Old National Bancorp /In/ Q1 FY2025 Earnings Call

Welcome to the Old National Bancorp First Quarter 2025 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 statement 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 contain non-GAAP measures, which management believes provide more appropriate comparisons. These non-GAAP measures are intended to assist investors' understanding of performance trends. Reconciliations for these numbers are contained within the appendix of the presentation. I'd now like to turn the call over to Old National's Chairman and CEO, Jim Ryan for opening remarks. Mr. Ryan?

Good morning. Earlier today, Old National reported our first quarter earnings. These better-than-expected results demonstrate our ability to navigate a challenging and uncertain economic environment, setting us up favorably as we move into the second quarter and importantly, as we prepare for the close integration of our partnership with Bremer Bank. Our strong deposit franchise and solid loan growth drove results for the past quarter. Our net interest income and margin performance met expectations. Noninterest income benefited from the gain on sale of some previously acquired loans and from higher fees from mortgages and service charges. Our disciplined expense management is reflected in our efficiency ratio. Net charge-offs were in the expected range and we took the opportunity to increase our allowance for credit loss, incorporating global trade and economic uncertainty in our reserve level. Additionally, our tangible book value increased meaningfully compared to both the previous quarter and year-over-year. In summary, our first quarter results showcase our disciplined expense management, our ability to maintain margin through careful deposit pricing, growth in core deposits and loans and strong credit quality. Despite the uncertain macroeconomic environment, we remain confident in our strength, supported by our robust balance sheet, diverse revenue streams and resilient Midwest markets, now bolstered by our partner, Bremer Bank. With over 190 years of experience navigating through uncertainty, we are committed to controlling what we can do to serve and support our clients, communities and shareholders. Before I turn the call over to John, I also want to provide an update on our Bremer Bank partnership. I'm excited to share that we have received all necessary regulatory approvals and anticipate a legal close date of May 1. We expect conversion of the banking centers and systems to occur in mid-October. We are thrilled to officially welcome our new clients and team members from across the Bremer footprint, including Minnesota, North Dakota, and Wisconsin. I have traveled extensively throughout the Bremer footprint, meeting team members and clients, and I'm even more convinced that this partnership will be one of our best. The individuals in these markets are ones we know and appreciate. Not only does this partnership significantly enhance our footprint, providing greater scale and density in the Upper Midwest, but it also offers a valuable boost for our balance sheet and earnings growth in an uncertain environment, which should translate into more value creation for our shareholders than the industry can provide today. Thank you. I will now turn the call over to John to discuss the quarterly results in more detail.

Thanks, Jim. Turning to Slide 4. We reported GAAP 1Q earnings per diluted common share of $0.44. Excluding $0.01 per share of merger-related charges, adjusted earnings per share were $0.45. Results were driven by growth in loans and deposits. Net interest income and margin that were in line with our expectations, stable fee income, controlled expenses, and a favorable tax rate. Credit was benign with normalized levels of charge-offs and our return profile, as measured on assets and on tangible common equity, remained high. On Slide 5, you can see our quarterly balance sheet trends, which again highlights stability in our liquidity with continued improvement in our capital position. Total deposit growth over the last year has again allowed us to organically fund our loan growth while minimizing our borrowings and brokered deposits. We grew our tangible book value per share by 5% as compared to last quarter and by 13% over the last year. We ended the quarter with a strong CET1 ratio of 11.62%, up 86 basis points from a year ago. With capital levels higher than we had originally modeled at the time we announced Bremer last November and rates lower, we have significant flexibility around the size of our contemplated commercial real estate loan sale post close. On Slide 6, we show trends in our earning assets. End-of-period total loans increased 1.5% annualized from last quarter or 2.3% excluding approximately $70 million of CRE loan sales in the quarter, in line with the lower end of our 1Q guidance. Production for the quarter was strong throughout our commercial book. Quarterly new loan production rates are in the high 6% range and marginal funding costs are in the mid-3% range. The investment portfolio increased 2.6% from the prior quarter due to the reinvestment of cash flows and favorable changes in fair values. Duration pulled in modestly linked quarter to just under 4%. We expect approximately $1.7 billion in cash flow over the next 12 months. Today, new money yields are approximately 150 basis points above back book yields on securities and fixed-rate loans. The repricing dynamics in both loans and securities combined with loan growth and the Bremer partnership support our expectation that net interest income and net interest margin will grow in 2025. Moving to Slide 7, we show trends in deposits. Total deposits were up 2.1% annualized and core deposits ex-brokered were up nearly 1.7% annualized as we remain focused on growth in this key funding source. Noninterest-bearing deposits were 23% of core deposits, relatively stable with fourth quarter levels. Business noninterest-bearing and public funds saw normal seasonal outflows while community deposits grew. Our broker deposits were stable and at 3.8% as a percentage of total deposits, our use of brokered continues to be less than half peer levels. The loan-to-deposit ratio was 89%, consistent with last quarter. With respect to deposit costs, the 17 basis point linked quarter decrease in our cost of total deposits played out as we expected and total deposit costs held steady throughout the quarter, consistent with Fed actions. Our spot rate on total deposits at March 31 was 190 basis points. Moreover, our exception price deposits have experienced a 103% down beta since we started lowering rates on that book in early 2Q of 2024. Our cumulative total deposit beta came in at 37%, which was favorable to our expectations. Overall, we remain confident in the execution of our deposit strategy. We are prepared to proactively respond to future Fed rate actions while staying on offense with new and existing clients to drive above-peer deposit growth at reasonable costs. Slide 8 shows our quarterly income statement trends. As I mentioned earlier, adjusted earnings per share were $0.45 for the quarter with all key line items in line with our prior guidance. Moving on to Slide 9. We present details of our net interest income and margin. Net interest income decreased as we had expected and guided with net interest margin likewise down modestly due to lower accretion and fewer days in the quarter. Away from accretion and days net interest margin would have been up 6 basis points with lower deposit costs more than offsetting rate and volume dynamics on the asset side. Slide 10 shows trends in adjusted noninterest income, which was $94 million for the quarter and above our guidance. Our primary fee businesses performed well with bank fees showing normal seasonality and wealth, mortgage and capital markets all stable despite choppy market conditions late in the quarter. Other income benefited $4.8 million from a gain on the previously mentioned sale of approximately $70 million of commercial real estate loans. As a reminder, looking back to fourth quarter, other income was elevated by approximately $8 million of discrete items. Continuing to Slide 11, we show the trend in adjusted noninterest expenses of $263 million for the quarter, which was moderately better than our guidance due to lower other expenses, predominantly professional fees, FDIC assessment and tax credit amortization. Run rate expenses remain well controlled, and we again generated positive linked quarter operating leverage. On Slide 12, we present our credit trends. Total net charge-offs were 24 basis points or 21 basis points, excluding 3 basis points related to purchased credit-deteriorated loans. The delinquency ratio improved from the fourth quarter, while the NPL ratio increased modestly. The fourth quarter allowance for credit losses to total loans, including the reserve for unfunded commitments, was 116 basis points, up 2 basis points from the prior quarter. Consistent with the fourth quarter, our qualitative reserves incorporate a 100% weighting on the Moody's S-2 scenario with additional qualitative factors to capture global trade and economic uncertainty. Also, we remind you that our allowance for credit losses plus the discount remaining on acquired loans to total loans now stands at nearly 150 basis points. Slide 13 presents key credit metrics relative to peers. Our proactive approach to credit monitoring has led to above-peer levels of NPLs for delinquency and charge-off ratios that are below peer averages over time. A steadfast approach to client selection, conservative structuring and our proactive stance on workouts have long been hallmarks of ONB's credit discipline. This, in part, explains our lower NPL to NCO conversion rates. It is also worth noting that roughly 40% of our NPLs are from acquired books with appropriate reserves and marks. On Slide 14, we review our capital position at the end of the quarter. All regulatory ratios increased driven by strong retained earnings. Tangible book value per share was up 5% linked quarter and 13% year-over-year, and we expect AOCI to improve approximately 10% or $65 million by year-end. Slide 15 includes updated details on our rate risk position and net interest income guidance. This guidance continues to include the original M&A marks and $2.4 billion of loan sales, but NII was updated to reflect the close of Bremer on May 1 versus our assumption of July 1 in our prior guidance. Away from this update, our guidance is relatively unchanged with NII expected to increase with the addition of Bremer and with the benefit of fixed asset repricing and growth. Our assumptions are listed on the slide, but I would highlight a few of the primary drivers. First, we assumed 3 rate cuts of 25 basis points each, which generally aligns with the current forward curve. Second, we assume a 5-year treasury rate that stabilizes at 4%. Third, we anticipate our total down rate deposit beta to increase from 37% in the first quarter to approximately 40% by 2Q, which is in line with our terminal uprate betas. And fourth, we expect the noninterest-bearing mix to remain relatively stable as a percentage of core deposits. Importantly, our guidance would be unchanged for 1 Fed cut or no cuts as our balance sheet remains neutrally positioned to short-term rates. Slide 16 includes our outlook for the second quarter and full year 2025. With the exception of loan growth, all guidance includes Bremer closing on May 1, 2 months earlier than the July 1 assumption in our original 2025 guidance. Again, this guidance continues to include the original M&A marks and $2.4 billion of loan sales. Excluding this update, our guidance is essentially unchanged. We believe our current pipeline supports full year loan growth, excluding the impact of Bremer 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 and expect to meet or exceed the 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 in line with current analyst consensus estimates and again, feature positive operating leverage and a peer-leading return profile with good growth in fees, controlled expenses and normalized credit. As we noted at the bottom of the slide, uncertainty surrounding global trade and a macroeconomic outlook if prolonged, could widen the range of possible outcomes this year with respect to both growth and rates. That said, the pending Bremer close creates interesting alternatives. A few thoughts there. As compared to the M&A model assumptions that we presented last November, ONB's capital starting points are almost 30 basis points higher than we had expected. Bremer's underlying performance has also tracked slightly better. ONB stock is lower and rates are approximately 40 basis points lower across the board, suggesting lower marks all else equal. On balance, this is expected to result in higher legal day 1 capital levels, creating significant balance sheet optionality. More specifically, while our guidance continues to incorporate up to $2.4 billion of loan sales, we believe more day 1 capital can support a larger pro forma balance sheet, a tremendous lever to have in a year that looks likely to be more uncertain than we would have guessed when we last spoke in January. We will provide an update to this guidance with 2Q earnings once we finalize accounting marks. In summary, echoing Jim's opening comments, we had a strong start to 2025. We remained on offense with growth in both loans and deposits. We showcased stability in fee income and disciplined expense management. We continue to execute against our deposit pricing strategy. We maintained strong credit quality. And finally, we anticipate closing our Bremer partnership 2 months earlier than expected on May 1 and look forward to welcoming our newest team members and clients. Bremer will not only provide greater scale and density in the Upper Midwest, but also provides meaningful balance sheet flexibility and earnings growth in an uncertain environment. With those comments, I'd like to open the call for questions.

Your first question comes from the line of Jerry Shaw with Barclays.

This is Jon Rau on for Jared. I wanted to start with Bremer and it's encouraging to hear about better capital from day one. What impact did that have on the NII outlook? Is there a difference in the accretion assumed compared to last quarter?

Yes, John. For 2025, we are maintaining the original M&A assumption and using the same model we presented last November, which includes $2.4 billion in commercial real estate loans. What we're communicating today is that if we were to assess this now, the initial closing capital will likely lead to significantly higher capital levels. Therefore, the $2.4 billion is expected to be less than that amount, which would offset the reduction in purchase accounting accretion related to the rate market.

Okay. That's helpful. And then just on some of the guidance, the 40% deposit beta does that include Bremer?

It does not. That's core ONB. And look, I would just note on that. That's where we expect to be at 2Q. We've still got a fairly large exception price book that we're grinding down over time. I think our expectation was that we were going to match our uprate beta on the downside. We'll be there by the end of 2Q, but I think there's room to go yet. And so we'll continue to work that book.

Okay. Perfect. And then just last one for me. The other fee income has had a kind of a lumpy couple of quarters. What's a good run rate for that ex-Bremer just in a normal environment?

Yes, it's been bouncing around a little bit. And obviously, we had the loan sale in there this quarter. Last quarter, we had $8 million of discrete items. I'd say if you look at 4Q and kind of back out $8 million, look at this quarter, back out about $5 million, that's a pretty good run rate for that. In aggregate, though, if you look at the guide, I mean the guide is basically unchanged, but for 2 extra months of Bremer in there on the 2025 guidance that we've got.

Your next question comes from the line of Ben Gerlinger with Citi.

I know you guys have, as you said, the unique position of potentially selling or not selling capital looks better, assuming rates don't go crazy here over the next week. So when you think about like what would be the driving factors for that decision? I mean, it's probably somewhere in the middle, maybe some, maybe so don't or not all of it, I guess, you could say, but is there something specifically you're looking for other than just better capital levels? Because I would assume you don't do anything changing.

Yes, Ben, there are really three things we’re focusing on. The first is that maintaining a double-digit CET1 is crucial for us, and I believe we can achieve that, especially with the current borrowing rates expected to rise significantly in the next couple of weeks. The second consideration is total risk-based capital, and the third is the percentage of commercial real estate in our total risk-based capital. Based on what we know right now, I’m confident that we will be in a strong position for all three of these factors, which will provide us with considerable flexibility.

Ben, I would just say this is a nice offset to if we think growth is more challenging today than we thought it was when we began the year, this is a nice offset to that, which is a tailwind that most don't have today, and we're really lucky that we have that for us.

Got it. I really appreciate that point because it's essentially not quite a year, but a healthy couple of quarters of potential growth that you have available. I was thinking, when you consider the original guidance, you assumed the $2-plus billion sale. So if no sales occur, would that suggest there is some upside to your full year '25 NII outlook?

Yes, it would, Ben, yes.

Your next question comes from the line of Scott Siefers with Piper Sandler.

Jim, could you give us an overview of where your customers currently stand and what they are communicating to you compared to January when we last spoke? Additionally, what needs to occur for them to regain momentum in their thinking, particularly in light of the recent tariff challenges? Is there a possibility we might see a quick recovery in activity, or are they preparing for a slower growth and higher inflation scenario? What are their thoughts on this?

I'm going to push it over to Mark since he's in the room with us.

Good to hear from you, Scott. Overall, businesses are performing well. While they are getting back on track, I would characterize it more as a pause, and their plans remain unchanged. The uncertainty experienced in the past couple of months has led to a more cautious approach, but it has not prompted any alterations in their plans. Our pipelines remain strong, which is why we have not altered our guidance, even as strategies are more tentative. Additionally, I want to highlight that the commercial real estate sector is quite active right now. The recent fluctuations in rates have not diminished the competitiveness of the market, and there is still a robust level of activity.

Okay. Perfect. And then maybe, John, can you sort of help us with sort of the underlying NII cadence through the year? I know you know you suggested in your prepared remarks, both margin and NII should increase. I presume that means sort of organic ex-Bremer. But just maybe sort of the puts and takes in it's going to be kind of a noisy couple of quarters with Bremer layered in starting 90 days from now.

Yes. So I think Slide 15 of the deck gives you our best guess of exactly how that's going to play out. I think on a core basis, we'd expect to see some better core margin in 2Q and NII dollar growth, and that would continue in 3Q, 4Q. And then obviously, Bremer coming in, in May, early gives us a nice lift.

Your next question comes from the line of Chris McGratty with KBW.

Chris, I have a question about loan growth. In your prepared remarks, you mentioned a slight increase expected over the year. How can we align that with the current macroeconomic situation? Are you confident in the pipeline's ability to deliver? Can you provide some insights into your guidance on loan growth?

I'd say it this way, Chris, it's Mark. The pipeline is up 30% from a year ago, our accepted category is up 50% from a year ago. So again, that would seem to indicate we're going to have nice strong loan growth. So we've tempered that a little bit with the caution I spoke of a few minutes ago, and that's what gets us back to that mid-single digit that we still believe. The pull-through rates in C&I, I think, are holding up. The pull-through rates in CRE candidly are down a little bit. It's just a more competitive marketplace. But again, with the pipeline up 30%, I think that bodes well for continued growth.

Chris, as I look at the total year, I think Mark is absolutely right. I mean there is more uncertainty around what that forecast could look like than we started the year with. But again, I'd just point back to we have a lot of flexibility that's coming online post-closing here. And I think that allows us to take into account through those loan sales, or lack of loan sales, any kind of offset to any organic growth we might have here, which is something unique we can offer today.

Okay. And Jim, just more broadly on capital. Any thoughts on restarting the buyback post-close, given where the stock is at?

We have certainly considered it, but it's still early to make a decision. We need to assess the capital marks and determine how much balance sheet flexibility we can utilize from the unexpected additional capital. Overall, I believe it is more beneficial for our shareholders to maintain a larger balance sheet and stronger capital levels rather than focusing on a buyback at this moment, even though the stock is attractively priced. My view is that it's better to have a slightly larger balance sheet than we initially expected. We will generate capital quickly, so the real discussion about optimizing that capital will occur in the latter half of the year and into 2026. For now, our priority is adjusting our balance sheet size and capital structure before considering other capital uses, including the buyback.

Your next question comes from the line of David Long with Raymond James.

In this more uncertain backdrop versus what we're looking at in January, you guys kept your loss provision guide. And I just want to see how maintaining that guide squares with the worsening economic forecast and potential incremental risks that you may see?

Yes. We still feel very confident about the content we have lost. The provision will account for that along with growth. As you know, we are currently fully positioned for an S-2 scenario. We have added some extra provisions to account for the global trade and macroeconomic uncertainty reflected in this quarter's results, and we feel assured about our provisioning.

And all of our credit metrics came in right where we thought they would.

Got it. Great. My second question is about your previous acquisition in Nashville. I would like to know about your expansion plans and investments there. Has the current situation affected your willingness to grow at the pace you were considering earlier in the year?

Yes. I don't believe the economic environment has altered our ambitions at all. We aim to continue expanding and investing in that area. We have excellent teams in place, though we are likely smaller than we ultimately want to be in that market. This represents a long-term investment strategy for both talent and infrastructure over time. We remain confident in our initial investment and the progress we've made thus far. Importantly, we expect that this area will receive a significant portion of our investments moving forward.

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

John Moran, for you. Just maybe a follow-up on David's question on reserves, that you flagged a qualitative reserve at 25% of your total ACL. How does that compare to history?

It's up a little bit as compared to where it was. I think we were running low 20s a couple of quarters back in '24 in the first quarter. So it's up just a touch.

Got it. On Slide 7 and 15, it seems like you've experienced a nice reduction in deposit costs. How much more potential do you see for further reductions? You mentioned the $7 billion in time and brokered deposits, and I'm curious about your thoughts on lowering deposit costs further.

I think we've got some room to run here. Obviously, there's an opportunity in the timing, particularly in the broker time bucket. And we have intentionally kept that very short, as you know. So we get a couple of bites at that on the way down if things change. And then the exception book still sits in 3.34% and a good chunk of the deposits in the bank today. Mike and his team continue to grind that book lower. And that's kind of you know how we do it around here. I mean this is hand-to-hand kind of combat and a very, very granular process, very, very detailed, but I think we've got opportunity in that book still.

Okay. Just maybe one more if I can. Jim, first couple of things you want to tackle on May 1 or 2 when Bremer closes?

Yes. We're heading your way this afternoon to spend time with our team members there, and we are pleased with our visits. We've traveled around, including a visit to Fargo in February, and we've been impressed by all the team members and clients we've met. It's primarily about cultural integration, which we excel at. We'll be dedicating significant time there to ensure the team feels welcomed and that clients understand our commitment to serving them as before. We aim to leverage the enhanced scale and density in that area compared to the past. While this feels familiar, it's a significant partnership for us, and we are committed to investing the necessary resources to ensure its success.

And just to elaborate on that, we've been addressing that effectively since before May 1. Since we announced it, we've been actively engaged and combining efforts.

I think a few weeks ago, we had 30 different locations across North Dakota and Minnesota. And so we'll be doing more of the same here this spring and into the summer.

Your next question comes from the line of Terry McEvoy with Stephens. This is a big partnership for us, and we are committed to making the necessary investment to ensure its success. John Moran, our CFO, mentioned that we've been addressing this effectively since before May 1. Since we announced the partnership, we've been actively involved and integrating our efforts. James Ryan, our CEO, noted that a few weeks ago we had 30 different locations across North Dakota and Minnesota, and we plan to continue this approach this spring and into the summer.

Maybe, John, I want to confirm that you agree with my calculations. Hypothetically, if you held the $2.4 billion of CRE loans, that would impact NII by about $34.6 million. When I review your presentation, that translates to approximately $0.09 or $0.10 in earnings. So, again, hypothetically, am I correct?

Hypothetically, Terry, you're accurate. You're directionally correct.

Okay. I will continue with the NII topic. What causes the increase of $25 million in the fourth quarter? It seems like you're fairly neutral. I ask because my calculations suggest a larger increase in Q3, closer to the fourth quarter run rate shown on Page 15.

It's the role of the fixed asset repricing, Terry, is a good chunk of that and just kind of timing of some of that role and then growth being back-end loaded in the year on a kind of core organic basis. Terry, I would just add, I think the up-to number, I've encouraged us to continue to look at some selective pruning regardless of where the capital comes in, I think it is an opportunity that you get with the purchase accounting marks to optimize the portfolio. So I've encouraged us to continue to look for those opportunities to make sure that it's the portfolio we want to own for the long time. So I would be shocked if we're able to keep a number that you just suggested. But nonetheless, it will be something that we'll look at really hard once we get the capital in from the day 1 marks.

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

Well, we appreciate all your participation. As usual, the full team will be here all day long to answer any questions you might have. Thank you very much.

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 517-6690. This replay will be available through May 6. If anyone has additional questions, please contact Lynell Durchholz (812) 464-1366. Thank you for your participation in today's conference call.