Old National Bancorp (ONBPO): Adapting to Change, Delivering Consistent Results

Published on November 28, 2024 | Ticker: ONBPO

Old National Bancorp (ONBPO) is a diversified financial services company with a rich history dating back over a century. Headquartered in Evansville, Indiana, the company has grown to become a leading regional bank, serving customers across the Midwest and Southeast regions of the United States.

Company History and Growth

Old National's origins can be traced back to 1834, when the Old State Bank of Indiana was founded. Over the decades, the bank underwent several name changes and mergers, ultimately culminating in the formation of Old National Bancorp in 1982. Since then, the company has pursued a strategic growth plan, expanding its footprint through both organic growth and strategic acquisitions.

The company's growth strategy has been marked by significant acquisitions, particularly in the 1990s and 2000s. Notable mergers include the acquisition of Integra Bank in 2011 and United Commerce Bancorp in 2014, which helped strengthen Old National's position in the Midwest. However, these mergers also presented integration challenges that the company had to navigate. In 2016, Old National further expanded its reach by purchasing Anchor BanCorp Wisconsin, and in 2022, the company acquired First Midwest Bancorp, significantly enhancing its presence in Wisconsin and Illinois.

Challenges and Resilience

Old National faced a notable challenge during the subprime mortgage crisis of the late 2000s. Like many financial institutions, the company had exposure to risky mortgage-backed securities, which led to increased loan loss provisions and writedowns. In response, Old National worked diligently to resolve these issues and strengthen its risk management practices in the aftermath of the crisis.

Community Focus and Recognition

Throughout its history, Old National has maintained a strong focus on community banking, prioritizing personalized service and local decision-making. This commitment to its communities has been recognized through the company's consistent ranking among the top banks for its environmental, social, and governance (ESG) practices.

Current Position

Today, Old National Bancorp is the sixth-largest commercial bank headquartered in the Midwest, with consolidated assets of approximately $54 billion as of December 31, 2023. The company operates a network of over 280 banking centers, providing a comprehensive suite of financial products and services to its customers, including consumer and commercial banking, wealth management, and capital markets offerings.

Financials

Old National's financial performance has been consistently strong, with the company reporting net income of $582 million and revenue of $1.84 billion for the fiscal year ended December 31, 2023. The bank's return on average assets (ROAA) and return on average equity (ROAE) for the year stood at 1.22% and 11.39%, respectively, demonstrating its ability to efficiently deploy capital and generate solid returns for its shareholders.

In the most recent quarter (Q3 2024), Old National reported revenue of $679,925,000 and net income of $143,802,000. The company's operating cash flow (OCF) for the quarter was $121,316,000, while free cash flow (FCF) stood at $115,650,000.

Old National's net interest income increased 4.4% to $391.72 million in the third quarter of 2024, compared to $375.09 million in the same period in 2023. This increase was driven by loan growth as well as higher asset yields and accretion, partially offset by higher funding costs. For the nine months ended September 30, 2024, net interest income was flat at $1.14 billion compared to the same period in 2023.

The provision for credit losses increased 49.4% to $28.50 million in the third quarter of 2024, compared to $19.07 million in the same period in 2023. For the nine months ended September 30, 2024, the provision for credit losses increased 76.8% to $83.60 million, compared to $47.29 million in the same period in 2023. These increases were due to credit migration, allowance for credit losses on individually evaluated loans, and the establishment of an allowance for credit losses on non-PCD loans acquired in the CapStar transaction.

Noninterest income increased 16.3% to $94.14 million in the third quarter of 2024, compared to $80.94 million in the same period in 2023. For the nine months ended September 30, 2024, noninterest income increased 11.0% to $258.93 million, compared to $233.25 million in the same period in 2023. The increases were primarily due to the acquisition of CapStar, as well as higher service charges, mortgage fees, capital markets income, and other income.

Noninterest expense increased 11.2% to $272.28 million in the third quarter of 2024, compared to $244.78 million in the same period in 2023. For the nine months ended September 30, 2024, noninterest expense increased 10.2% to $817.60 million, compared to $742.07 million in the same period in 2023. The increases were driven by the additional operating costs associated with the CapStar acquisition, as well as higher salary and employee benefits reflecting merit increases.

Liquidity

The company's liquidity and capital position remain robust, with a Tier 1 leverage ratio of 8.83% and a total risk-based capital ratio of 12.64% as of December 31, 2023. These metrics underscore Old National's financial strength and its ability to navigate the evolving regulatory landscape and economic conditions.

Adapting to Market Changes

One of the key drivers of Old National's success has been its ability to adapt to changing market dynamics and customer preferences. In recent years, the bank has invested heavily in technology and digital banking capabilities, enabling it to better serve its customers' evolving needs. This strategic focus has been particularly evident in the bank's response to the COVID-19 pandemic, which accelerated the shift towards digital banking across the industry.

Despite the challenges posed by the pandemic, Old National has remained resilient, with its credit quality metrics continuing to outperform industry averages. The bank's nonperforming assets to total assets ratio stood at 0.58% as of December 31, 2023, reflecting its prudent risk management practices and the overall strength of its loan portfolio.

Future Outlook

Looking ahead, Old National remains well-positioned for future growth. The bank's recent acquisition of CapStar Financial Holdings, a Nashville-based financial institution, has further strengthened its presence in the Southeast, a region that is poised for continued economic expansion. Additionally, the company has outlined a strategic plan focused on organic growth, fee income diversification, and disciplined expense management, all of which are expected to contribute to its long-term success.

Old National reported GAAP earnings of $0.44 per common share and adjusted EPS of $0.46 for Q3 2024, in line with expectations. For the full year 2024, the company's outlook for pre-provision net revenue remains unchanged from the initial expectations shared in January 2024. The full year 2024 outlook for loan growth and net interest income are expected to be in line with the original expectations.

Net charge-offs for the full year 2024 are expected to be in the range of 17-20 basis points, which is in line with the original 15-20 basis point guidance provided at the start of the year. Provision expense for the full year 2024 is expected to be slightly higher than originally anticipated due to grade migration from Old National's proactive credit management.

For Q4 2024, Old National expects net interest income to increase modestly, though the guidance is a bit lighter than what was anticipated 90 days ago due to changes in the yield curve. The company expects a declining rate total deposit beta of approximately 30% and a noninterest-bearing to total deposit mix that remained stable at 24% for Q4 2024. Old National remains highly confident in the execution of its deposit strategy and is prepared to respond proactively to future Fed rate actions.

Conclusion

In conclusion, Old National Bancorp's enduring history, consistent financial performance, and strategic adaptability position the company as a compelling investment opportunity in the regional banking space. As the company continues to navigate the evolving landscape, investors can take comfort in its strong fundamentals, prudent risk management, and unwavering commitment to serving its customers and communities. With its recent acquisitions and focus on organic growth, Old National is well-positioned to capitalize on opportunities in its markets and deliver value to its shareholders in the years to come.

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