Old National Bancorp Q1 2023 Earnings Call
Slide 13 shows our credit trends credit conditions are stable and our commercial and consumer portfolios continue to perform exceptionally well.
Delinquencies and Npls are showing positive trends and net charge offs were stable at a modest five basis points, excluding the 16 basis point impact from PCI loans.
Our special asset team is continuing to work through the F&B acquired PCB loan book and expect charge offs from this portfolio to be elevated in the near term.
The provision expense impact from the workout efforts should be minimal as we carry $54 million or approximately 5% reserve against this book.
On Slide 14, you will see details of our first quarter allowance, including reserve for unfunded commitments, which stands at $333 million consistent with Q4.
Reserves reflect loan growth with relatively small increases due to portfolio mix more than offset by improvement in economic forecasts and charge offs of PCI loans that don't require a reserve replenishment.
The financial health of our clients remain strong and while credit metrics are stable. We believe it is prudent to maintain elevated reserves given the uncertainty in our economic outlook. Our current reserves reflect reflect a 100% weighted Moody's <unk> scenario with negative GDP of three 1% and unemployment of seven 1%.
Unless the economic outlook deteriorates materially 2023 provision expense should continue to be limited to portfolio performance and loan growth in.
In addition to the $333 million in reserves, we also carried $96 million in acquired loan discount marks.
Next on Slide 15, you will see details of our net interest income and margin.
Both metrics were generally in line with our expectations.
Net interest margin contracted 16 basis points quarter over quarter to $3 six 9%, while core margin, excluding accretion decreased 13 basis points to 362% core.
Core margin was just shy of the low end of our margin guidance due to holding more cash on hand following market disruption in March.
We continue to proactively manage the balance sheet towards a neutral rate risk position, while layering in protection for a sudden reversal and fed rate policy.
Slide 16 shows trends in adjusted noninterest income, which was $76 million for the quarter.
Again this was generally in line with our expectations with improvements in capital markets and wealth revenues offsetting macro driven weakness in mortgage and a full quarter impact of our service charge enhancement put in place in December the linked quarter increase in our other category was driven by fair market value adjustments on equity securities and higher bully income.
Next slide 17 shows the trend in adjusted noninterest expenses adjusted noninterest expense was $235 million and our adjusted efficiency ratio was a low 48, 8%.
Expenses were well controlled and consistent with the prior quarter the.
The increase in the other expense category was largely due to higher FDIC assessment and marketing expenses.
Slide 18 provides details on our capital position at quarter end capital ratios were stable and reflect strong earnings offset by loan growth and share repurchases in the quarter.
Our TCE ratio increased 19 basis points to 637% largely due to a reduction in unrealized losses and other comprehensive income.
Total available for sale unrealized losses impacting our TCE ratio by 145 basis points.
Our after tax HTM unrealized losses stood at approximately $300 million of quarter end.
We continue to monitor our balance sheet for economic stress and feel very comfortable with our capital levels. While we did repurchased one 8 million shares of common stock earlier in the quarter, we do not anticipate repurchasing additional shares in the near term.
As I wrap up my comments here are some key takeaways, we had a strong start to 2023 with results in line with our expectations. We posted strong return metrics with adjusted return on average assets of 139% and adjusted return on tangible common equity of 23%.
Our deposit franchise continues to perform exceptionally well in this environment as we have maintained stability in our deposit balances, while delivering a top quartile total deposit beta of 15%.
We have ample liquidity with uninsured deposit coverage ratio of approximately 150%, including unencumbered eligible collateral.
It remains strong and we continue to manage expenses in a disciplined manner as evidenced by our efficiency ratio of 48, 8% for the quarter.
Slide 19 includes thoughts on our outlook for the remainder of 2023.
We believe our current pipeline should continue to support near term loan growth in the mid single digit range, while we expect to have meaningful year over year NII growth in 2023 in the range of 9% to 12% margin will continue to be under pressure from higher deposit costs.
More detailed NII and margin guidance is difficult to provide given the uncertainty of future fed rate actions and the uncertainty of market dynamics that will ultimately determined.
Terminal deposit betas.
That said, we remain confident in our ability to manage deposit costs better than most.
Actual accretion is expected to be approximately $16 million for the remainder of full year 2023.
We expect our fee businesses continued form well despite headwinds with mortgage following industry patterns. We should continue to see revenue momentum in wealth from the strategic hires we've made over the last two years capital markets revenues will largely follow loan demand and should perform consistent with Q1 levels.
This quarter's bank fees fully reflect the HSA sale and service charge enhancements implemented in December and should represent a good baseline.
Our expense outlook is consistent with our prior guidance with full year 2023 total expense of approximately $939 million, excluding merger related charges and property optimization related expenses.
Provision expense should continue to be limited to loan growth portfolio changes and non PCB charge offs. As we believe we have adequate reserve against the PCB book and we are already 100% weighted towards the Moody's <unk> scenario.
Turning to taxes, we expect approximately $11 million in tax credit amortization for the remainder of 2023 with a corresponding full year effective tax rate of 24% on a poor FTE basis, and 22% on a GAAP basis.
Those comments I'd like to open the call for your questions and we do have the full team available, including Mark Sander, Jim Sandgren and John Moran.
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Yeah.
The first question comes from the line of Scott <unk> with Piper Sandler you May now proceed.
Good morning, everyone. Thank you for taking the question.
Bryan condolences regarding the.
Events over the last couple of weeks.
Hoping we could start.
Maybe on the sort of thoughts on deposit mix, what would be your best guess as to where noninterest bearing levels go as a percent of total deposits, maybe a little historical perspective, and why whatever number you think Mike.
Might be the best one where where you sort of think things will settle.
Yes, Scott this is Brendan yes, we'd look back I think the 28% kind of pre COVID-19 level is probably a decent spot.
In terms of <unk>.
How long it takes to get there at this pace I'm not sure, but that's probably a good place to think about where it may settle.
Okay.
And then when you you made some comments about.
Having worked aggressively on some <unk>.
Ccd's ups from the merger and it sounds like we will continue to see some charge offs, there, albeit not ones that will require provisioning since you already have the PCB reserve, but maybe just some thoughts on.
What kind of stuff you are working through how long it might take to work through the remainder of where you'd see issues et cetera.
So we still have a scott its mark.
Still have 10 $4 million of BCD reserves.
And so I think that will work through over the next 18 to 24 months, we would say and I don't think it would be a linear type of thing so there'll be some lumpiness in there, but as you indicated and as Brendan said, we think we're fully reserved on all those loans.
Okay Alright.
Alright wonderful.
You very much I appreciate it.
Thanks Scott.
Thank you Mr <unk>.
The next question comes from the line of Dan Gallagher with Hub Group you May now proceed.
Hey, good morning.
Good morning, Ben.
I just want to take a moment.
Yes, it is a fantastic job as a bulk management team.
The franchise to support that.
I know you guys wanted to ask maybe about yourself.
I applaud the tragedy, so you guys.
This is a great job stepping up being a community bank and supporting screening far beyond.
Yes.
So we appreciate auto floor kind of just.
Yes, absolutely.
In terms of just kind of growth going forward.
It makes sense, but it's a little bit softer I mean, obviously, the economic outlook isn't great, but when you guys think of kind of new loans.
Any sort of subcategories within lending or within the loan portfolio that you guys are kind of targeting is likely a scenario that we could still see some growth for <unk>.
Positive risk adjusted returns in any sort of geographies that might entail.
Okay.
I wouldn't specify any geographies, Ben but C&I remains relatively strong I would say.
Seen a lot of Shanghai clients over the last two quarter and.
Main positive slightly more muted than a few quarters ago, given rates and noise relative to recession, but still a positive outlook overall in C&I generally speaking.
Strong operating performance and there are still looking to invest so I think the C&I space still looks solid, albeit at a lower level than we saw in 2002 and CRE certainly volumes are down, but you still have a couple of sectors multifamily and industrial which is where we do the vast majority of our <unk>.
Business. These days, which are holding up well, we're not seeing major rent increases, but theres still seen modest rent increases off of really strong basis. So you still have pockets of strength out there.
That's great to hear.
You guys have done a pretty sizable rebranding.
An adjustment and frankly, highlighting wealth management.
Do you still think that there was a lot of additional hires or is that kind of embedded.
Or are we still kind of in retirement and somewhat of a run rate.
Obviously market dependent helps assets under management and I'm, just trying to think from a fee income perspective.
It sounds like you guys are growing faster than peers, but clearly investing there to.
I'm trying to see the dynamics within that subcategory.
Maybe I can start then and mark can chime in but first the new hires are embedded in our outlook on the expense guide to a lot of that would include additional wealth hires and I know, we're still seeing a lot of talent and having a lot of that that will continue to invest and I do think the momentum you've seen over the last couple.
Quarters in that space.
We're hopeful that can continue absent you know market dynamics that may be a bit of a headwind. There I think the story here is similar to what we said relative to total growth rate I think we still see opportunities at a lower level of new hires in 'twenty three than we saw in 'twenty, two but we will still hire we hired eight revenue producers across wealth and commercial in Q1.
Again, I think Youll continue there's still markets, we'd like to build out further and we still we invest for the long haul and so we are a franchise.
People want to join and we still are.
They are a nice.
We think people who are high performers pay for some sales quickly we never tire of saying that.
Two people and I think we're going to continue.
Continue to see a steady stream, albeit at a lower level of new hires in 'twenty three.
Got it appreciate the color great quarter guys.
Thanks Pam.
Thank you Mr Gallagher.
The next question comes from the line of Terry Mcevoy with Stephens you May now proceed.
Hi, Good morning, and first off Jim I also want to share my ongoing support for for you and the old National team.
Thanks Terry.
It means an awful lot.
Okay.
And then just a couple of questions here, Brendan I recognize and appreciate the predicting and forecasting deposit betas tough tough to really estimate estimate, but when you look at your NII guide of 9% to 12% is there a deposit beta range or some underlying assumptions that youre willing to share within the outlook for full year.
Your NII.
Sure as you said this is a tough environment, but we did want to at least put some guard rails out there. So what we did is we we model both the forward curve, which implies kind of two and a half cuts in the back half of the year and then something more consistent with the fed dot plot, which has won more than flat.
And then we you know we looked at a range of betas from 30% to 40% cumulative by the end of the year in.
That's kind of where the range of possibilities came out as.
As we look at that and try to probability weighted we have a we have a bias towards the higher end of that range, but it's just difficult to pinpoint with any more precision than that.
Right.
And then maybe as a follow up any comments with regards to deposit trends in metro versus community markets and how they've differed over the last several quarters at all.
So it really hasn't been a big difference.
We have one one market in particular, one state that has typically had a higher beta than others.
But generally fairly fairly consistent across across the footprint.
And we have slightly different pricing parameters across markets and so to reflect some of those regional differences, but the performance has been stable across the entire footprint.
Yeah.
And then one last quick one the debt security loss was that an investment in one of the banks that failed last quarter.
It was.
Okay. Thanks for taking my questions.
Thanks Derek.
Thank you Mr. Nick go ahead.
The next question comes from the line of Chris Mcgratty with K B W. You May now proceed.
Oh, great good morning.
Like everyone else think extend our condolences to the OMB family.
Jim.
Maybe a question for Brendan.
The $1 two that's going to come off the bond book over the next year.
Effectively map to one for one on your loan growth. So I guess is that the way youre thinking kind of flat flat, earning assets.
From here and then the second part would be great and the second part would be.
Given the steps you've been doing to protect downside risk and margin how do we think just bigger picture the trajectory of the NIM the core margin.
If the futures curve dose does give us some cuts maybe into next year.
Yes, I'd point, you back to the kind of year over year guide that we just.
We talked about clearly there'll be there'll be pressure on the margin embedded in that in a year over year increase.
And just it's really difficult to again say, where where that thing is going to land, but in terms of the downright protection we continue to.
To be really active on that on that spot and continue to put pressure on it put additional protection there.
Obviously that deposit costs continue to increase we get closer and closer to a neutral risk rate position, which is what we're trying to trying to move towards over the next couple of quarters.
And in terms of just broader balance sheet man is there anything.
That might be on the table given the environment has gotten a little bit more challenging.
And also can you remind us where you were.
Where you'd be comfortable letting the loan to deposit.
Yeah.
Yeah. So yeah. Obviously this is a dynamic environment all tools are on the table, both off balance sheet and on balance sheet opportunities to preserve margin and protect capital. So we will continue to look at all opportunities, but we don't see anything big or major restructurings in the future and we think we have room to.
To grow in that loan deposit ratio we.
We have ample liquidity and we saw we have levers to continue to let some of the noncore consumer books shrink to support a higher and better quality commercial growth.
Okay.
Okay, Great and then Jim maybe one for you.
Noted the buyback I seen that happen before.
March 9th.
What would it take to either turn it back on.
Or perhaps consider something.
External with your capital.
Typically you guys have been pretty disciplined in when you see things but.
The volatility.
It could be some opportunities.
Yes, obviously more stability for a longer period of time I think is what's going to require for us to get more comfortable in looking at capital differently, you know getting more clarity as the year plays out with respect to the economy. I think is also going to be critical.
We're in no hurry to do much different with our capital.
We're just going to continue to watch how the year plays out.
If it plays out where it's a little bit better than everybody anticipates I think I think we could be thinking about capital in the future, but until then we just got to sit on the sidelines.
Watch watch things play.
Okay, great. Thank you.
Thank you Chris for your support really appreciate it.
Yeah.
Thank you Mr Mcgratty.
The next question comes from the line of.
Brody Preston with UBS you May now proceed.
Hey, good morning, everyone.
Again like everybody else is on the same I'm terribly sorry about what happened that's very tragic.
Thank you Brian .
Yes.
Just on the noninterest bearing.
Let's see.
I want to ask if there's any geographic concentration.
As to where that run off occurred within your footprint and then your thoughts you can offer.
Expectations from here I think Scott asked about it earlier, but I might have missed it.
Yes, sure I can help no geographic concentration.
Clearly it was mostly in the commercial side, we will have a higher percentage is not sparing deposits in total.
And we had talked about pre Covid, we were at a low point about 28% noninterest bearing deposits and that might be a good way to think about a potential floor.
Yes.
Okay understood.
And then I did want to just.
Circle back on the on the assumptions and the allowance that was seven 1% unemployment is that like a 2024 number like just give me a timeframe on that.
Yeah.
Yes, I cant remember specifically the quarter that that peaks, but that is the peak unemployment and the Moody's is three <unk>.
Scenario okay.
Got it back up with you.
Yeah that'd be great.
Could you just I want to circle back on the data commentary I think you and I think you responded to Terry's question, maybe on NII, you said, a 30% to 40% beta is what you ran through when you did the different scenarios I'm, assuming the 40 is maybe in the.
And the flat scenario using the dot plots in the 30 is maybe closer to that if we get if we get fed cuts is that a good way to think about it and could you help us understand what the interest bearing.
Data is or if that was the interest bearing beta that you were talking about.
That is the interest bearing data we ran all of those beta assumptions through both curves.
But to your point, obviously, we would expect probably a lower beta and the forward curve, where there's cuts higher beta and if it's higher for longer.
Which is where we're glad we're leaning towards the higher end or a bias toward the higher end of that range.
As we look through it it's probably unlikely we have the highest beta and <unk>.
Down a rate cutting environment.
Got it and could you remind me could you remind us what percentage of the loan portfolio is floating rate and then give us a sense for what the fixed rate loans that need to reprice over the rest of the year look like.
Yes, we are sitting at 56% floating floating today and the duration of our loan book is roughly five years, so you'll see about 20% of our fixed rate loans reprice.
You know meaningfully higher.
Got it and we are we done with the hedging or is there additional hedging that's going to take place on the loan side.
No. We will continue to look for opportunities like I said, both on balance sheet and off balance sheet to continue later in downward protection and protect margin and we're not and we're not taking our eye off the ball of OCI and capital itself.
There are some opportunities to do there to protect you take that.
Got it and then last one for me was just if you happen to have the.
The assets under management.
At quarter end.
We have a 28 billion.
Okay, so relatively flattish quarter over quarter.
Yes.
Awesome. Thank you very much for taking my questions everyone I appreciate it.
Thanks, Brian .
Thank you Mr. Preston we.
We have a follow up question from the line of Scott <unk> with Piper Sandler you May now proceed.
Everyone. Thank you for taking the taking the question just sort of a ticket pack one within the 9% to 12% NII guidance growth guidance does that assume the contractual accretion or is there a different number baked into there.
Yeah.
Slightly slightly higher than the contractual accretion number kind of in that typical 20% to 30% range.
Okay, perfect that was actually up so thank you very much.
Thanks Scott.
Thank you Mr Fifer.
The next question comes from the line of John Armstrong with RBC Capital markets. You May now proceed.
Thanks, Good morning.
Good morning, Judah like the others deepest.
Deepest condolences to everyone impacted.
Hi.
Wanted to get to a couple of follow ups here, but you used the term limited pricing exceptions in terms of your deposit management how.
How much more frequently is that today than it was prior to mid March.
I don't know that its picked up materially.
It's been pretty it's been pretty steady since the since December .
And I think if you look at the average interest bearing costs and sort of the spot rate differences 12, 31 to 331 that pace hasn't really increased so I think it's indicative it's pretty steady state we have.
Competitive rack rates as Brendan alluded to earlier and.
Some of the larger deposit balances we've.
Got to them early and so most of that has played its way out I wouldn't say, it's done but I would say a vast majority of those price exceptions is largely behind us because the large balances were on it quickly.
We're also getting aggressive and on the offense.
Judiciously.
And in our markets right, where we're open.
Opening more accounts that we're closing and.
Raising balances across our footprint.
Okay.
Do you guys. So this seems like a crazy question, but.
Yes.
If things really changed that much in terms of deposit pricing.
Since mid March.
Yeah.
Interesting question not really.
Yeah, It's a great question.
There's been a lot more conversations but the actual pricing.
It Hasnt changed dramatically since mid March.
Okay.
That was my sense of it.
Potash biopsy.
A couple more things here.
Youre talking about your relationship managers on the.
Focus on the full banking relationship.
Is that something that's different that's now expected from your borrowers in your relationship manager does that change your restrict any opportunities for you just youre talking about the tightened pricing structure enhanced credit structure.
Kind of.
<unk> deposits as well.
I really appreciate that question because the answer is no I mean, that's our model right. It's a relationship based model and we lend to people that bank with US in times like this you can be more Adam mentioned forceful and disciplined but I'd like to thank candidly, we always are and I think in general we are but this is a place.
Where do you draw a line in the sand a little bit more and make sure that that's the case.
Okay.
And then just last one this is a follow up on Brody's question. The S. Three Moody's waiting.
Obviously pretty severe.
Are you guys more.
More concerned.
Today about credit than you were a quarter ago.
And if there's a degree of whether you're more concerned or not.
Isn't changed your views at all and then what happens is that S. Three is just way off and that doesn't come true.
There have been a much better spot than that.
Yeah.
John Let me take the top of that I don't think we're meaningfully more concerned about credit today than we were heading into really all of last year and into this year. Obviously, we're not immune from hearing about what's going on in the economy and you know, but as Mark said, we spent an awful lot of time with clients and when we're out with clients.
Just not hearing that same kind of feedback that seems to be discussed in today's new cycle.
Having said that we think it's prudent and have had that opinion for quite some time.
I guess the question gets back to maybe more of an accounting question about when do we think about a different <unk>.
<unk> forecast to run through there Brendan I don't know what else you'd add to that.
No, obviously I think there'll be a time, where whatever recession may or may not be coming hits, we're going to we'll have to think about a different weighting for Moody's at three and that would imply some opportunity for potential reserve release, depending on what the environment looks like.
<unk> continues to lead us through you know.
Portfolio reviews, and making sure that we're going through and doing deep dives on.
The entire book and particularly those areas that are generally more vulnerable we're going to continue to do that look for you know kind of active proactive management and we've always been known for.
And if we identify weaknesses, we're going to put them in the hospital quickly.
What's the what the hope that they come out.
Help you again.
And we're just going to continue to do that.
We're probably a little bit more sensitive that today than we were maybe six months ago, but that's absolutely. The approach that we've always taken and in these kinds of times.
Okay, Alright, well nice job this quarter.
Thanks, John .
Thank you Mr Archer.
As a reminder, if you would like to ask a question. Please press star one.
There are no further questions registered at this time I would like to turn the call back over to Jim Ryan for closing remarks.
Well thank you.
For your participation. Thank you for your support.
I meant a lot to all of us.
And as usual if you have any follow up questions. Please don't hesitate to reach out to the whole team will be here to answer anything you have thank you.
Okay.
This concludes old nationals call once again, a replay along with presentation slides will be available for 12 months on the Investor Relations page of old National's website, all national Dot Com a replay of the call will also be available by dialing 866813940.
Three access code 569807. This replay will be available through May nine if anyone has additional questions. Please contact <unk> Walton at 8124641366. Thank you for your participation in today's conference call.
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