8-K: Old National Bancorp Presents 4Q23 Investment Thesis, Highlights Strong Performance and Strategic Growth

Old National Bancorp's 4Q23 investment thesis highlights strong financial performance, a peer-leading deposit franchise, and strategic growth initiatives, including the pending merger with CapStar Financial Holdings.

Summary

• Old National Bancorp released its 4th Quarter 2023 investment thesis, showcasing strong financial results and strategic initiatives.
• The company reported a record adjusted EPS of $2.05 for 2023 and $0.46 for the fourth quarter.
• Old National's adjusted return on average tangible common equity (ROATCE) was 21.3% for the year and 19.0% for the quarter.
• The efficiency ratio was 50.4% for the year and 53.8% for the quarter, both adjusted figures.
• The company's tangible book value per share reached $11.00.
• Old National's deposit base is considered a key strength, with a cycle-to-date total deposit beta of 35% and a cost of total deposits at 185 bps in 4Q23.
• The company's loan-to-deposit ratio is 89%, and over 70% of deposits are insured.
• The company is managing its net interest income to a neutral rate risk position, with 55% of loans being variable or floating rate.
• The pending merger with CapStar Financial Holdings is expected to be accretive to 2025 GAAP EPS by approximately 5% and have a tangible book value dilution of 1.8% at closing with an earnback of less than 2 years.
• The company anticipates three 25 bps Fed rate cuts in the second half of 2024.
• Old National expects full-year 2024 loan growth of 12-13% including CapStar, and total revenue growth of approximately 4% including CapStar.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with strong financial results, strategic growth initiatives, and a focus on risk management. The pending merger is expected to be accretive, and the company is well-positioned for future growth. However, there are some challenges related to the rate environment and integration risks.

Positives

• Old National has a strong, peer-leading deposit franchise with a low deposit beta of 35%.
• The company has a granular and diversified loan portfolio.
• Old National has a strong credit culture with low net charge-offs.
• The company is well-capitalized with a CET1 ratio of 10.70%.
• The pending merger with CapStar is expected to be financially beneficial.
• Old National has a track record of successful partnerships and integrations.
• The company has a long-tenured deposit base with 75% of core deposits having tenure greater than 5 years.
• Old National is building capital faster than peers.
• The company has a diversified revenue stream.
• Old National has a strong tangible book value per share growth glidepath.

Negatives

• Net interest income decreased due to the current rate environment.
• The net interest margin decreased by 10 bps compared to the previous quarter.
• Noninterest expense increased in 4Q23 due to a performance-driven incentive accrual true-up and additional amortization of tax credit investments.
• The company experienced a decrease in net income applicable to common shares by 35% year over year.

Risks

• The company is exposed to risks associated with changes in economic conditions and interest rates.
• There are risks associated with the pending merger with CapStar, including integration challenges and the ability to obtain necessary approvals.
• The company faces competition from other financial institutions.
• There are operational risks, including cybersecurity threats and technology disruptions.
• The company is exposed to credit risk and the sufficiency of its allowance for credit losses.
• The company is exposed to the impacts of pandemics, epidemics and other infectious disease outbreaks.
• The company is exposed to the effects of climate change on Old National and its customers, borrowers, or service providers.

Future Outlook

Old National anticipates a 12-13% increase in loans and a 4% increase in total revenue for full-year 2024, including the impact of the CapStar merger. They also expect three 25 bps Fed rate cuts in the second half of 2024.

Management Comments

• Management believes excluding certain items from EPS, the efficiency ratio, return on average common equity, and return on average tangible common equity may be useful in assessing the Company's underlying operational performance.
• Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis.
• Management believes that tangible common equity measures are capital adequacy metrics that may be meaningful to the Company, as well as analysts and investors, in assessing the Company's use of equity and in facilitating comparisons with peers.

Industry Context

Old National is positioning itself as a top-performing regional bank, focusing on a strong deposit base and strategic acquisitions. The pending merger with CapStar is part of a broader trend of consolidation in the banking industry, as institutions seek to gain scale and market share. The company's focus on a low-risk balance sheet and strong credit culture is also in line with industry best practices.

Comparison to Industry Standards

• Old National's adjusted ROATCE of 21.3% for 2023 is in the top quartile of its peer group.
• The company's adjusted efficiency ratio of 50.4% for 2023 is also in the top quartile of its peer group.
• Old National's net charge-offs are lower than the peer average, indicating a strong credit culture.
• The company's deposit beta of 35% is favorable compared to peers, suggesting a sticky and low-cost deposit base.
• Old National's tangible book value per share growth is strong compared to the KBW Nasdaq Regional Bank Index (KRX).
• The company's loan-to-deposit ratio of 89% is within the range of industry standards.
• Old National's CET1 capital ratio of 10.70% is above the regulatory minimum and compares favorably to peers.
• The company's cumulative net charge-offs since 2009 are lower than the U.S. Commercial Banks average.

Corporate Governance

Stakeholder Impact

• Shareholders are expected to benefit from the company's strong financial performance and strategic growth initiatives.
• Employees may experience changes due to the merger with CapStar, but the company aims to retain key market personnel.
• Customers are expected to benefit from the expanded product suite and capabilities resulting from the merger.
• The company's commitment to corporate social responsibility and ESG initiatives may positively impact communities.

Next Steps

• The company will continue to manage its net interest income to a neutral rate risk position.
• Old National will work towards closing the merger with CapStar Financial Holdings by June 30, 2024.
• The company will focus on integrating CapStar's operations and realizing cost savings and synergies.
• Old National will continue to monitor and manage its credit risk and maintain a strong capital position.

Key Dates

Keywords

Old National Bancorp, ONB, Financial Results, Investment Thesis, Merger, CapStar Financial Holdings, Deposit Franchise, Net Interest Income, ROATCE, Efficiency Ratio, Tangible Book Value, Credit Quality, Capital, Loan Portfolio, Banking