Old National Bancorp Stock: Positioned For Growth (NASDAQ:ONB)

Banks were hit hard in the recent market meltdown in September. It was really ugly. Since then, there has been a nice bear market rally once again. We have been fueled by much better-than-expected earnings for Q3, and we have seen sustained buying. It may or may not be the bottom, as the Fed is still looking to hike rates 3 more times.

There is hope that inflation data will show the pain is easing, and that could slow the Fed. Regardless, the higher rates, while impacting immediate loan demand, have benefitted banks tremendously as they are making more money on their loans now than on past loans. Margins are improving, as is net income. Fee income is down, but this seems to be common right now. We want to be clear. For weeks, we have been pushing that we want to see our members to be buying financials for a big turnaround. Regional banks in particular look great, and we have looked at a number of them this earnings cycle.

A higher rate environment will help banks in 2023, and Old National Bancorp (NASDAQ:ONB) is a solid choice. Right now, the stock is rallying after it just reported Q3 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. We think the stock looks to break above $20 before the holidays. Let us discuss the key banking metrics for Old National Bancorp

Q3 Old National Bancorp headline strength

Make no mistake, the bank’s operational results were strong. They were largely better than expected here in Q2. Old National Bancorp reported top-line and earnings growth. Such growth was a result of loan growth and deposit strength. The topline widened from last year for Old National Bancorp. The Q3 revenues were $456.9 million, rising 118.0% in this metric year-over-year, and much of this was again a result of their First Midwest bank merger back in February of this year. That said, there was loan and deposit growth regardless of the merger. This helped fuel better revenues and earnings.

As we saw the year-over-year revenues shoot higher, margins were also strong, and widened nicely, helping earnings power. Because of a strong topline and widening of margins, the bottom line was better than expected. Net income was solid at $150.4 million or $0.51 per share, beating consensus by $0.01. This compares to a net income of $71 million, or $0.43 per share a year ago, however. Earnings will expand now at a more normal rate as the company fully incorporates First Midwest operations and is offloading 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. Margins grew nicely. Net interest margin was 3.71%, up big from just the sequential quarter’s 3.33%. That led to serious gains and will continue to boost the bottom line, offsetting declines in non-interest income.

Loans and deposit growth at Old National Bancorp

Growth in loans and deposits at any bank is important. We like that new loans are being issued at higher rates. The bank uses its deposits and lends them out and collects the difference. As we mentioned, the net interest margin for the quarter increased mightily and has widened all year. Rising margins are excellent for earnings potential. This is why we want to own regional bank stocks. On top of the better margins, loans are growing, and not just because of acquisitions.

Net loans totaled $30.5 billion at the end of the quarter, rising 13.2% annualized from the end of Q2 2022. That is some killer growth. Most of the growth was in the bank’s commercial loans, but consumer loans are strong loans. We expect further and strong production of both consumer and commercial loans in 2023, despite the risk of a mild recession from the Federal Reserve’s actions. Unlike most banks we have covered, Old National saw an influx of deposits. Period-end total deposits were $36.1 billion, up from $35.5 billion to start the quarter. Overall, the bank now has even more liquidity with which to lend. Winning.

Old National asset health

Now, growing loans is great and all, but you want to have a sense of the quality of assets. Well, that said, Old National has very strong asset quality metrics, and they remained strong in Q3 2022, though softened in a few places. This is one risk to be aware of.

The provisions for loan losses were a bit higher, much like other banks in Q3 as the bank prepares for some milder economic strength. There was a provision of $11.4 million, up from $9.2 million in Q2 2022. The allowance for credit losses was $302.3 million, or 0.99% of total loans compared to 0.97% to start the quarter. Further, 30-day delinquencies were just 0.22% of loans, up from 0.17% coming into the quarter. Net charge-offs also rose to $7.6 million, or 0.10% of loans vs 0.02% of loans in Q2. While those increases caught our eye, the bank has a strong efficiency ratio as well, at 50.7%, improving from 53.9%. This contributed to a great return on equity of 22.6% in the quarter.

Old National Bancorp valuation

The stock is not super-expensive relative to book but does command a premium. The bank’s stock is somewhat expensive at $18.91 relative to the book value per share at September 30, 2022. Book value per share was $16.05 at the end of the quarter. Book value has been falling a bit in the last few quarters for most banks, but should stabilize. There is a strong pipeline of loans, and both consumer and commercial lending remains strong. Right now, shares are at a 17.7% premium-to-book. Things are much more expensive relative to tangible book value. Tangible book value is about $9, but it is very rare to find regional banks trading below tangible book. However, this is 2X tangible book and could dissuade investors. The premium is there due to the growth. On this metric, valuation is a bit more stretched.

Take home

Old National Bancorp stock is likely to continue to rally as banks get stronger with better rates on their loans. We would like to see a better dividend with earnings increasing as they are. Overall, Old National Bancorp stock is a bit expensive, but we like it on a pullback.