Old National Bancorp /In/ Q4 FY2024 Earnings Call

Welcome to the Old National Bancorp Fourth Quarter and Full-Year 2024 Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. Corresponding presentation slides can be found on the investor relations page at oldnational.com and will be archived there for 12 months. Management would like to remind everyone that certain statements on today's call may be forward-looking in nature and are subject to certain risks, uncertainties, and other factors that could cause actual results or outcomes to differ from those discussed. The company refers you to its forward-looking statements legend in the earnings release and presentation slides. The company's risk factors are fully disclosed and discussed within its SEC filings. In addition, certain slides containing non-GAAP measures, which management believes will provide more appropriate comparisons. These non-GAAP measures are intended to assist investors in understanding performance trends. Reconciliations for these numbers are contained within the appendix of the presentation. I’d now like to turn the call over to Old National's Chairman and CEO, Jim Ryan for opening remarks. Mr. Ryan?

Good morning. Old National reported strong results for the fourth quarter and the full-year this morning. In 2024, we successfully navigated a challenging environment while maintaining an offensive growth strategy, investing in talent, and remaining opportunistic for new acquisitions. Our basic banking strategy has served us well. A hallmark of this strategy is our focus on low-cost core deposits, which grew by approximately 10% in 2024, funding a corresponding 10% growth in loans. Since 2022, total deposits and loans have experienced a compounded annual growth rate of 8%. Our total cost of deposits finished the year at 1.93%, driven by a 93% down beta on our exception price deposits. Our peer-leading deposit franchise, disciplined loan growth, strong credit quality, well-managed expenses, and dedicated team members who are committed to serving our clients and communities enabled us to exceed our expectations set as we began 2024. Our full-year results can be found on slide four. GAAP earnings per common share for the year were $1.68 with adjusted earnings per common share of $1.86. Notably, the adjusted efficiency ratio stood at 52%. At the same time, our net charge-offs were low at 17 basis points. Our tangible book value per share also grew by 8% year-over-year, and our total shareholder return significantly outperformed the KRX and our executive peer group in 2024. During the first half of 2024, we successfully closed and converted CapStar Bank and Old National Bank, strengthening our presence in Nashville and other high-growth Southeastern markets. Later in the year, we announced our partnership with Bremer Bank, enhancing our presence in the upper Midwest and expanding our footprint across Minnesota, North Dakota, and Wisconsin. We have recently filed our S4 with the SEC and our regulatory applications to the OCC and the Federal Reserve in connection with our partnership. A forthcoming community growth plan will accompany this partnership too. After a recent visit with Bremer team members, I can report the genuine enthusiasm for our combination. And we are excited to collaborate with the executive team and our new team members as we start the integration process. We still anticipate closing the partnership by mid-year and completing our integration in the latter half of the year, with 100% of the cost savings projected to be realized in 2026. In summary, our 2024 EPS results were more resilient than most peers in a challenging year, thanks to our relentless focus on fundamentals, growth of core deposits, strong underwriting practices, and disciplined expense management. John will provide our official 2025 outlook at the end of his prepared remarks. Looking ahead, I’m confident in our ability to navigate changes in short-term interest rates, shifts in the yield curve, and overall economic conditions as we have for the past 190 years. I want to take a moment to discuss two leadership changes announced in this morning's news release. As mentioned in the release, our President and COO, Mark Sander, will retire on June 30. Mark has been an invaluable partner over the past few years. His steady leadership has played a significant role in Old National's transformation into a high-performing bank, solidifying our position as one of the premier banks in the country. On behalf of all of us at Old National, I express our gratitude for his daily embodiment of our organizational values. We have begun searching for Mark's successor and will consider internal and external candidates. Additionally, we announced that Dan Hermann, a highly respected business leader and a significant contributor to our corporate board for the past five years, has succeeded Becky Skillman as our lead independent director. On a personal note, she has been an exceptional mentor and partner during my tenure as CEO. I'm pleased to share that she will continue to serve as a key member of our corporate board. I want to emphasize how fortunate we are to have Dan as our Lead Independent Director. He brings a wealth of leadership experience, and I'm confident that our board will continue to excel under his guidance, providing strong support to our executive leadership team. Thank you. With that, I will now turn the call over to John to discuss the quarter results in more detail.

Thanks, Jim. Turning to slide five, we reported GAAP 4Q earnings per share of $0.47, excluding $0.02 per share of merger charges, adjusted earnings per share were $0.49. Results were driven by net interest income and margin that were in line with our expectations, strong fee income, and a favorable tax rate partially offset by incentive true ups. Credit remained benign with normalized levels of charge-offs, and our return profile remained high as measured on assets and on tangible common equity. On slide six, you can see our fourth quarter balance sheet, which highlights stability in our liquidity and continued improvement in our capital position. Total deposit growth over the last year has again allowed us to organically fund loan growth while minimizing borrowings. Since 2022, our 8% CAGR in both loans and deposits has exceeded industry growth. We also accreted nearly 70 basis points of CET1 for the year ending 2024 with a strong CET1 ratio of 11.38%. We continue to expect that we will accrete capital at a faster pace than most. These liquidity and capital levels continue to provide a strong foundation which strengthens our position as we begin 2025. Moving to slide seven, we show trends in our earning assets. Total loans decreased 1.6% annualized from last quarter with strong production in our commercial book offset by $600 million of outsized payoffs and lower line utilization. For the full-year, we saw total loans grow 10% or 4% excluding CapStar. Quarterly new loan production rates are in the 7% range and marginal funding costs are in the high 3% range. The investment portfolio was consistent with the prior quarter and duration is now just over 4%. We have approximately $1.5 billion in cash flow expected over the next 12 months. Today, new money yields are currently running approximately 180 basis points above back book yields on securities and fixed-rate loans. The repricing dynamics in both loans and securities support our expectation that net interest margin will be stable to improving in 2025. Moving to slide eight, we show our trend in total deposits. Core deposits, excluding brokered, continue to grow and were up nearly 2% annualized as we remain focused on growth in this key funding source. Non-interest-bearing deposits were 24% of core deposits consistent with third quarter levels. Private banking and community deposits were up during the quarter while public funds saw normal seasonal decreases. Our broker deposits decreased approximately $200 million, and at 3.7% as a percentage of total deposits, our use of brokered deposits remains less than half peer levels. The total loan-to-deposit ratio was 89%, consistent with last quarter. With respect to deposit costs, the 17 basis point decrease in deposit rates, compared to the prior quarter played out as we expected, and total deposit costs steadily decreased in the quarter, consistent with Fed actions. Our fourth quarter total deposit beta came in at 28%, which was in line with our expectations and accelerated over the course of the quarter. Overall, we are highly confident in the execution of our deposit strategy, and it continues to unfold as expected. We are prepared to proactively respond to future Fed actions in the evolving environment while staying focused on driving above-peer deposit growth at reasonable costs. As we have mentioned in past calls, we remain front-footed with respect to client acquisition. Slide nine provides our quarter-end income statement. We reported GAAP net income applicable to common shares of $150 million or $0.47 per share, excluding $0.02 per share of merger-related expenses or adjusted earnings per share or $0.49. A quick note on taxes. This quarter included additional tax credit benefits, which were partially offset in the operating expense line and also benefited from the resolution of certain tax matters. Moving on to slide 10, we present details of our net interest income and margin. Net interest income was relatively stable as expected and net interest margin was likewise flattish as lower deposit costs and higher accretion were offset by increased pay downs and lower line utilization. Year-over-year, we again showed deposit growth that essentially kept pace with asset generation while maintaining a low total cost of funding. Slide 11 shows trends in adjusted non-interest income, which was $96 million for the quarter and above our expectations. Our primary fee businesses performed well with wealth, mortgage, and bank fees ahead of expectations, while capital markets declined as a result of lower CRE production. Other income benefited from $8 million of discrete items. As a reminder, looking back to the third quarter, other income was also elevated by approximately $3 million, primarily related to market valuation gains. Continuing to slide 12, we show the trend in adjusted non-interest expenses of $269 million for the quarter. This was slightly higher than expectations due to a $5 million year-to-date performance-driven incentive accrual true-up, as well as $1.2 million in higher tax credit amortization that is offset within the tax line that I mentioned earlier. Run rate expenses remain well controlled, and we again generated positive linked quarter operating leverage. On slide 13, we present our credit trends, which reflect the quality of both our commercial and consumer portfolios. Total net charge-offs were 21 basis points and a low 17 basis points excluding 4 basis points related to PCD loans. The non-performing loan ratio and delinquency ratios were relatively stable from last quarter. The fourth quarter allowance for credit losses to total loans, including the reserve for unfunded commitments, was 114 basis points, up 2 basis points from the prior quarter. Our qualitative reserves incorporate a 100% weighting on the Moody's S-2 scenario with additional qualitative factors to capture the possibility of grade migration. 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 14 presents key credit metrics relative to peers. Our proactive approach to credit monitoring has led to above-peer levels of NPLs, but delinquency and charge-off ratios that are below peer averages over time. We have long practiced conservatism here, and we continue to believe that the results will speak for themselves. On slide 15, we review our capital position at the end of the quarter. Again, all regulatory ratios increased, driven by strong retained earnings. The increase in rates at the intermediate points of the yield curve led to a modest decrease in TCE and tangible book value per share, given a $142 million link quarter AOCI headwind. Despite that headwind, tangible book value was up 8% year-over-year, and we expect AOCI to improve approximately 15% or $110 million over the next 12 months. Slide 16 includes updated details on our rate risk position and net interest income guidance. NII is expected to be relatively stable in the first half of 2025, excluding the impact of two fewer days in the first quarter, and then increasing in the back half of the year with the benefit of fixed asset repricing, growth, and the anticipated closing of our Bremer partnership. Our guidance would be unchanged for one cut or no cuts as our balance sheet remains neutrally positioned. On slide 17, we include our outlook for the first quarter and full-year 2025. With the exception of loan growth, all guidance includes Bremer and assumes a July 1 close. We believe current pipelines support full-year loan growth of 4% to 6%, which is expected to ramp up over the course of the year. We anticipate continued success in the execution of our deposit strategy, expecting to meet or exceed industry growth in 2025. Other key line items are highlighted on the slide. At the midpoint of the range on these lines, you'll note that we expect full-year results that yield earnings per share above the current analyst consensus estimates, featuring positive operating leverage, a peer-leading return profile, good growth in fees, controlled expenses, and normalized credit. In summary, 2024 results were excellent with run rate fourth quarter results in line with our expectations. We remained on offense and continue to demonstrate our ability to execute against strategic priorities. First, we organically grew deposits at a sufficient pace 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 maintained an adjusted efficiency ratio in the low-50s. Fourth, our credit remained resilient, and we believe we have ample reserve coverage along with a well-diversified and granular loan book. Lastly, we continue to compound tangible book value per share, which was up 8% year-over-year. With those comments, I'd like to open the call for questions.

Thank you. We will now begin the question-and-answer session. Your first question comes from a line of Ben Gerlinger from Citi. Your line is open.

Good morning, Ben.

Good morning. Seems like you guys got a good start to the year. When you think about the guidance that you laid out for expenses, this is more of a clarification question than anything. Are you backing out any CDI or any sort of non-core other than the merger-related expenses for closing?

Yes, Ben, just the merger-related expenses are backed out. Everything else is fully loaded.

Got you. Okay, helpful. And then when you think about the outlook for ‘25 and ‘26, you already have the table set in front of you here with the merger closing and then back half of the year, the game plan is already laid out? We think about this capital allocation with AOC coming back and the deal price incredibly well. Is there anything you guys can do in the medium term, either outside of just core growth, such as share repurchase or anything about allocation over the next 12, 18, 24 months?

Yes, I think it's a bit early for us to make a decision about how capital will be allocated. Clearly, the first priority is always growth. We'll have more capital flexibility if things play out the way we expect. We'll be in a better position probably by mid-year to have more clarity on how capital management looks going forward.

Got you. Now if I could sneak one more in, it seems like loan growth across the banking industry is still a little bit muted, but there seem to be some green shoots? Are you guys seeing anything within your book, either geographically or lending, per chance, that could be a little bit more of a leading indicator for improved growth, not just for you guys, but from the commentary on your clients you serve?

Hey, Ben, it's Mark. I would say it's cautiously optimistic, you know, is the best thing we would say. We think the first quarter, coming off the quarter where we had outsized payoffs and decreases in line utilization, has us a little more cautious about our first quarter growth. But we do think the underlying fundamentals are still really solid out there. That's why we have a 4% to 6% growth target for the full year.

Gotcha. That's helpful. Appreciate it. Thank you.

Your next question comes from a line of Scott Siefers from Piper Sandler. Your line is open.

Good morning, guys. Thanks for taking the questions.

Good morning. Good to hear from you, Scott.

Yes, likewise. Let's see. Maybe, John, first question for you. So you've got a good, strong NII outlook for the year? I was hoping you could help us to understand a little more of the nuance of the standalone margin in coming quarters. I mean, certainly, I see everything on slide 16 with the broad assumptions. But just when you think about ONB on a standalone basis, I think you said stable to improving this year for the margin. I think you were talking standalone, but sort of big puts and takes as you see them. In other words, what would be sort of the potential choke points that you'd worry about, and by contrast, maybe things where you think could come in a little better as you look out over the year?

Yes, hey Scott. Yes, you're correct. When I said stable to improving, I was talking about ONB core underlying. I think when we look out into this year, what drives that is our ability to continue to grow assets, right? So loan growth will be important there. The fixed asset repricing dynamics are favorable to us today. We've been living in an inverted market for a long time. So a steepness in the curve and improvement in the belly is certainly something that I think could help us out a little bit, providing a little bit of a tailwind.

Perfect. Okay, great. Thank you very much.

Thanks, Scott.

Your next question comes from the line of Jared Shaw from Barclays. Your line is open.

Thanks, good morning everybody.

Good morning, Jared.

Maybe just going back to Ben's discussion around capital. You know, just looking at CET1, it's really strong and continues to grow. You mentioned some of those tailwinds. I understand you're going to wait a little while to sort of get into maybe some alternative uses of capital? Where do you think the model needs - what capital level do you think the model needs to be at here with the new administration, maybe the new regulatory outlook and better-than-feared credit? Do you think that ultimately this model gets back down to 10% or below CET1?

That's a good question. I don't think we have the answer yet. I think we need some more time through the year to have better optics into that. Capital is running a little ahead of our own internal expectations, which is good. I think that provides flexibility regarding the Bremer partnership and balance sheet optimization. We might end up with more assets on the balance sheet than we originally modeled just because capital comes in a bit stronger. There are other stakeholders to consider, such as rating agencies, and their views can also influence our decisions. We'll aim to manage all stakeholders, especially our shareholders, to ensure we have the right amount of capital, but not too much. That will be our focus as the year unfolds.

Thanks! And then on NII and beta, should we be thinking that deposit beta is sort of a linear move through the year or is there perhaps an expectation that it's not so much linear? And then I guess within that, how sensitive is your NII expectation to the long end of the curve?

Yes, that's a good question. I'd love to say that it's going to be a linear move. It may not play out exactly that way, but I think, point to point over the year, we fully expect that we'll capture what we gave up in upside beta. We will capture in down beta over the course of the year. We are working hard on that. In any given quarter, it could come in a little better or a little worse, but I think for modeling purposes, linear is probably a pretty good estimate.

Okay, and just the sensitivity to long rates, you know, with the longer end being up over the year…

Yes, sorry. That was the second part of your question. I think our real sensitivity is mostly on the 3-year to 5-year points of the curve.

Okay, thanks! And just finally for me, what's the accretion expectations within that NII guide for 2025?

In total? So, we had accretion ran a little bit heavy in the fourth quarter. That was partly due to accelerated paydowns that we referenced. We expect that to drop to about $10.5 in the first and second quarter. There's a schedule on that in the back, and then we'll update that schedule with the full Bremer piece of it once that becomes clear. But for now, I would just point back to what we announced with the deal announcement regarding the back half of ‘25.

Great! Thanks a lot.

Thanks, Jared.

Your next question comes from a line of Brendan Nosal from Hovde Group. Your line is open.

Hey, good morning.

Good morning! I hope you're doing well.

Just to circle back to the loan growth guide, I'm just curious if you could unpack that a little bit around how much you need to see paydowns and line utilization pressure ease off to help you get to that guide versus how much is going to be a pickup in originations?

I'd say this way, Brendan, our production is still solid and strong, and our pipeline at $2.7 billion gives us plenty of ammunition to grow that 4% to 6%. So yes, if we see $600 million a quarter of outsized payoffs, that will be a headwind that will be tough to fight. But that was really outsized this quarter like we haven't seen before. I think if we see any bit of normalcy in paydowns and line utilization, that 4% to 6% is a really good guide.

Yes. Okay. Perfect. If I just look at average earning assets outside of the loan piece, I mean, average cash and average securities were up a fair bit this quarter. Just curious in the guide for NII, how much non-loan earning asset growth you have contemplated?

I think it will be pretty flat. I don't think we're going to build the securities book, and this quarter was probably a little bit of liquidity drag, all else equal, because of the paydowns that we run.

Fantastic! Thank you for taking the questions.

Your next question comes from a line of Terry McEvoy from Stephens. Your line is open.

Hi, thanks. Good morning.

Good morning, Terry. Hopefully, you're warmer than we are here in Indiana.

Not much! First off, just congrats to Mark on news of your retirement. Enjoyed working with you the last two decades. Then maybe for Jim, your thoughts on filling that role. How important is it to have somebody with a kind of a Chicago land background given the franchise there?

It's incredibly important to have leaders based in Chicago. It’s the biggest part of our franchise. We'll have succession planning in the next handful of years, and we'll ensure leaders are present in Chicago. This is a priority, and I'm heading there this afternoon to address it. We've dedicated substantial resources there and will work through succession across our entire footprint. Mark has been an amazing partner; his contributions have been crucial to our execution.

Terry, I appreciate your kind comments. I've enjoyed working with you and so many others on this line. I still have a bit more time; I'm not going anywhere for a bit.

Good to hear! Jim, you guys are no strangers to M&A with your time at ONB. What are your thoughts on the new administration and potential impacts on pricing? Are you hearing anything about the $100 billion threshold possibly moving higher?

It's challenging to appreciate all the changes that could impact the $100 billion regulatory cliff. The FDIC's new guidance is being absorbed. One major challenge is TLAC, which is likely under review. That could present an opportunity for certain banks. We are not approaching that threshold nor plan to anytime soon. Regarding pricing, there are typically one or two good buyers for potential partnerships. Success comes from partners looking beyond day one premiums to how to create long-term value together.

Great, thanks again, Jim. A quick modeling question for John: can you remind me what percentage of your securities are floating rate today?

We’ll have to get back to you on that, but I don't believe it's a big piece.

Thirteen percent.

Perfect! Thanks, guys. Goodbye.

Thanks, Terry.

Your next question comes from Jon Arfstrom from RBC Capital Markets. Your line is open.

Well, we know we're warmer than the Twin Cities this morning, so we're grateful for that.

Yes, you are. Just can you talk a little bit more about the payoff trends? Anything unusual to call out? I know you said it was abnormally large, but any specifics?

You had a bit more capital markets activity and some secondary market refinancings, along with a couple of outsized ones that won't repeat. So, it was driven by more secondary market activity and a couple of larger transactions.

The secondary market borrowing is generally advantageous for us. Though there may be increased payoffs as people access capital markets, I think it's a healthy capital market environment overall. Our market production was solid, though the line utilization was off and affected by unique transactions towards year-end.

Yes, I agree. Okay, anything new on the non-performers? Your classified and criticized metrics look pretty solid, but what’s your overall credit assessment?

We feel good about credit. It has continued to normalize, and our activity was fairly balanced. We moved some items out, and we're observing some grade migrations, but overall, it was a quiet quarter, on credit, right where we expected it to be.

Okay, good! Do you have any updates on Bremer? What's the feedback and your updated thoughts now that you're not working in the dark?

I got to tell you, after spending a few days there last week, the executive team and all the leaders we met are incredibly enthusiastic about this partnership. They are looking forward to the opportunities to grow and invest in their franchise. Our organizations coming together will build on excellence. The talent there on both client-facing and support sides will be valuable as we grow larger. I walked away even more enthusiastic after last week, confident that this partnership may be a pivotal point in our transformation.

Okay, thank you.

Thanks.

Your next question comes from a line of Chris McGratty from KBW. Your line is open.

Great! Good morning.

Good morning, Chris.

First off, Mark, I echo the congrats on your retirement. It's been great working with you over the years. John, maybe a question on slide 16 if you could, the quarterly cadence of NII. I think I understand the first quarter down about 10% due to the accretion you mentioned. Can you help us with the ramp in Q2? Is that entirely due to back book resets?

Yes. Don't forget too that there are two fewer days in Q1, so we get those two days back in Q2, which is a help as well as back book repricing and growth.

Okay! And then regarding the mid-year closing and the CRE loans, you've talked about potential sales. Is there a broader evaluation of the balance sheet at that time, such as securities restructuring?

I don't anticipate any major transformation here. We will examine their investment advantage of purchase accounting marks for repositioning likely on day two and the CRE sale we referenced. Capital came in stronger than expected, and depending on how things move in the next six months, we may adjust our approach.

I would also add that other than the typical balance sheet adjustments we've done with previous partnerships, we don't foresee a drastic change. We are in a solid position to deliver the balance sheet we originally intended during this process.

So it appears that you're prioritizing capital for growth first and potentially buybacks in the back half of the year or early '26?

Yes. Our focus is on delivering the growth we anticipated.

All right, great! Thank you.

Thanks.

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

We're all huddled here cold with heaters trying to navigate this polar vortex. We hope you guys are all staying warm, and really appreciate your support. The whole team will be here all day to answer any follow-up questions you have. Have a great day.

This concludes Old National's call. 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 9682-197. This replay will be available through February 4. If anyone has additional questions, please contact Lynell Durchholz at (812) 464-1366. Thank you for your participation in today's conference call.