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This rising rate environment has wreaked havoc on the markets. Banks were hit hard up until about a month ago. Since then, there has been a nice bear market rally in our opinion. We think you let the market selloff some in September and then do some buying. One such place we would like to see our members buying in would be the banks. Regional banks in particular look strong. We encourage our members and followers to put money into financials, and specifically regional banks on the next round of weakness. A higher rate environment will help banks in 2023, and one that we like on a pull back to $16-$17 is Old National Bancorp (NASDAQ:ONB). Right now the stock is pulling back slightly with a weak market the last two sessions, but the company has been doing well, despite a tough macro environment in H1 2022. Old National just recently reported Q2 earnings which were impressive. In addition, the bank pays a dividend with a yield just over of 3%. We think this dividend can be raised as we move forward in a higher rate environment. Wait for a pullback then buy this name. Let us discuss the key banking metrics you should be aware of here.
Q2 headline strength
The bank’s operational results were mostly better than expected in Q2. Old National saw revenues and earnings grow thanks to continued loan growth and deposit strength. The top line expanded from last year. The Q2 revenues were $430.9 million, rising 110% in this metric year-over-year, largely due to merging with First Midwest bank back in February. Still, organically, there was loan and deposit growth which we will discuss.
Earnings were strong as well. While year-over-year revenues ripped higher, margins were strong which helped fuel earnings power. Due to strong top line and increases in margins, the bottom line was better than expected. Net income was solid at $111.0 million or $0.46 per share, beating consensus by $0.07. This compares to a net income of $205 million, or $0.41 per share a year ago, however. Earnings will now start to grow at a more organic normalized pace, especially as the company fully incorporates First Midwest operations and offloads its Health Savings account business. We think 2023 will be even better based on the trends we are seeing for banks, especially in a rising rate environment.
Book value suggests waiting for a dip
We would really like the stock if it gave back some of the gains seen the last two or three weeks so that you could get a better price before entering the stock. While the stock is not expensive relative to book, we would like to see you buy shares at or below book value. Thus, investors should wait, in our opinion, though we are bullish. The bank’s stock is somewhat expensive at $18.00 relative to the book value per share at June 30, 2022. Book value per share was $16.51 as of this time. Book value has been falling a bit the last few quarters, but should stabilize. There is a strong pipeline of loans and both consumer and commercial lending is strong. Right now shares are at a 9% premium. But just weeks ago we were trading at book value. Still, this is not an expensive stock, but let it fall. Tangible book value is about $9, but it is very rare to find regional banks trading below tangible book. On this metric, valuation is a bit more stretched, but on a selloff, we would are buyers.
Loans and deposit growth
Growth in loans and deposits are a key metric. This is true whether the bank is small or large. Bank stocks tend to do better when rates rise because the idea is that they should make more money on the margin between what they lend out and what they pay for funds (e.g. interest on deposits). The net interest margin for the quarter increased from last quarter to 3.33%, as compared to 2.88% for Q1 2022. That is what we are talking about. Rising margins are amazing for earnings potential. We want to own these stocks. On top of the better margins loans are growing, and not just because of acquisitions.
Net loans totaled $29.6 billion at the end of the quarter, rising 17% from the end of Q1 2022. Stellar. Growth was concentrated in the bank’s commercial and consumer loans. Commercial loan production was $2.2 billion in the quarter while the commercial pipeline totaled $5.9 billion. Consumer loans grew $86.0 million, or 12.9% to $2.8 billion and residential mortgage loans grew $372.9 million, or 26.1% to $6.1 billion, driven by strong production. Winning.
Total deposits have grown which we like though were about flat from Q1 at $35.5 billion. The bank has strong liquidity with which to lend.
Old National asset health
You want to have a sense of the quality of assets. Old National maintained strong asset quality metrics in Q2 2022. The provisions for loan losses is creeped up much like other banks in Q2 as the macro situation is so poor. There was a provision of $9.2 million, rising from a year ago. Non-performing loans improved dramatically from Q1 2022. They were 0.78% in Q2 2022, improving from 0.88% of all loans to start Q2 2022. Further, 30-day delinquencies were just 0.17% of loans down from 0.34% coming into the quarter. Net charge-offs also fell, down to $1.8 million or 0.02% of loans vs 0.05% of loans in Q1.
The bank has a strong efficiency ratio as well, at 53.9%. This led to a very strong return on equity of 20.4% in the quarter.
Overall, we love what we are seeing here.
Final thoughts here
We think that this is an interesting regional bank. The merger has been costly but the assets are now rolled in and almost fully integrated. We are seeing improving performance in the loan pipeline and in margins. We want to own the stock if it pulls back so it is cheaper relative to book value. We like the 3%-plus dividend yield, and believe it can be raised in 2023, especially as interest rates are now bolstering the bottom line.
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