Q3 2024 Old National Bancorp Earnings Call

John Moran

Thanks Jim. Turning to slide 5. You can see our third quarter balance sheet which highlights continued improvement in our liquidity and our capital position. Total deposit growth over the last year has again allowed us to organically fund loan growth while reducing our borrowings.
As Jim just mentioned, we grew our tangible book value per share by 21% over the last year and by 8% from the prior quarter. We ended the quarter with a strong CET1 ratio of 11% and we continue to expect that we will accrete capital at a faster pace than most. Our liquidity and capital levels continue to provide a strong foundation which positions us well as we finish 2024.
On slide 6, we show our earning asset trends. Total loans grew 2.7% annualized from last quarter in line with industry performance with strong production in our commercial book in the quarter, partly offset by payoffs. We remain focused on full relationships and structure at prices that meet our risk adjusted return requirements. Quarterly new loan production rates in the mid-7% range and marginal funding costs in the low 4% range support our expectation that net interest income will grow modestly in 4Q ’24.
The investment portfolio increased 3% in the quarter due to reinvestment of cash flows and positive changes in fair values with duration decreasing to just under four years. We have approximately $2 billion in cash flows expected over the next 12 months. New money yields are currently running approximately 110 basis points above backbook yields on securities and approximately 175 basis points above backbook yields on fixed rate loans.
Moving to slide 7, we show our trend in total deposits which grew 8.5% annualized from 2Q. Core deposits ex-brokered were up an even better 10% annualized and we saw a nearly $100 million increase in noninterest bearing deposits in the quarter. Commercial and community deposits were up and public funds on normal seasonal increases. Our brokered deposits decreased and at 4.2% as a percentage of total deposits, our use of brokered remains well below peer levels.
We did see a 9 basis point increase in deposit rates compared to the prior quarter as we remained on offense with respect to client acquisition and we drove our loan to deposit ratio below 90%. Total deposit costs decreased in September consistent with fed actions and our spot rate at September 30, was 212 basis points.
Moreover, our exception price book has seen a 90% down be since we started lowering rates in that book in early 2Q. This was in line with our expectations. Overall, we are highly confident in the execution of our deposit strategy and it continues to unfold as we expected. We are prepared to proactively respond to future fed rate actions and the evolving environment while staying focused on driving above peer deposit growth at reasonable costs.
Slide 8 provides our quarter end income statement. We reported GAAP net income applicable to common shares of $140 million or $0.44 per share. Reported earnings include $0.02 per share of merger related and separation expenses. Excluding these items, our adjusted earnings per share was $0.46.
Moving on to slide 9. We present details of our net interest income and margin. Net interest income grew as expected while net interest margin was essentially unchanged as increases in asset yields and accretion were offset by deposit costs. Year over year, we again showed deposit growth that essentially kept pace with asset generation while maintaining a low total cost of funding.
Slide 10 shows trends in adjusted noninterest income which was $94 million for the quarter and above our expectations. Our primary fee businesses all performed well with bank fees ahead of expectations, mortgage benefiting from seasonality and a modest improvement in production, and capital markets benefiting from CRE production.
Continuing to slide 11, we show the trend in adjusted noninterest expenses of $263 million for the quarter. Expenses remain well controlled and we generated positive link quarter operating leverage.
On slide 12, we present our credit trends which reflect the quality of both our commercial and consumer portfolios. Total net charge offs were 19 basis points and a low 16 basis points excluding 3 basis points related to PCD loans. The nonperforming loan ratio increased 8 basis points due mostly to poor borrowers in unrelated sectors that we are actively monitoring.
The third quarter allowance for credit losses to total loans including the reserve for unfunded commitments was 112 basis points, up 4 basis points from the prior quarter. Risk rating migration over the last several quarters has been driven by the effects of higher interest rates and a more conservative posture in our risk rating framework. While the grade migration has resulted in an increase in our quantitative reserves, our total qualitative reserves are unchanged from the prior quarter.
Qualitative reserves now incorporate a 100% weighting on the Moody’s S-2 scenario with additional qualitative factors to capture the possibility of further grade migration. This is logical as greater conviction comes into focus that a hardly ending scenario is unlikely. Moreover, the S-2 scenario assumes an unemployment rate that is 70% higher than current levels and negative GDP. Also we remind you that our allowance for credit losses plus the discount remaining on acquired loans to total loans now stands at nearly 160 basis points.
Slide 13 presents key credit metrics relative to peers. As you can see, our proactive approach to credit monitoring has led to above peer levels of NPLs but delinquency and charge off ratios that are well below peer averages over time. We have long practiced conservatism and we continue to believe that the results speak for themselves.
On slide 14, we review our capital position at the end of the quarter. All ratios increased driven by strong retained earnings. In addition, the rate environment further aided TCE build.
Slide 15 includes updated details on our rate-risk position and net interest income guidance. NII is expected to increase modestly in the fourth quarter. Our assumptions are listed on the slide but I would highlight a few of the primary drivers. First, we assume two rate cuts of 25 basis points each consistent with the forward curve. Second, we are now anticipating a declining rate, total deposit beta of approximately 30% and a non-interest bearing to total deposit mix that remains stable at 24%. We continue to believe that we have positioned the balance sheet well and we have maintained our neutral rate risk position.
Slide 16 includes our outlook for the fourth quarter and the full year of 2024. You can see the details in the chart but it is worth pointing out that our full year outlook for preprovision net revenue remains unchanged from the initial expectations we shared with you in January of this year. And our outlook proved more durable than many peers.
Full year loan growth and NII are expected to be right in line with those original expectations while higher fee income is expected to be partially offset by higher noninterest expenses. Net charge offs are in line with our original range, while provision expense is slightly higher than originally expected as a result of grade migration driven by our proactive approach to credit management.
In summary year-to-date 2024 results have been excellent with third quarter results in line with our expectations and strong performance metrics. More importantly, we continue to demonstrate our ability to execute against our strategic priorities. First, we are driving organic deposit growth to fund our asset generation. Second, our adjusted return profile remains top quartile against peers at 17% on tangible common equity.
Third, we remain disciplined on expenses, driving positive operating leverage and an adjusted efficiency ratio of 51%. Fourth, our borrowers remain resilient as evidenced by non PCB net charge offs of just 16 basis points. And we believe we have ample reserve coverage along with a well-diversified and granular loan book. And fifth, we are continuing to rapidly compound tangible book value per share, which was up 21% year over year. With those comments, we’d like to open the call for your questions.

Operator

(Operator Instructions)
Scott Siefers, Piper Sandler.

Scott Siefers

Morning guys. Thanks for taking the question.

James Ryan

Good morning. Good to hear from you.

Scott Siefers

Hey, likewise. You too, thank you. So just want to John, I appreciate the comments on the sort of the full year NII, I guess the fourth quarter, in particular, the expectation may be a little lighter than what we had hoped 90 days ago. I suspect it’s sort of just a function of what happened with the belly of the curve since then as well as the different timing of the fed moves. But would love to hear in your words, anything that has changed.
And then I know you touched on like the $2 billion of cash flows over the next 12 months, if you can maybe offer any updated thoughts on sort of how powerfully the NII base could advance from the fourth quarter expectation and just sort of main levers additionally that you would see allowing it to do so.

John Moran

Perfect. Yeah. Hey, Scott, your suspicion is right on, on the NII guide. Really, it’s a touch on the five year belly of the curve being a little bit a little bit lower is driving that outlook. And then on securities, roughly $2 billion in cash flow coming off of that book over the next 12 months. Pick up there about 110 basis points against the backbook. So certainly that’ll be helpful and we would anticipate plowing most of that just right back into the securities book. At the margin, there could be a touch, if long growth comes in stronger, maybe we let that come in just a little bit, but I think most of that will go back into securities at this point.

Scott Siefers

Okay, perfect. And then maybe if John, if you could expand a little on some of the reserving comments, just in particular, trying to get my arms around, why credit costs a little higher this quarter and expect it to be so at least relative to what I would have anticipated next quarter. Is this something that will continue for a little while or is it kind of a transitory catchup? How should we think about those sort of dynamics?

John Moran

I think it’s just normalization of credit here. I think for the year we sort of tightened the range on the guidance, but it’s still, I think at the beginning of the year we were saying 15 to 20 basis points on chargeoffs, we’re now sitting at 17 to 20 basis points on chargeoffs. So I don’t think that there’s any real difference in our expectation around lost content. And the provision that you saw in the quarter was kind of covering chargeoffs and building a little bit of reserve.

Scott Siefers

Okay. All right, perfect. Thank you guys very much.

James Ryan

Thanks Scott.

Operator

Brendan Nosal, HOVDE Group.

Brendan Nosal

Hey, good morning folks. Hope you’re doing well.

John Moran

Thanks Brendan.

Brendan Nosal

Let me just start off here looking a little further out on kind of the margin and NII dynamics. I heard your comments again this quarter on a relatively rate neutral balance sheet positioning. Maybe just offer some thoughts on how you expect the NIM to traject across 2025. If we end up getting the forward curves, like let’s say 200 basis points or so of cuts by the end of next year. Thanks.

John Moran

Yeah, Brendan. I think, what you’re seeing here is kind of bottoming in 3Q, 4Q probably up a little bit. Our bias would be up a little bit. I think our bias in 3Q was kind of stable down a little bit and that played out. I think as we look out into 2025, de-inverting in the yield curve and continued growth in the underlying franchise are going to be helpful for us. And, look, I think that’s helpful for us, it’s helpful for the whole industry. So I think that will be the key factor next year.

Brendan Nosal

Okay, perfect. Maybe one more from me. Just kind of looking at the charge off rate on the SP CD kind of core loan book, seeing a little bit higher numbers over the past two quarters, just wondering how you would characterize that? Is that still well within the framework of normalization off of a low base or is it indicative of perhaps some gradual weakening?

Mark Sander

No, I think you hit the nail, I’m happy with your first option, Brendan, which is its normalization of credit are still well within our guidance. As John said, we started the year at 15% to 20%, we’re now 17% to 20% for the full year. And so as credit normalizes, I think that’s just what you’re seeing.

Brendan Nosal

All right, fantastic. Thank you for taking the questions.

James Ryan

Thanks Brendan.

Operator

Ben Gerlinger, Citi.

Ben Gerlinger

Can you guys talk through your appetite for kind of hiring and where you might be targeting? And it’s more so obviously at ’25 or even meeting the ’26 questions. But again, like from the balance sheet perspective, you seem pretty well situated for the current rate outlook. I just kind of appetite on hiring and any trends you might want to highlight?

Mark Sander

Ben, it’s Mark. I would answer it this way. I think we’re open and opportunistic, but we don’t need to do anything really. We like the team that we have. We think we can outgrow industry, loan growth. I think our deposit performance, growth performance has been terrific and all of our teams are focused on that. So I don’t think we need to do anything, but we will continue to look to opportunistically fill in good talent.
We say it all the time pays for itself quickly. And so if people come along, but we’re also watching expenses closely. And so we’re not looking to have talent unless just a great opportunity comes along.

James Ryan

Yeah, I might add on top of that. As we think about talent acquisition, we’re particularly paying attention to our fee income businesses. If you think about treasury management, you think about our wealth management businesses, those are businesses that again have a little bit longer earn back on the hires that we think are the right long term investments for us, particularly as we just transition to a larger institution, have more opportunities in that space. And so that’s an area. As Mark says, we have plenty of balance sheet growth and don’t feel like we need to have more relationship managers there to grow the balance sheet. However, on those fee income business and there will be continued opportunities for us to be successful.

Ben Gerlinger

Got you. That’s helpful. And then when you think about the integration and going forward, kind of let’s call it the Southeast or kind of is there any additional costs now that you kind of have the integration in place, you kind of have your lay of the land, anything that you would want to potentially call as incrementally more positive on growth, or thoughts on an additional expense costs, just not that you have your feet under you here.

John Moran

No. I think, you’ll see the full run rate reflected in 4Q in terms of the saves that we highlighted for CapStar, just to remind you, those are around $30 million annually. And we expect that that will be fully realized in the fourth quarter. I think if anything, we’re looking to invest in that I know that’s a great market. And I don’t know if Mark would add or Jim.

James Ryan

I would just say I spend a lot of time down there. It seems like, I’m down there a few times a month and it’s unique and, our core legacy midwestern markets, oftentimes we’re a part of the economic engines that are making those, communities successful. And down in Nashville and Tennessee broadly, really, you just have to be there, there’s just plenty of organic growth opportunities for us and we need to be in a position to take advantage of that. And so as John said, I think we’ll continue to invest there. It’s unlike any other part of our franchise where the economic growth is still incredibly strong.

Ben Gerlinger

Got you. That’s helpful color. I appreciate it. Thanks guys.

James Ryan

Thanks, Ben.

Operator

Terry McEvoy, Stephens.

Terry McEvoy

Thanks. Good morning everyone. Maybe John, let’s start with a question for you. Did the $400 million guide for NII in the fourth quarter. Does that assume $13 million of accretion? And then how are you thinking about the deposit beta over the next several quarters? I know in the slide, you said 30% total deposit beta by the end of this year. But what’s your insight beyond the end of 2024?

John Moran

Yes. So the CRE piece, yeah, roughly stable. So you’ve got the right number there for 4Q in terms of beta. I think 30% probably allows us still some room to play offense and we’ve been unapologetic about that. We’re on our front foot with respect to client acquisition and we really want to continue to fund organically our loan growth.
I think where we’ll get the most beta and we’ve been saying this for a couple of quarters now and it’s playing out exactly as we had expected is really in that exception price book. And there we expect to see roughly 85% down beta. And we’ve been able to move that very quickly. In fact, when the fed moved 50 basis points, Mike Lloyd and team had program A and program B. One was ready to go for 25 basis points; one was ready to go for 50 basis points. When we got 50 basis points, they pressed the button and that went in that afternoon. And so, we’re ready to move very, very quickly and we’ll remain agile.

Terry McEvoy

Thanks. And then as a follow up, could you discuss any common themes among the increase in nonaccrual loans? I think there was four specific borrowers as well as the increase in classified loans and anything to do with the recent [Snake National Credit Exam] that showed up in third quarter results.

Mark Sander

Yeah, I take those in reverse Terry. It’s Mark. Given the environment, we moved to a more conservative posture in our risk framework this year which drove that negative migration overall. We’re now looking at our primary source of repayment debt service coverage almost exclusively in our risk ratings. And so, as you know, as borrowers have absorbed a full year of the 500 basis point increase in rates coverage ratios have tightened, particularly in CRE. We still feel good about secondary sources of repayment, guarantors and collateral.
So, but these sources no longer factor into our risk ratings. But they obviously influence loss content, which we still believe is generally low across our special mention and substandard loans. Specifically that are not accrual, there were four larger credits. When I say larger, you got to think about that, relatively speaking, larger for us. Those four credits were all in the $12 million to $25 million range. So each one is a manageable level, each was on our radar screen before they moved into nonaccrual. And again, it’s just reflective of our granular portfolio, I think.
One was a downgrade from the [Snake] exam, CNI credit out of the CapStar portfolio. The other three were different segments of CRE so no trend, no geography, just unique issues to each individual credit.
And again, I’ll just say like most of our nonperforming book, I think there’s decent underlying value in the real estate and demand for those properties. So even though our now rules are up, our charge off guidance hasn’t moved. We think in Q4, we’ll still be in that 20 to 25 basis points.

Terry McEvoy

Thanks, Mark and thanks for taking my questions.

James Ryan

Thanks, Terry.

Operator

Jared Shaw, Barclays.

Jared Shaw

Hi, good morning. Thanks. Yeah, maybe just looking at the guide for fee income. It sort of looks like it’s implying an $8 million decline firsts, third quarter. Anything specifically driving that or is that just a little bit of seasonality? And how should we be thinking about sort of the jumping off point as we look next year on fee income?

John Moran

Yeah. Hey, Jared. Yeah, it was, I think a little bit seasonality in some of the lines that are subject to that right. Mortgage will probably be a little bit softer in the fourth quarter. Capital markets had a really strong 3Q. I don’t know that I would necessarily count on that one run rating and then in other, there was a couple of little things that kind of broke our way in 3Q that I don’t know, are necessarily run ratable.

Jared Shaw

Okay, thanks. And then how should we be thinking about your thoughts and view on capital build here? It certainly seems like we’re going to continue to see capital building, especially CET1, plenty of capital for the organic growth side. Is there an opportunity to supplement that with buybacks or any other capital actions?

John Moran

Yeah. So 11% CET1, we’re starting to — and we’re going to rebuild capital very quickly, left unchecked. We’ll, tack on 100 basis points plus minus a year on that ratio. So I think as we get into next year, certainly there’s an opportunity to kind of think about high back, we’re a little bit sensitive to earnback on that. And every quarter we kind of talk about dividend with the Board.

Jared Shaw

Okay, thanks,

Operator

Chris McGratty, KBW.

Chris McGratty

Hey, good morning. Jim or John, positive operating leverage, you talk about a lot and you talked about your low [50%] efficiency ratio. How do we think about just the cadence of those with the forward curve and You know, the investments in the growth, any material Change as we get into ’25?

James Ryan

No, I think we just keep running the playbook and to the extent that, we have the ability — we’re obviously sensitive to our expenses and we know ultimately some of that expense base is inside our control. As you know, though, Chris, we’ve really been trying to manage for the long term here and we going to continue to invest in ourselves both from a risk management governance perspective, but also from a offensive relationship management perspective.
And we’re going to continue to make those type of investments. But I am sensitive to revenue growth to help offset any of those investments we make and sometimes the investments we make. As we talked about some of the fee income businesses, the returns are a little bit longer than maybe some of the other businesses like the balance sheet, but we’ve done a pretty good job of managing those trade-offs and I expect us to continue to make those same types of calls in ’25.

Chris McGratty

Thanks for that. Any use of capital related to your fee income initiatives and even a deal in the next year?

James Ryan

No. Yeah, I don’t see anything coming to the future that’s material of any nature. But, again, we just know that that’s an area of as I think about treasure management, wealth management. We have the right to win and clearly mortgages is mortgage and that there’s been some volatility around that and we like the production we’re at today and hopefully it will continue to grow. But I think it’s at a reflection point around the 6% kind of 30-year rate.
But those two other businesses, treasury and wealth are ones that we have the right to win; we have some long term gains. You know, we have high expectations around the growth of those businesses and we’re going to continue to build in those businesses specifically.

Chris McGratty

Great. Thank you.

James Ryan

Thanks, Chris.

Operator

David Long. Raymond James.

David Long

Thanks, good morning, everyone. As you’re talking about the positive operating leverage and that being a goal, how does that revenue growth impact? How quickly you may invest in, say Tennessee where you see some great growth opportunities? Do you need to have positive offering leverage or can you if revenue growth maybe doesn’t come in, are you still going to put the dollars forward in that market?

James Ryan

Yeah, I think that’s an area we got to continue to invest in. That is again, like I said earlier, the growth dynamics, there are unlike any other part of our franchise where we — we have low share, obviously, but there’s high growth and other parts of our market we have low share and maybe the growth in total is not as high.
So I think we’ll prioritize investments in that newer part of market franchise. And I would say continue in some of our expansion markets as well. Those are going to be key continued investments. And I would rather give up a little bit of the expense side for kind of longer term growth. And I think we’ve been able to kind of navigate those trade-offs on a pretty adept basis and continue to deliver earnings and return profile that you all expect.

David Long

Yeah, thanks Jim. And then my second question is related to loan growth and as far as customer demand what do you think are the biggest candles out there in the marketplace to increase commercial customer loan demand?

Mark Sander

Yeah, Dave, it’s Mark. I think just removal of uncertainty, right? As the soft landing is becoming a little bit more coming clear into focus, I guess people I think are the cautiousness that we’ve seen is starting to abate a little bit. And then people just kind of hang on the election stuff. And they want to get past the election. So they just talk a lot about that and not that they’re frozen, but I think it’s making people a little more hesitant.
So I think once we get a little more clarity on those two issues — that said you’re starting to see activity and people refinance things out in the CRE markets. You’re seeing longer term lenders take things out at pretty aggressive rate. So you’re starting to see — there’s a sources out there and demand needs to catch up a little bit.

James Ryan

David, Mark — it’s Jim have done an excellent job kind of leading us through this different environment since the spring of ’23. And our expectations have definitely risen in terms of what we want full relationships, deposit growth. So I think that client selection has played really important part of maybe a little bit slower quarter for the third quarter that we see in the back half of the year, the first half of the year. But that was quite intentional.
We want to ensure that we hit our hurdle rates in terms of the economic pricing and that we bring a full relationship to the table and we’re much less willing to bet that it will come and we want to make sure it’s there up front.

David Long

Got it. Thanks, Mark. Thanks, Jim. I appreciate the insight.

James Ryan

Thanks, Tim.

Operator

Jon Arfstrom, RBC Capital Markets.

Jon Arfstrom

Just a quick follow up on that. Is it more competitive? Do you think you’re talking about risk adjusted returns on lending? But is it more competitive? Is that what’s driving your intentional comment or is it something else?

James Ryan

Hey, John, this is Jim Sander. No, I think we’re starting to see the competitive pressures just picking up a little bit over the last quarter. So, we’re still fighting and we have the right to win in all the spaces that we do business in because of our relationship. So, but it’s picking up both on the lending side and the deposit gathering side. So again, I like Our chances, we like our chances to win and we’re doing just that.

Jon Arfstrom

Okay. Thank you on that. John, maybe for you on the — I like that exception pricing chart, the one on slide 7 and then 22 as well. But how quickly is that gap closing and would you say the reasons for the initial exception pricing or are have faded quickly or maybe you’re no longer there?

John Moran

I think, we can close the gap and look clearly we’ve sort of crested here on both total deposits and the exception book. But again, John, I mean, we’re going to stay on offense. I mean, we, if somebody else is out there flashing a 50% down beta, I view that as Old National’s opportunity. I think we’re very much interested in continuing to have deposits, keep pace with our loan generation. And so we’re still putting on good spread, right? And as long as that’s the case, we’ll stay on offense on deposits.

Jon Arfstrom

Okay. All right. And then last one on credit again, maybe hard to answer this. But when I look at the delinquency and nonperforming trends, I think they’re still obviously manageable but what’s the signal you want to send us? Are you expecting the growth to flatten out to continue to go up a little bit over time or are you seeing some of this stuff start to crest as you look forward? Thanks

Mark Sander

John. It’s Mark. I’ll start with the delinquencies that bumped a little bit this quarter based on the CapStar conversion. It really administrative issues. So that I think is a non-event honestly and I think that’ll come back, it’s still at a decent level now and it will come back down in Q4. Relative to further risk rating migration, I mean, we could still see some, I mean, it’s possible. But I think our potential problems are well known and closely monitored and so while we could still see some downgrades, I think there’s a lot of things that will mitigate the downgrade activity.
Frankly, our conservative and proactive approach in identifying them early, this expectations for a soft landing which we’re starting to see manifest itself already in some upgrades as well, interest rate cuts and just our aggressive efforts to reduce that book. So again, we could see some but I think we’ll manage it well.

Jon Arfstrom

Okay. All right. Thank you very much.

James Ryan

Thanks, John.

Operator

(Operator Instructions)
Scott Siefers, Piper Sandler.

Scott Siefers

Thanks. Just sort of a top level strategic question, Jim as you build capital so quickly, just hoping to get any updated thoughts on how M&A might fit into the picture. Last quarter, I recall getting the impression that deals were not high on the list of preferences. But if you look ahead, would the preference be to stay on the path of increasing tangible book value or would we look to deploy some of that into any acquisitions?

James Ryan

Yeah, I think what we’ve said is, any future M&A opportunities really have a high hurdle. And as we try to convey, we’ve got plenty of organic growth opportunities today that we just need to execute on. However to the extent that there are opportunities that come along and exceed those very high hurdles we have in place, I think all of our shareholders will want us to look at those things opportunistically.
But at the end of the day, we are very focused on long term shareholder value creation and anything we look at has to meet those pretty high hurdles we put in place.

Scott Siefers

Perfect. Okay, good. Thank you very much.

James Ryan

Thank you for the question, Scott.

Operator

And there are no further questions at this time. I’d like to turn the call back to Jim Ryan for closing remarks.

James Ryan

Well, we appreciate your participation and as usual, the team will be around all day to follow up with any questions. Have a great day.

Operator

Ladies and gentlemen, this concludes Old National’s call. Once again, a replay along with the presentation slides will be available for 12 months on the investor relations page of Old National’s website, oldnational.com.
A replay of the call will also be available by dialing 800=770-2030, access code 158-66-00. This replay will be available through November 5. If anyone has additional questions, please contact Lynell Durchholz at 812-464-1366. Thank you for your participation in today’s conference call.