our modeled merger cost synergies, resulting in a record low efficiency ratio of 47, 5%.
Slide 18 includes thoughts and our outlook for 2023.
We believe commercial sentiment in our year end pipeline supports mid single digit loan growth in 2023.
Net interest income and margins should be consistent with the guidance, we outlined earlier with pressure from deposit repricing in the back half of the year.
We expect our fee businesses continue to perform well despite headwinds with mortgage following industry patterns.
While our wealth business will be subject to market volatility we are beginning to see revenue momentum from the strategic hires we've made over the last 18 months.
Capital markets revenue was under pressure and should perform consistent with Q4 levels.
Service charge pages implemented in December that are largely consistent with industry best practice will impact full year 2023 by approximately $5 million.
Our expense outlook is consistent with guidance, we outlined earlier.
Turning to taxes, we expect approximately $14 million in tax credit amortization for 2023 with a corresponding full year effective tax rate of 24% on a core FTE basis, and 22% on a GAAP basis with those comments I'd like to open the call for your questions. We do have the full team available, including Mark Theater, Jim Sandgren and John Moran.
Thank you if you'd like to ask a question. Please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind I would like to be removed from the key that stops biting.
When preparing to ask a question. Please ensure that youll device, Andrew microphone on mute could like kidney.
We would just take a brief moment to allow the questions to fill and sticky.
Our first question today comes from the line of Ben <unk> with Husky great.
Please go ahead.
Hey, good morning, everyone.
Good morning, Ben.
Curious I appreciate the guidance you guys gave on expenses in the waterfall is really helpful.
When you think about 'twenty three I think obviously everyone's a bit more skeptical on the economic outlook. When you think about the hires I know that's kind of a priority longer term and investing in the company thinking decades, rather than.
Quarters, but.
Is there any way you could possibly slow because you don't necessarily want to hire lenders going into a recession or any type of one thing that you're looking to lean into.
But I just think there's great opportunities.
For us to tell our story and when we get those opportunities and people are interested I think we're always going to have in place for top talent and Mark Center. So it does really well top town will pay for itself.
So while we'll be thoughtful and deliberate about all of our new hires.
I think when given the opportunity to attract I mean this is really the key.
Top quartile top decile of each of the marketplaces, we're going to go ahead and hire those folks.
But again, we will be thoughtful if the economic outlook looks materially different then when we look at it today, we're going to be thoughtful about adding expenses and we'll be diligent about looking at ways to reduce costs as well so.
But at this point in time I, just don't see anything different than the plan, which is to go ahead and attract the best possible talent, we tend to the organization.
Gotcha that's fair.
Then.
Obviously hires is broadly speaking in terms of lenders. So when you think about the fee income line items are a lot of moving parts and a lot of different businesses I know, the recently announced wealth management.
As a big positive, but obviously you guys can't project the full year fee income with mortgages, the volatile factor of that but when you think about it.
Are we at a floor in mortgage and from here you think fee income rebounds holistically.
Let me give you a 50000 foot view and then I'll have our CFO jump in I'd like to think that mortgage doesn't get much worse than where we're at today right.
And a lot of the balance sheet a lot of the production. We're doing today is our balance sheet not the fee income line.
In terms of well the good news is we're basically taking our business and dividing it into a couple of different businesses. In 18 to 34 is one of those businesses right. So there's not a big increase needed to staff that and I would say that the talent. We're looking for is bolt on the commercial side business banking.
It's also the wealth management side, that's a big part of where we're heading the good news is we have all the talent we need to go to 18 34 off the ground and running at a high level. So there's not a big required investment there, but we do have high expectations that that will grow kind of above our historic norms in that business. Despite what market conditions. The market conditions are going to be what they're going to be.
But nonetheless, we have pretty high expectations around our ability to grow that organically and just before I turn it over to Brendan but I would just add to what Jim said, a number of those hires that we put on in 2022 were in wealth management. So as we hired a dozen to 15 a quarter probably half of those were worse not more than sufficiently staffed to grow in wealth.
Probably the only thing left to add on that than to double click into mortgage I think we have to remember year over year 22 at least in the early part of the year did include some elevated gain on sale margins.
Say, we add we're at a slower in terms of production and gain on sale.
Margins today, but we were aided in the first half of last year by elevated gain on sale margins. So that'll that'll impact year over year numbers I'd also like a thing in the capital markets business right. I mean, you know it was a difficult time with rates rising very quickly, but those businesses find a way to adjust and offer new products or different products, particularly if there's a different set of.
Our view of rates.
Emerging so I think there'll be opportunities to grow that business.
Obviously, the fourth quarter is a tough quarter for that business overall.
Got you and if I can sneak one more in any appetite for potential repurchase or capital deployment. I know that you guys are or historically, we're looking to kind of support the growth, but if growth is growing down into a recession or just overall thoughts on that.
Yes, I think it's a little too early.
To want to jump in that I think we need to have more clearer picture of economic outlook.
Any any issues.
Issues related to credit out there I think we need to have a much clearer picture before you want to jump jump on top of that.
Sounds good I appreciate the time I'll step back in the queue and let Scott asked some boring.
Thanks, Ben I'm sure Scott appreciate the time.
Our next question comes from Scott <unk> with Piper Sandler. Please go ahead Scott.
Good morning, everybody.
Good morning, Scott good to hear from you.
Thank you that that just seemed gratuitous, but I certainly understand.
[laughter], let's see there Brendan everyone's probably most exciting topic I can think of.
So the margin that you're talking about margin pressure in the second half do you have sort of a thought for order of magnitude and maybe a sense for lower bound where the margins could settle in the event that things do start to integrate.
It's really hard Scott to pinpoint something so much of it depends on what the fed does if the fed kind of keeps their foot on the gas we could see maybe even marginal margin expansion, but they are.
Pause for a while.
Deposits continue to re price.
Loan demand remains relatively strong.
I think that would be the kind of the worst case scenario in terms of margin pressure just hard to know where those deposit betas fallout, but one thing we continue to talk to ourselves about is whatever that is I think we have a competitive advantage our deposit beta was half the industry last cycle and I expect we can have a significant advantage over that of the industry.
In this cycle.
Perfect and I guess just for reference when we talk about potential degradation in the in the second half I know you're hesitant to.
Offer thoughts would be on the first quarter, but is that 368, the best starting point for the margin or is something in like the low to mid $3 70 is more appropriate in other words. It goes down in the one one Q due largely to day counts.
Does it go down and stay down or what it would it bounce back all else all else equal.
All else equal right.
Would bounce back.
So Q2 will not have the same level of day impact and then what happens in the back half of the year I think is really going to come down to where deposit costs fall out.
Yes.
Heading if the if the market thinks the fed is headed in the opposite direction right I mean that can alleviate some pressure.
On deposit rates as well.
Yeah.
Perfect. Okay. Thank you very much.
Yeah.
Our next question today comes from Terry Mcevoy with Stephens Kerry. Please go ahead.
Hi, Thanks, good morning, everyone.
Good to hear from you Jerry.
Hi, maybe just a question slide 12, you've got the the <unk>.
10 year at 4% by the end of this quarter.
Is that what $3 50 today and I'm just kind of wondering.
How that could impact the outlook. If the tenure does not change and then maybe as a follow up since I'm on NII do you think even with some margin compression in the back half of this year the loan growth in the balance sheet growth can support growth in net interest income.
As we progress throughout 2023.
Yes, I don't think it's not a huge impact from the 10 year moving around it will impact a little bit of our investment book and fixed rate pricing, but not a not a huge material impact.
I used the same thing with NII, certainly loan growth, earning asset remix will help support NII, but the total NII dollars again, it went back to the guidance and it's really going to come down to where deposit costs fall out and what does the fed do in the back half of the year.
Okay.
And then maybe just stick with kind of the hedging strategy added more swaps in the fourth quarter.
Could you maybe talk about kind of the receive rate duration of of the additional hedges and bigger picture, what's the strategy from here on protecting the margin from lower rates.
The duration on the hedges have been roughly around three years. The average strike on that floor today is as of the entire $2 $2 billion is right around two 6%.
The most recent ones, obviously has a strike significantly higher than that so I think that will provide some some meaningful protection and as you think about it.
Deposit costs continued to reprice up if and when the fed starts to starts to move a.
We've got a lot of a lot of support might be able to reduce deposit costs in the back half. So as we think about positioning the balance sheet towards a more neutral position I think we're a long way towards that goal already.
Maybe one last small question if I could is the tax rate creeping higher that 24% core FTE. It just seems like and I haven't gone back to past presentations. It just seems like it's kind of gotten higher the last few quarters or am I correct and if so what's behind that and if not then we can move on.
No Youre correct, absolutely we added obviously with the F&B partnership we added a lot a lot of earnings, but our tax credit business has not not not.
Increased by double so we're working on strategies continue to invest in that business and we'll look to move that forward, but nothing in the near term. It is going to change that so we feel good about the guidance we gave you.
Okay. Thanks for taking my questions I appreciate it.
Thanks Terry.
Yeah.
Our next question comes from Chris Mcgratty with <unk>, Chris. Please go ahead.
Hey, great good morning.
Good morning, Chris Brendan Hey, good morning, Good morning, Jim.
Jim the efficiency ratio you talked about $47 five just being just being a great level.
How should we be thinking about the trajectory.
Sectary of this of this metric I know, it's one metric but.
<unk> seen both sides of the equation, how do we think about directionally that the efficiency ratio where it settles.
Some obviously, we'd give you the expense outlook for 'twenty, three where the efficiency ratio falls out will largely be.
Jen of where revenues revenues hit, but I can tell you this sort of this.
I don't know that we can repeat 40 75.
But I do think for the full year, we're going to have a really strong efficiency ratio and we continue to work on opportunities to continue to control expenses. Yeah. I would just suggest that you know Chris we've had a long history of being very disciplined around the expense base here and it was obviously been nice to have some tailwind from the revenue side to help us out, but having said that theres no magic bullets.
Easy wins out there, but it's going to be a continued long term focus on driving expenses lower.
Lot of these come through just long term enhancements through technology and business process automation would helps which should help continue to reduce costs. So theres not theres not any quick wins out there that are going to reduce it significantly but it's just a continued focus and by our leadership and management teams to make sure that we're driving our expense dollars and more sufficiently we can.
If I could just push on that a little bit Jim.
I think in the deck, you say theres $5 million.
The savings coming from this branch optimization right. The one timers were were call it 27%.
How do I wrestled with that kind of earn back math or is there something I'm missing in that strategy.
I expected a little bit more to fall to the bottom line.
Yeah.
Most of this was from real estate just readers physician right. So the reality is I think its something less than a five year earn back just a little longer than we would anticipate.
Anticipate normally.
But nonetheless, we think it was the right. These are properties, which are problematic around 20 pieces of property in total about half of those were in the branch world, but very small branches. So.
Again, something like a little less than a five year earn back a little longer than we'd like it to be but appropriate for us.
Particularly given the HSA gain we had to reinvest.
Got it great and then maybe I could on credit.
<unk>.
I'm getting some questions about whats the pace of reserve build you guys have I think been viewed as very very good on credit.
F N B I's history is a little bit a little bit more chunky, but but overall you kind of put them together pretty good credit how do we think about I guess two questions. The pace of build based on your economic forecast and also how you view that kind of a normalized charge offs at this pro forma company.
I think we were in a good spot and that we really never released a lot of the excess reserves. We carried in through through Covid, we're continuing to put up a pretty severe economic scenario.
Through our models so it's difficult for us to sit here today to think about a more adverse scenario coming through in reality. So we think provisions limited to portfolio changes and growth and in terms of charge offs. I think we've had that we've had a good run.
I don't know what normalized charge offs, it looks like and going into next year or what the economy might may provides us, but I do think we have significant amount of coverage on the PCB book that came over from F. N b into the tune of 5% reserve against that book. So I think that will also go a long way in offsetting incremental provision expense associated with the with the merger.
That's helpful.
Get the reserve at 98 bps, what's the I can do it but what's the how do you feel like the fully loaded fully loaded.
Reserve with the with the 5% Mark on F&B I like what's the real metric you guys are tracking internally is like in terms of cover to think about that.
I'm not sure everyone. So if we think about the entire the $102 million of additional discount and credit overall with a 1.4% number.
Got it thank you.
Yes.
Thanks, Chris.
Our next question comes from David Long with Raymond James David. Please go ahead.
Good morning, everyone.
My question first question here is related to funding loan growth and loan growth, you've got a pretty decent expectation for 2023 with the potential for some deposit outflows.
How do you look to fund that growth it looks like securities, you'll get a little bit there, but that that may not close fill that hole gap.
So we have opportunities in the mortgage book and the indirect book and as liquidity in those forms. In addition to the invest portfolio. We also have a lot of wholesale funding capacity.
And that said, we are still out there fighting hard for deposits and we're going to we're going to work hard to maintain those levels.
As we go through we granted it's going to be a tough environment, but we're certainly not giving up and were out there playing often so the.
The combination of those three items is how we're going to find out where we're confident we haven't we have enough liquidity to make sure. We support the commercial team and the growth of that book I think we are defending our deposit base quite well.
The ones in getting more aggressive where we have to and you saw some of that repricing happened in this quarter consistent with the rest of the industry.
I just feel confident in our ability to raise deposits you know.
Deposit gathering is a large component of the goals in every one of our lines of business and we're adding net new clients in every business and so I feel confident in our ability to raise deposits as we need them.
Okay, Alright, great and then you gave some commentary around the deposit service charges and the changes in some of the the your products. There is the fourth quarter number a little rates email is is that the right run rate is it fully baked in or is there still a little bit more out of that to get to the right run rate.
Into the first quarter.
Yes, the service charge line has more than just the NSF fee.
Items in there is only one month of the of the NSF related changes at been baked in there.
But I think if you look back at sort of a couple of quarters average is probably a better view of.
If you look at Q3, it would be a better view of sort of more stable business than typical service charges.
Yeah.
Okay, Great and then just sneak one last one here on the operating expense guide 939 million I. Appreciate the color there, but you know I know you say it depends on the revenue side of the equation, but what are you assuming or can you talk about what you're assuming on the incentive compensation to.
To get to that not to get to that $939 million level.
And how that impacts the revenue side.
So 939 that would that would include incentives really at target as opposed to above target. Obviously, we were we benefited from a really great year. This year.
So incentives.
We hired this year relative to what we're projecting that but it was consistent with the revenue expectations. We also laid out right. So if revenue goes up significantly then clearly we'd have some more incentive opportunity.
But given the revenue outlook, we provided you in the expense base I think those are consistent with each other.
Got it thanks, a lot guys I appreciate it.
Thanks, David good to hear from you.
Our next question comes from John Austrian with RBC. Please go ahead John .
Hey, good morning, everyone.
Good morning, John .
Question for you guys on loan growth Brendan you made a comment I think I got it right, but some of the fourth quarter production and put some pressure on the pipelines, but just.
Do you still expect decent growth.
Have you guys seen in the pipelines is it slowing.
And what what is your view on the cadence of growth you expect continued strong first and second quarter growth and it slows later in the year or just give us your thoughts on that.
Well I'll start and Jim can add a little bit John I think we feel good about suddenly the pipeline coming down is a reflection of three really strong quarters of loan growth and normally is a little bit of reduction in the pipeline in Q4, So that's normal seasonal reduction.
Certainly we think the pipelines at a level that can provide the growth that Brendan laid out mid single digits for for full year of 2023, and the short term still is good I mean as much as there is a mixed signals out there in the economy, our C&I clients are still.
Stronger or a little more cautious than they were before but there's still the business is solid and strong and then.
Liquidity balances are good and they're still investing so.
Ari has slowed a bit.
Interest rates environment has certainly brought down the pipeline there and so we expect a less robust year in 'twenty three there Jimmy I think you said no I think that's I think that's really well said I think our C&I customers actually feel pretty good about things either cautiously optimistic and continuing to invest so we will see how that plays out the rest of the year and in to marks comments about CRE, obviously interest rates are causing.
Sure on the pipelines, there, but we'll stay close to our borrowers and have opportunities to do the right deals with the right clients.
Okay.
You also mentioned deposit pricing exceptions and deposit specials.
A couple of comments you made earlier can you talk about how prevalent that is and kind of what youre doing there.
So we have a special pricing and about 15%, 16% of our non time deposit customers right. Now. So I'm you know client by client and we're negotiating we have given our teams tools too.
But as they need to to stay market competitive and retain deposits and as Brendan mentioned, we have a number of promotional specials and every line of business to raise deposits from money market to Cds to a new check in account promotions.
Okay.
Brendan.
You talked about 1 billion won in cash flows on the securities portfolio over the next 12 months, what kind of uplift do you think youre going to get most repurchases or on the new purchases and give us an idea of what you're interested in buying and kind of the duration on that.
A lot of those casuals actually will go reinvestment right into the loan books of the lift is material.
Run off runoff yielded.
Moving into into new loan yields that are north of 6% today, so meaningful uplift on those cash flows as we think about.
Going forward.
Okay.
And then Jim you'll love this one but.
Do you feel you're done.
With first Midwest, both sides of the merger things are tracking well and any appetite whatsoever to be back in the M&A market.
You know from a systems perspective, you know theres not a.
Projects officially concluded I think the reality, though is we're continuing to look at ways to get better when we do both in the back back office and the front office and then we're spending an awful lot of time on culture.
Our leadership team spent the last year really building a strong culture together and now we're continuing to find ways to drive a deeper and deeper in our organization. So that work is going to take years John to continue to complete.
But I feel really good about where we stand and in fact, we joke with ourselves I'm not sure. We could have painted a better picture of how we come together as two organizations two large organizations coming together and so feel really good about that.
Obviously the results we feel great about the results.
Given all that went on this year.
And so that's.
That that couldn't actually feel any better with respect to the next opportunities that come along we will continue to have active conversations and dialogues, but I can tell you. It's not top of mind for us to think about wanting to do something right now.
But nonetheless, you know these are long term our relationship building activities, we're going to continue to engage in and those will be important to our future.
At the same time, we have an obligation to our shareholders to make sure whatever we do it's really disciplined and shareholder friendly. So we're going to stay focused on organic growth and building out our teams.
With new talent and then if the right partner it comes along and it's the right fit and timing for US we'll take a look at it.
But theres a lot of ifs in there before we think about doing our next partnership.
Okay. Thank you.
Thanks, John good to hear from you.
Our next question is a follow up from Scott scientists with Piper Sandler. Please go ahead Scott.
Hey, guys. Thanks for taking the follow up I just wanted to go back to the expenses, just I'm kind of crystal clear on it so the $900 million launching point, that's a core number but the $939 million expectation includes it looks like about $9 million of items that are not included in the starting point from the $14 million of tax credit.
Amortization and the $5 million of property.
Optimization, so would the more kind of apples to apples expectation would be $930 million for 2023 in other words. If you were to hit this guide would you call. The adjusted 23 expenses $930 million.
We would call at 925, we would exclude the entire tax credit amortization. So benign 25 would be apples to apples I know analysts treat that differently. Many of them is accurate yes.
Okay.
25 is kind of the underlying projections in there.
Okay, and then that the I appreciate that clarification and then when you talked about the 24% core FTE.
Tax expectation for full year 'twenty three does that include or exclude.
The tax credit benefits.
Include that includes the tax rate.
Yes.
Okay.
Alright, Thank you guys very much.
Thanks Scott.
Our next question is a follow up from Chris Mcgratty with <unk>. Please go ahead Chris.
Oh, great. Thanks.
Brendan the 1 billion one that's coming off the bond book I think you alluded that you probably will shrink the bond portfolio and put it into the loan book.
I guess question on how much of a remix we should think about for this year ultimately I'm trying to get at two things the level of borrowings that you're going to have to do and and.
And your ultimate comfort with the loan to deposit ratio.
Yes, we're comfortable with letting the loan deposit ratio increase from here I think we have plenty of room, we have plenty of wholesale funding capacity I think how much of that is how much of the borrowing as borrowings or uses for loan growth.
Will be a function of how effective we are at and maintaining stable deposits.
Okay, but the Golar golar roughly stable deposit right.
Right.
Okay. Thank you.
Thanks, Chris.
As a reminder for any further questions. Please press star followed by one on your telephone keypad now.
There are no further questions at this time I'd like to turn the call back to Jim Ryan for closing remarks.
Well thanks for all your attendance I appreciate all the questions we will be around all day long to answer any follow up questions.
Thanks, and look forward to talking with you soon.
Yes.
This concludes old nationals 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, Oh, that's no dot com a replay of the Covid will also be available by dialing 866813940 grey and the access code one eyeful AI.
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