Old National Bancorp (ONB) Earnings Call Transcript & Summary

Good afternoon, everyone. For those of you who don't know me, I'm Brian Morton with the U.S. large cap banks here at Barclays. Up next, we have Old National Bancorp, headquartered in Evansville, Indiana. Old National's footprint covers 7 states across the Midwest. Here from the company, we have CEO, James Ryan, presenting.

Thank you. Thanks for the opportunity to be here today.

Sure. No problem, James. Why don't we get start to kind of up straight from the top. For those in the room that really aren't familiar with the bank, why don't you tell us a little more about the Old National Bancorp story. Some of the important things such as size, geography, major markets, products, services, major competitors and competitive advantage.

Sure. I think we have a unique story. The fact of the matter is we turned 189 years old this year. The bank was started in 1834. Our building -- our headquarters building is on the exact same spot it was 189 years ago. And we've coined this new phrase that boring is the new growth story. And so we are an old-fashioned basic bank and everything that means and applies. And so for us, we primarily serve the Midwest, the upper Midwest. We've had -- we're about approximately $50 billion in total assets and kind of old-fashioned basic banking where we take deposits in, in our footprint and turn on and lend them out. We have some nice fee income businesses and are treasury management and wealth businesses and obviously, mortgage and when mortgage is good. But yes, I mean, just an old fashioned basic bank, obviously, being in the Midwest, Chicago is our largest market followed by Minneapolis. So we see pretty much all of the regional banks and some of the G-SIBs and national banks in our footprint. But we compete very effectively across that. And ultimately, at the end of the day, we're really successful if relationships are part of the buying decisions, that's where we have tremendous success. We have just as good, if not better, people facing off with clients and prospects every single day, and we're incredibly successful at it.

Excellent. Interesting. You've had an acquisitive history and an MOE that closed just years ago. Tell us about how that margin is going now that you're on the other side?

Absolutely. I often tell people the merger with First Midwest was definitely transformational for our franchise and really set ourselves up to be incredibly successful particularly given the environment we find ourselves in today. There's no doubt about it that our Board is not strong as a result of the merger. Our management team is not strong as a result of the merger. Our balance sheet, our financial performance is not stronger as a result of the merger. And really, it -- while we have had a long history, this was something that really haven't done this transformation in the past so it was an all-hands-on-deck effort to work on the integration efforts between First Midwest and our bank. And while there's a lot of skepticism about those types of transactions that are transformational, the rewards are very high and I think we proved the marked wrong. We were able to grow from the time of announcement until the time of close, we were able to grow from the time of close through the entire integration process. We kept all of our relationship managers, by and large, we had a [indiscernible] growth attitude about that. We try to think the best of both worlds, but at the same time, we knew we owed it to our shareholders to drive cost savings that were promised as a part of the merger [ synergies ], and we were able to successfully do that through just being really disciplined as a result of that. And sitting here today, again, our company is net better as a result. Our shareholders are net better as a result, and we're incredibly happy with the results. And one thing that I'll just make a mention of because I think it's important to the success of this is we spent much of our effort around cultural, the cultural integration. Even before legal close, the management team spent an awful lot of time together talking about the similarities and the differences and really working on where those differences were and how we were going to run the new organization, the new company. And I think that allowed us to go in once we legally close to really get off to a strong start with all of our newest team members and really allowed us to continue that kind of path towards growth, getting the cost savings, executing on the integration activities. And so again, we're really proud of our accomplishments, and I think the performance really speaks as a great proof point for the efforts of all of our teams.

Maybe just kind of talk about some recent events, kind of early in the spring time, many banking prices really kind of [indiscernible] large-cap bank sector. How do the large bank failures impact your business? How the deposit trend's been since then? How have you managed to keep such a little deposit data?

Yes, great question. And the reality is, is that I think for banks, many banks like ourselves, it's been more business as usual than not. There was obviously a hectic few weeks there where there's a lot of conversations going on. I personally only had a handful of conversations during the most stressful of that which I think is a pretty good barometer for how our clients are feeling. And I think the good news is our clients because of our long history with them, being around for 189 years and even the organizations that we have acquired throughout the years or partnered with really had those deep relationships as well. So it really allowed us to navigate, which were pretty tumultuous times pretty successfully. And in fact, we've obviously grown deposits year-to-date. And I really stacked it up well against almost any other organization out there in our space and I think it also starts with the fact that we have an incredibly granular loan base that comes with an incredibly granular deposit base. 80-plus percent of our accounts are 5 years and older. With an average balance of $25,000 and less. So really, on average, relatively small balances. Again, this is old-fashioned community banking here that really allows us, I think, to be thought of a little bit differently than maybe some of the largest peers or largest banks in the country. And so really kind of business as usual. And I would say those kind of trends, we were able to obviously update everybody in the second quarter and trends continue to be the same from the last time we reported.

Nice. I think that makes some nice segue into credit quality. As a bank with historically strong asset quality, what do you see in your markets from a credit perspective? Any markets or asset classes specifically that are showing any signs of weakness? Anything changing any of your credit and underwriting criteria?

Like everybody else, we are taking a deep dive through the portfolios, looking for any signs of weakness. And so far, I think like industry, we're really seeing no systemic weakness. Old Nashville has always prided itself on having a relatively low charge-off history. And we spent an awful lot of time to know our credits. We don't, as a rule, do a lot of wholesale credit by nature. And so while we continue to dive deep, and we just don't see anything in a large way that gives us any kind of concern. And like everybody else, though, there are sectors like real estate that we have a close eye on, particularly when we think about office, but our office exposure tends to be relatively de minimis in total. There are other sectors that are on everybody's radar or like multifamily feel really good on the multifamily products just given the high demand and where our properties are primarily suburban type multifamily product. But right now, knock on wood, really not seeing any systemic weakness and feel generally really good about where we're heading in the back half of the year.

Okay. Great. Maybe another question. How would you feel about M&A given the current environment? Is it possible to get a deal completed? Would you be interested in any new geographies beyond the Midwest?

Yes. So that's a great question. I do think M&A is going to take some time to come back to more robust sets of announcements. Obviously, there's a couple of things maybe standing in the way. I think everybody is thinking about their own balance sheet and own liquidity positions. We're in a pretty strong position here. But there are some roadblocks there, right? The balance sheet marks, which will take some time to get to the point where everybody can stomach what those are going to apply the earn-back associated with them. I feel good about our regulatory relationships and our ability to continue to look at partners. But at the same time, if you look at our ability to grow our tangible book value per share given our kind of top decile return on average tangible common equity and our average dividend payout ratio, we have a really strong growth -- expected growth around our tangible book value per share. And so it has to be a relatively high hurdle for us to consider looking at a deal today to interrupt that projected growth line. But I think it's possible, and I think for the right opportunity, we would be interested. And I think that opportunity looks like something that has -- it looks like us, that has a really strong deposit franchise, has good solid credit quality and has a stronger fee income businesses. I think for something like that, we could be interested. But I think it's going to take some time for the industry to be able to have balance sheet marks, which are reasonable and allow the transaction economics make sense.

During the conference, the recent Basel III endgame proposal has kind of made a lot of interest. Does the additional regulation at the $100 billion threshold change your mind at M&A?

I think the interesting spot for a bank like Old National is $50 billion. We're largely going to escape a lot of the most onerous parts of the proposed rules. We're obviously incredibly sensitive, we've always been sensitive to our tangible common equity, right? That's always been a measure that we've paid attention to. I don't think that -- I think it's an advantage for banks of our size today. And I think it's a real advantage as we had, and we got plenty of growth path forward until we reach $100 billion. It's something we have to keep an eye on and I do think that over time, as an industry, we will definitely hold higher capital, more liquidity. We'll probably have some higher investments in people to meet some of the new requirements, but I think we're in a sweet spot here. And I think it's going to create probably more opportunities for us than less opportunities for us. I think if the banks that are smaller than us, may have more challenges, whether it's on the liquidity side or maybe meeting some of the capital standards. And I think that will create opportunities for us in the future.

Yes. Great. Still you've posted strong loan growth in the first half of the year. How do you see that playing out for the rest of the year? What lines of businesses and markets are driving that growth?

Yes. We've had really strong loan growth in the first half of the year. And what we said is mid- to high single digits for the full year which probably implies a slightly lower back half of the year. And it's really been broad-based. The interesting thing is, last year, we did about $9 billion in new commercial loan production, about $2 million average loan size. Can we continue that into this year, in a couple of different ways. I mean we continue to have relatively low share in very dynamic markets. Think about markets like Chicago and Minneapolis, Milwaukee, Indianapolis [indiscernible], our newest markets in places like St. Louis and Kansas City, we recently opened offices in Nashville and Detroit. And so -- and we continue to hire just some amazing talent that have come out of some of the super regions and some of the national banks that have joined our team and that talent is really driving great growth opportunities for us and what's also interesting, and there's been a little bit of a buzz in the conference here about how some of the banks maybe are on an RWA diet. And so I think that's going to create opportunities for us to continue to leverage the investments we've made in people and the markets and continue to create higher brokers. They just kind of look out a little bit further forward for us. So I'm excited about that. The continued granular approach, we are best at this space when we're working with owner operators. Those small- and medium-sized businesses are really where we excel at, and again, as we think about who we're competing with, it doesn't take the best technology, right? You have to be competitive in that space. But often times, those relationships are based on people, right? And those are people who are most important part of the buying decision that we're going to continue to excel. So I'm long-term bullish in our ability to continue to have near peer or above peer growth on those investments in people and in the markets we sit in today.

Great. Continuing on that growth theme, Old National recently announced some prominent commercial hires, both Metro Detroit and Nashville. Can you discuss some of the lending and deposit gathering activities in those markets? And what level of growth should we see? Any other markets you're considering expanding into in this way?

Those are great questions. I think about Nashville, really 2 different approaches. Nashville was an opportunity that we actually led by hiring our wealth management team that came out of a regional bank. And that team joined us, and we're off to a great success. And one of the reasons they were seeking a new bank to be a part of was that they had commercial opportunities for their wealth management clients. And they, quite frankly, weren't able to be as successful as they had hoped with their previous institution. So it really allowed us to be able to sell and bring the full bank through their client set. So when they came on board, in fact, it was interesting, we were servicing -- we didn't have a commercial team in place to help our wealth management team there. And really, we're trying to service them out of some adjacent markets and really because of their need to continue to have greater access really forced our hand to make sure we find a great team to bring alongside them. And so we're off to a great success. It's really a complement to the wealth management business. Detroit market was a little bit different where we had been in and around Michigan for probably 10 years now or so, and it was really complementing what we already built in Michigan. But we have really not gone as far as being in kind of the Metro Detroit area. And so really building on that and hire just great folks there, open an office there, in fact, we had a reception in Detroit not too long ago. And I was absolutely amazed at -- we had 100-plus clients show up at this event, I was absolutely amazed at their enthusiasm and their interest and their kind of feedback that we think there's a place for a bank like Old National in Detroit. And some of the banks that had previously been there looked a lot like what we look like today, right? And we saw that opportunity for us to be successful. We've got a large amount of it coming up here in Nashville in a couple of weeks, and I'm excited about that. But interesting enough, we've had the same experience when we've gone to St. Louis or gone to Kansas City and had these types of client events, we get that same kind of feedback because we're that kind of old-fashioned basic bank, right, and they kind of get their heads around that when we lead with relationship management, right? And I think that is in that small and medium-sized business that private wealth space, I think that resonates really well, and we continue to be happy, some of the best people that are at the marketplace serving each one of those communities. I think it's really allowed us to excel and be more successful despite being relatively new names in some of these lines.

Great. In addition to like the traditional banking business, also you're investing in and expanding the wealth business, specifically in 1934, maybe tell us more about the wealth line of business and what growth opportunities you see there?

We are very long-term bullish on our ability to be successful in wealth management business. We've done a really good job of investing in talent in that space to augment our existing wealth management business. And historically, we served relatively modest sized account relationships. But increasingly, we have the opportunity to serve kind of high net worth and even ultra-high net worth. So we've done a really good job of building out the infrastructure and the sophistication to be able to serve clients from small all the way to super big and so that's allowed us to probably drive a higher organic growth opportunity in that business than we would historically saw. So I'm excited about those investments. I'm excited about our ability to be successful there. And it's interesting. That business is a slightly higher efficiency ratio business than our traditional banking businesses. And those returns take a little bit longer to come. But we've made substantial investments in the people and technology to support that, but I really believe that we're going to be able to differentiate ourselves in a big way. And again, when we have the opportunity to sit across from a client and really tell our story about Old National and how our ability, how we plan to service really leading with financial planning versus leading with maybe asset management. We have great success. And I think if you think about what's happened in our industry where increasingly, even very large accounts get serviced out of call centers or maybe robo-advisors, we tend to lead with team members. We tend to bring all of the right resources and surround individual clients with a team of researchers around them. We're -- well, quite frankly, some of our peers, some of our biggest banks, they just don't do it that way anymore. And I think that's allowed us to drive maybe greater success than we hoped for.

Okay. Great. Maybe moving on to expense. Old National has made significant headway reducing efficiency ratio in the last few years, what do you attribute this improvement? Is there room to reduce that ratio even further?

I think it's an area that we've had an incredible amount of focus on in the last 10 years, and we will continue to do so going forward. We got this pretty enviable spot of having a sub 50% efficiency ratio, like I said, and it's something that we're going to continue to work on. We've spent an awful lot of time here recently building an automation team and with the hope that we can continue to build automation into their processes, and it does 2 things, right? It reduces our cost to process, but it also improves the client experience. And so I really believe, the next evolution [indiscernible] spending time in this automation space, ultimately driving what it takes to invest in our business. And I think it will allow us to give us building out stronger processes, adding more technology to that, I think, will really help us to the extent that there are going to be margin headwinds in our industry, going forward, just with where we're at with the Fed cycle here. I think this will help us offset any kind of challenges in revenue headwinds that we are already facing. I'm excited about that. What I'm as excited is about the client experience opportunities to improve those client experiences as I am continuing to have kind of top quartile efficiency ratio.

Great. Maybe I have just one last question. You mentioned earlier, you're kind of the [indiscernible] and focused on tangible common equity. Maybe you can just kind of give us your capital priority and strategies for that.

Yes. Great question. Obviously, first and foremost, we want to make sure we have enough tangible common equity to invest in organic growth. Again, I believe we're going to see an opportunity to continue to grow at or above where our peers are growing. I want to make sure we have enough for that. Secondly, I think we think about opportunities for capital deployment back to our shareholders, right, what those opportunities look like. And then lastly, I think we're going to think about those inorganic growth opportunities like M&A. We continue in our last -- our conversations with our Board are really focused on what does that -- how do we continue to create shareholder value? How do we continue to drive shareholder interest in us. And I think having that consistent quality growth at tangible book value per share. And again, given our leading return on average tangible common equity profile and our average dividend payout ratio, that line should lead our peers as we look into the future. And so we're just going to continue to remain focused on that and support the organic franchise first and then look at deployment opportunities second.

Excellent. I think we'll just end it there. And everyone, please join me in thanking Jim for his presentation.

Appreciate the opportunity to be here today. Thank you very much.