Q3 2023 Old National Bancorp Earnings Call
Welcome to the old National Bancorp third quarter 2023 earnings Conference call. This call is being recorded and has been made accessible to the public in accordance with Sec's regulation FD.
Responding presentation slides can be found on the Investor relations page at old National Dot Com and will be archived there for 12 months. Many people 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 statements led legend in the earnings release and presentation slides the company's risk factors are fully disclosed and discussed.
It sounds like.
Okay.
Provide appropriate comparisons.
non-GAAP measures are intended to assist investors' understanding of performance trends reconcile.
A reconciliation of these numbers are contained within in the projection of the presentation and now to turn the call over to National CEO , Jim Ryan program right.
Right.
Good morning, we're pleased to be with you today to share details about our strong third quarter performance the strength of our franchise remains evident in the results outlined on slide four this quarter was like our last business as usual for old national with growth in deposits well controlled bonding call.
US ample liquidity and stable credit quality.
We also saw slightly positive loan growth despite loan sales.
We reported an EPS of <unk> 49 for the quarter. Adjusted EPS was <unk> 51 cents per common share with adjusted our way and our O a T C, a 1.26% and 21% respectively.
Accordingly, we achieved significant year over year tangible book value growth.
Our adjusted efficiency ratio remained under 50%.
Total and core deposit balances were up 3% during the quarter as we compete effectively for new deposits.
Our total cost of deposits was 161 basis points, and we maintained our deposit pricing discipline.
A low 30% total deposit beta cycle to date.
As a result, we beat our own margin expectations.
Our credit quality remains stable net charge offs were 24 basis points 15 of which related to a single charge off that we don't believe indicates a broader weakness in the portfolio.
We remain diligent in managing the portfolio consistent with our past strong credit management practices.
On the new business side, while our loan pipeline has declined we continue to actively seek and win new loan business, where we can develop full relationships meet hurdle rate returns and have a strong credit profile.
Broadly some competitors have seen significant appetite change, creating new opportunities for us.
As a result, we expect our loan portfolio to grow modestly for the remainder of the year.
We also continue to hire top revenue generating talent selectively, albeit slower than previous quarters with that I will now turn the call over to Brendan to cover the quarter results in more detail.
Thanks, Ken.
Turning to our quarter end balance sheet on slide five.
We continue to effectively navigate this challenging operating environment.
Our focus on deposit acquisitions resulted in 3% growth this quarter and has led to a better funding mix stronger than expected net interest income and will allow us to take advantage of new lending opportunities, while many of our peers are pulling back.
Our strong earnings improved all regulatory capital ratios and our tangible book value per share increased 3%, excluding the OCI impact.
On slide six we present the trend of total loan growth and portfolio yields total loans grew in line with our expectations, we sold $389 million of non relationship CNI loans at par during the quarter as we look to manage liquidity, while prioritizing lending to our clients with full banking relationships. Excluding these loan sales.
Total loans increased one 7%.
The investment portfolio declined in line with our expectations and the duration remained steady at 4.3.
Cash flows from the portfolio are expected to be $1 $4 billion over the next 12 months.
Moving to slide seven we show our trend in total deposits, which increased $1 billion, including approximately $300 million.
A normal seasonal public fund inflows.
All three of our lines of business posted solid growth and client acquisition.
Growth came mostly from the money market and time deposit categories offset by declines in noninterest bearing deposits, which continued to experience migration to higher yielding products.
Non interest bearing deposits as a percentage of total deposits was 28% at quarter end and we anticipate this downward trend to continue in the near term, albeit at a slower pace.
Market conditions continue to put upward pressure on deposit rates with interest bearing deposit costs up 56 basis points to 2.22%.
Total deposit costs were 126, 1% for the quarter, which equates to a cycle. The day total deposit beta of a very low 30%.
While it's challenging to estimate the terminal beta we have a strong history of managing deposit rates and are confident we can maintain our cost advantage through the remainder of the rate cycle.
Our deposit promotions have been highly successful at bringing in new clients and we are actively working to deepen and expand those relationships.
Slide eight provides our quarter end income statement, we reported GAAP net income applicable to common shares of $144 million for 49 cents per share.
Our reported earnings include $6 million in pre tax merger related charges. Excluding these items our adjusted earnings per share was <unk> 51.
Our profitability continues to be strong with an adjusted return on average tangible common equity of 29% and adjusted return on average assets of 1.26%.
Moving on to slide nine we present details of our net interest income and margin as expected deposit pricing led to modest declines in both NII and NIM.
We anticipate approximately $3 $4 billion in fixed rate loans to be repriced over the next 12 months and reinvestment rates, approximately 260 basis points better than runoff yields.
This should provide a considerable offset to late cycle deposit repricing.
Slide 10 shows trends in adjusted noninterest income, which was $81 million for the quarter.
All of our primary fee businesses performed as expected with a slight seasonal uptick in mortgage revenue.
Continuing to slide 11, we show the trend in adjusted noninterest expenses adjusted expenses were $239 million and our adjusted efficiency ratio was a low of 49, 7%.
These results were generally in line with our Q2 guidance.
On slide 12, we present, our credit trends, which remained stable, reflecting the quality of both our commercial and consumer portfolios delinquencies and nonperforming loan trends were both within our normalized range.
Net charge offs were 24 basis points with 15 basis points related to a single long term C&I clients that suffered operational challenges following a generational management succession.
Our third quarter allowance, including reserve for unfunded commitments stands at $337 million or 103 basis points of total loans and was largely unchanged from the prior quarter.
A reserve model assumptions already reflect a material slowdown in the economy consistent with the Moody's <unk> scenario, which should limit reserve build to portfolio performance and loan growth.
Shifting to key areas of focus on slide 14, you will see further details of our loan portfolio.
We have no material change in our office portfolio with less than 1% of total outstandings located in the central business districts.
Our shared national credit portfolio was 7% of our total portfolio has above average credit quality and continues to perform well.
We did have some limited exposure to mandated regulatory downgrades this quarter, which accounted for half of our credit migration.
That said as part of our ongoing portfolio management, we were able to exit one of these credits at par shortly following the force downgrade announcement.
On slide 15, we provide highlights from our recent examination of fixed rate CRE maturities over the next 18 months.
We continue to believe given the small exposure and current performance that the refinance risk in this portfolio will be minimal.
Slide 16 details, our Q3 commercial production or slightly lower production and pipeline. This quarter reflect moderating client demand and are focused on obtaining full banking relationships with new loan requests.
On slide 17, we present further insights into our franchise, leading deposit base, which is exceptionally granular and long tenured.
These note we reduced our broker deposit exposure this quarter, which stands at only three 2% of total deposits compared to the industry average of 10, 6% last quarter.
On slide 18, we provide a comprehensive overview of our capital position at the end of the quarter.
We observed improvements in all regulatory capital ratios and a modest decline in our TCE ratio, which was driven by rate related increases in OCI.
Our above peer return on tangible common equity coupled with our peer average dividend payout ratio should result, an OMB accreted capital at a faster rate the most.
Additionally, we anticipate 30% of our outstanding a OCI to accretive capital by the end of 2024.
In summary, our strong third quarter performance exceeded our expectations, we have improved the efficiency of our balance sheet with strong core deposit growth, which has led to a better funding mix and better than expected net interest income.
We continue to demonstrate our ability to expand our customer base, while maintaining peer leading deposit costs.
Our strong liquidity also positions us well to take advantage of new lending opportunities.
Our credit portfolio remains stable and our disciplined approach to managing expenses is evident in our quarterly adjusted efficiency ratio of 49, 7%.
Slide 20 includes thoughts on our outlook for the remainder of 2023, we believe our current pipeline should support fourth quarter growth in the low single digit range.
We anticipate continued success in our execution of our deposit strategy and expect to meet or exceed the industry growth in the fourth quarter.
We're expecting a 3% to 4% decline in NII in Q4, which equates to a 13% year over year increase a slight upward revision from our Q2 guide than anticipated, 12% year over year growth.
This updated guidance assumes no additional fed actions a through the cycle interest bearing deposit beta of 46% by year end and noninterest bearing deposits fall into 26%.
We expect fee businesses to be stable with typical seasonal patterns longer term, we remain bullish on both T M and well as our investments in these areas build momentum.
Our expense outlook for the fourth quarter should be consistent with Q3, excluding merger related charges with some potential variability related to incentive accruals.
Provision expense should continue to be limited to loan growth portfolio change and non P. C. D charge offs as we believe we have adequate reserves against the P. CD book.
Turning to taxes, we expect approximately $5 million in tax credit amortization for the remainder of 2023 with a corresponding full year effective tax rate of 25% on a core FTE basis, and 23% 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 Sander, Jim Sandgren and John Moran.
Okay.
Okay.
Okay.
<unk> concluded our prepared remarks, so with any questions.
Please. Please go ahead and ask we're not getting any feedback from the operator here so.
Okay.
Okay.
Okay.
Yeah.
Okay.
Thank you, ladies and gentlemen, if you have a question.
Please press star one on your telephone keypad.
One moment. Please next question.
Yeah.
Your first question comes from the line of Scott sight Cyphers of Piper Sandler.
Your line is open.
Good morning, everybody good morning for taking the question.
Good morning.
Sorry for the delay and I'm glad you're back on top.
No problem <unk>. Thank you.
Let's see was hoping to start on the deposit side, maybe just some expanded thoughts on the way you were sort of thinking about the balance between growth and and rate or cost on the deposit side. So you accelerated total deposit growth total deposit growth, which was great but in some some higher cost areas. So just maybe.
Philosophically, how you how you were thinking about things through the third quarter.
Yeah, we think there's opportunities to continue to land and building dry powder through deposit growth. It makes a lot of sense to us at the rates, we're able to do it you think about growing deposits at a low four handle and be able to lend that out in mid to high Sevens. I think gives you a marginal margin that is a quality risk it is.
Our returns so that's that's the thought process. So as long as we can continue to raise deposits at those levels and have lending opportunities in those high Tech high Sevens I will continue to do that and as we raise a lot of deposit Scott through money markets. A good chunk of that is new clients to the bank and so we think there's opportunities to expand those relationships over time.
And we've got room to do that to duration.
Market competitive deposits right now.
Okay perfect perfect and then.
Now you talked about the three nearly $3 5 billion in fixed rate loans that would sort.
It's a reprice over a recast over the next 12 months do you think that'll be allow.
There will be enough to allow the margin to trough in the next quarter or two if that if the fed finishes its tightening cycle.
You know Scott I think it's too still too early to tell I can tell you that it does provide a lot of offsets in until late cycle pricing.
If it is going to be enough hard hard to say, but it's a meaningful amount and then couple that with the $1 4 billion of cash was from the best portfolio.
That's a meaningful offset.
Okay.
Alright, perfect. Thank you.
Thanks Scott.
Your next question comes from the line of Terry Mcevoy of Stephens. Your line is open.
Hi, good morning, everyone.
Morning, Jerry.
May start a question on capital C. E T. One up to 10 for T. C. E. Six two so can you discuss any near term capital targets, given what you call market conditions here in the presentation and in essentially what would you need to see.
To begin repurchasing stock again.
No no sorry, the spread on new capital targets now not thinking about turning on our share repurchase and no dividend actions considered at this time we.
We'll continue to kind of run that run the play and grow capital.
Thanks.
And a question for Jim.
Could you just expand on the 'twenty 'twenty four growth strategy, that's right in the beginning of the press release, maybe best markets to build share opportunistic hiring and then how does that play into your expense management for next year.
Yes, great Great question, I think it's more business as usual the knot, we continue to find great opportunities to hire folks selectively that pace has slowed down a little bit.
We're not really considering any kind of new markets in terms of hiring.
Relate commercial relationship town or wealth management talent, they may come along and we certainly see a fair number of those opportunities, but I think it's more business as usual for us and contributing to really execute on.
The teams and the folks who've already hired.
And then I think there's still opportunities within our existing footprint to continue to add select look selectively at our key markets. So I would say, it's more business as usual we're sensitive to obviously you know the the demand on the expense base will continue to look ways to be judicious in how we manage our expenses going forward our.
Hopefully to offset any incremental costs from those new hires.
And I'll squeeze one in Brendan any thoughts on expense growth for for next year any targets in mind.
No specific targets.
Take care that we have as we have a good track record.
<unk> expenses did not grow much beyond sort of a typical merit increase and we have some levers are there to pull.
But as Jim said, if I can stop us from investing in ourselves that we got to find ways to pay for that.
Thanks for taking my questions.
Thanks Derek.
Your next question comes from the line of John <unk> of RBC capital markets. Your line is open hey, thanks, Good morning.
Good morning, John Good to hear from you. Thank you Brennan just one for you back on Scott's question your NII guidance.
Suggest a pretty big step down in the fourth quarter and the margin can you can just help us understand a little bit more some of the puts and takes there in terms of what's going on.
Yeah, largely that kind of 3% to 4% decline in Q4 is almost entirely deposit cost.
<unk>.
Again, we're not getting a lot of help on the asset data set at this point other than the fixed rate re pricing.
But the question on the NII side as Chemokine continues to grow through that and help and help bolster NII.
That's the game plan.
Okay.
Alright, and then I guess on Slide 17, you talk about the exception pricing on deposits, how was that trending at that intensifying or easing off at all.
Not not intensify.
We're still less than 30% of our book of exception priced or or promotional related.
Again those are at the very low 4% handles we feel really good about that marginal funding opportunity that we have.
Okay. Good.
The loan sale I think I understand it but with that was that a the snick that you've talked about.
One of them was scrapped.
Congrats on the rest out of the helicopter market.
It was out of our capital markets book, which was a transactional book that we had used to soak up excess liquidity over time and all of the loan sales of 400 million came out of that book.
More to come on that or we're not.
At a lesser pace if there if there is additional it'll be at a lesser pace than that in the next couple of quarters I would say okay. Okay. Good.
And then you kind of touched on it Jim with tears question, but the pipeline change it.
Feels like maybe the market is slowing down, but you're seeing better opportunities, but can you just maybe touch on some of the elements of the pipeline change. Thank you.
I think the pipeline changes reflective of what's going on in the economy more broadly as well as our selectivity that Jim alluded to.
Yes, certainly.
<unk> less CRE activity overall in the marketplace clearly.
And even C&I is.
A little bit work projected will slower growth over the next couple of quarters that we saw the quarters before as an industry. We think we're still well positioned to outgrow the industry. We think industry growth is has got a little more muted going forward.
I do think we've seen a significant appetite change out of some of our regional.
Our competitors and that is creating new opportunities were worth a client last night.
The follow up would fall into that camp and I think thats going to create nice opportunities for us.
Bolt on our ability to get the right credit profile picture, our full relationships in at full pricing. So those are our expectations. We are definitely open for business. We're still on the offense and still believe we've got.
Room to continue to grow here.
Okay, Alright, thank you very much thanks.
Thanks, Jeff.
Once again, ladies and gentlemen, if you have a question. It is star one on your telephone keypad.
Your next question comes from the line of Chris Mcgratty with K B W. Your line is open.
Hey, good morning.
And Chris Jim or Mark and the the comment about the the force downgrades of the certain relationships, maybe a little bit more color. There I presume that's the shared national credit book.
But just a little bit of color on the regulatory guidelines you talked about.
Thanks.
As Brendan alluded to about half of our downgrades. This quarter came from the Snick review all credits are which we feel good about that as Brendan alluded to we already sold one frankly I think we'll sell another one this quarter at par. So we feel good about all of those credits and yet.
A little up.
Downgrade as a result of the exam other than that you know you saw a little bit of risk migration, but no no concentrations no nothing to point to just kind of reflective of what's going on in the broader economy.
Okay, and then maybe just Brendan on the the.
The balance sheet you you, obviously have the ability to bring down borrowings I'm not a lot on the books, but anything.
If.
You're considering in terms of retooling the balance sheet into next year with the securities portfolio or.
Plans to kind of reduce that you talked about the 1 billion for.
12 months cashless.
Yes, no major restructuring plan on diverse portfolio will continue to manage our portfolio appropriately.
And take appropriate action, there, but no no major restructuring plan.
Okay, Great and then maybe the last one.
A lot of questions this quarter for the industry about the trough in revenues net interest income.
How are you thinking it without providing 24 full year. How are you thinking about just the cadence of of the of.
Of the NII for the next several quarters.
Yes, as we talked about so I think theres, a theres, a 333, 4% step down and and then largely I think this becomes sort of the the fight for flat that we've kind of been talking about I think that that's how we're going to be thinking about 2024, and if we get some some rate cuts.
In the back half of <unk> plays out I think that's where you start to see some upside.
Alright Thats helpful. Thank you.
Thanks, Chris.
Your next question comes from the line of Brody Preston with UBS. Your line is open.
Hey, good morning, everyone.
Good morning Brody.
Hey, I just wanted to ask a question a little bit in the weeds.
But just the $3 4 billion of the fixed rate loan repricing over the next 12 months.
It doesn't quite put a.
You know like the call report bucket I guess, I guess I would've expected maybe in the three to 12 months.
So I guess I wanted to ask kind of what what's driving that difference and then also is there any kind of lumpiness to that 3.4 or is it fairly evenly distributed.
Fairly evenly distributed this is coming right out of our asset liability management system, which would obviously include some some prepay speed assumptions in there, which is probably the biggest piece of what you'd see from a regulatory point versus versus what we're sharing.
Okay, Great that's helpful.
And I appreciated the additional SEC disclosure on slide 14, I did want to ask though.
Yeah.
If you could give us any color I know, it's a small book for you but was there anything specific that drove the downgrades you know that you know from the Snick review like was the debt service coverage related like just looking for a little bit of color there.
It was principally debt service coverage release related it was a half dozen credits.
Across with no concentration in an industry of royalty so.
And again looked at off of 'twenty two numbers. So I think there is a theirs.
There's more to come as as 23 plays out.
Got it.
Got it no that's extremely helpful.
I also wanted to ask.
I saw the tidbit on the maturing CRE loans.
And as said loans underwritten at 300 basis points over the current market rate and so I just wanted to clarify I think on your previous slides and send you originate and stuff in the <unk>.
Seven seven.
770 range or something like that.
Does that mean that your you underwrote those those loans that are coming due at the ability to perform at a 10% interest rate and I understanding that correctly.
So brody.
That no means 300 basis points above.
The rate at the time of origination. So if you have the forehand got it origination of those underwriting at 7%, which again helps gives us confidence given current market rates.
Most of those will have the ability to cash flow.
Got it that's that's very helpful.
<unk>.
Excuse me.
On the deposit slide in order that 25% of total deposits are exception and special pricing, where the weighted average rate of 417.
How would you expect those deposits.
The beta on those deposits.
To be if if rate cuts that did happen in the back half of 2020 core.
Yes, we have the opportunity to reprice.
A lot of those and not in a hurry some of them are fully indexed.
Many of them are related to teaser rates that will reset.
Early back in in Middle Middle of next year, so with the opportunity to bring those down in a hurry if we get rate cuts.
Got it thank you for that and then.
Just one follow up on the SNCC review and Yeah, I guess, it's not as as familiar the process.
That's for each individual bank right, so or so different banks go through that at different points in the year is that accurate.
No no. So it's done now across universally they're reviewed at the agent Bank and then the other.
Participants in those credit facilities have to adjust the rates at the time that efficiency HVAC, but it's all done at once.
Got it thank you very much I appreciate it.
Thanks Brody.
There are no further questions at this time I'd like to turn the call back to Mr. Jim Ryan for closing remarks.
Well. Thank you all for coming on this morning.
We apologize for the technical difficulties, we had this morning, hopefully you're able to get all your information and get all your questions answered, but as always we'll now.
And Brendan and John and the whole team will be here to answer any questions. You might have we hope you have a great day. Thank you.
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, all national Dot Com a replay of the call will also be available by dialing 807 702030.
Access code five to 583 to five this replay will be available screen November eight.
Anyone has additional questions. Please contact lanell character calls at 8124641366.
You for your participation in today's conference call you May now disconnect your lines.
[music].
Okay.
[music].
Yes.
Okay.
[music].
Sure.
[music].