Old National Bancorp (ONB) Earnings Call Transcript & Summary

Thanks, everybody. We'll kick off the afternoon sessions on the cap end track. Excited to have Old National with us today. We are joined by Jim Ryan, Chairman and CEO; and John Moran, the new CFO, congrats on the new role. It's an exciting opportunity. So you've had a lot going on over the last few years.

Maybe to kick it off, just give us a little update on the state of the bank.

Sure. Well, let me just start with a congratulations, John. We're super excited to have John and the team leading us forward. I really could not think of a better partner to have. And so this is John's, I guess, first conference as permanent CFO, but he clearly has been acting in that capacity now since April, so we're really grateful for all of his contributions. And obviously, you've done an excellent job, continue to have great relationships with our investors and all of our stakeholders. And thank you for the opportunity to be here today, by the way. I really appreciate the opportunity to speak this afternoon but also for all of our one-on-ones and just appreciate the support. So for those of you who don't know that much about Old National, Old National is a 190-year-old institution headquartered at Evansville, Indiana. We have approximately 300 locations spread across the Midwest. We recently -- Chicago would be our biggest market, followed by Minneapolis and recently closed and converted an acquisition in the state of Tennessee, so we've got 23, 24 locations now in the state of Tennessee. And we've been really blessed. We've had great organic growth from a couple of different factors, a, we've had just an excellent opportunity to attract new talent that was leaving. Some of the banks that are here at the conference, some of the large banks and some of the super regional banks have contributed to our excellent workforce. And we've built that both in our legacy markets across wealth and commercial businesses, which has been great contributors to, I think, are above kind of market growth in the last handful of years. We've done a handful of acquisitions that have also allowed us to, I think, to change our growth trajectory. Obviously, most recently in Tennessee and specifically in Nashville, we're super excited about what we think Tennessee can bring to our franchise, I've used this analogy with respect to what Tennessee -- well, it's a relatively small percentage of our total footings today, around 5% of our total assets today. There's so much growth opportunities and it's kind of falling off trucks there, you just got to be there to scoop it up. And so we're excited to have a team there to take advantage of that. But really, we've been really blessed for 190 years to have an exceptionally strong community-focused organization. We believe in culture, culture is a huge driver of our success. And I think that's what allows us to attract just some amazing talent to join the organization to be a part of something maybe a little bit bigger than they're coming from.

Great. That's a great overview. Thanks. Maybe drilling down on the growth topic a little bit. You've seen really strong growth for a number of years. You mentioned some of these newer markets. Where are you seeing the most opportunity, whether it's geographically or by vertical and product line? And how are you attracting these new clients to the bank coming from some of the other competitors really well.

Excellent question. I would just start with -- when I first started the organization 20-some years ago, we really had to have just some home run quarters in a handful of key markets. And those were legacy more rural markets in Indiana and Western Kentucky. And today, we're really blessed to have really strong markets. And even if the markets aren't necessarily growing as fast in these traditional Midwestern large cities like Chicago and Minneapolis and Indianapolis I mean there's growth there, and these are great places to be, but we have relatively low share. So it's really opportunities for us to pick up share. And so -- but today, I tell everybody, if we go and hit singles and doubles in all of our good markets, we're going to have a great quarter. And so I think that allows us to be choosy when it comes to the client selection, we really want to have the best clients to do business with. And I think that affords us an opportunity to grow, but grow at a responsible rate, particularly given the environment we find ourselves in today's world. And because of that, I think that growth, we get noticed, we get on the radar screen pretty quickly, particularly from some of our competitors. And so we've been able to attract, that growth brings traction of new talent and wants to be a part of that opportunity. And so I think today, we sit in a really enviable position that maybe 10 years ago, organic growth was a challenge for organization. Today, that's not our challenge. Today, it's -- we have -- I shared just earlier today, somebody had reached out to us, and this has happened a few times this year from a different larger market that wasn't a market we're in today. And they said, "we've heard your story, I want to be a part of your team, but we said, I appreciate that and maybe someday, but not today" we just focus in on the markets we've got, the opportunities we have in front of us and continue to serve those communities.

In addition to the strong organic growth, you have used M&A in the past. What's your thoughts in terms of going forward from here, is there enough on your plate with organic opportunities that you're just going to stay busy taking that share? Or is there still an opportunity to take that expertise and do deals and look to expand?

Certainly, I think we have expertise in M&A. Having said that, and I was -- I made a comment on our second quarter call as well that -- and I think there's going to be plenty of opportunities in M&A to come in maybe the back half of the year, maybe if people wait for the elections, certainly in 2025. I think the best path for shareholder value creation for Old National, as I see the markets today is to continue to concentrate on growing organically, executing on the markets in the offices that we started. We started a few LPOs up, continue to make sure that we take advantage of Tennessee and our LPO in North Carolina that came along with the CapStar acquisition, and just be really focused on serving our clients growing organically and growing tangible book value per share. I think that's probably the best path for us in the near term here. Obviously, we're sensitive to that $100 billion. Things change pretty quick, and we want to stay far enough away from that, that nobody believes we're going to cross $100 billion anytime soon, whether they be a regulator or an investor and start imposing the potential costs and changes that are required as a result of that.

Maybe spend a little time speaking about CapStar? How has that integration gone? You did the systems conversion in July. How is the broader cultural integration going on and success with some of the synergies that you've identified earlier in the announcement.

Yes. The great news, I'll let maybe John comment on the synergies themselves. But the great news is from a cultural perspective, very early on, it's hard for you -- due diligence to ensure that this is an organization that will align with the culture. You have a pretty good, but you have limited optics into the franchise. And what I would say is every single time I'm down there, I have been impressed with the people that came to us as a part of the partnership. Also, we had a team that we had in place. We had about 9 folks that already work for us in Tennessee that came from different organizations, a really big, strong wealth presence there. That team, along with the CapStar team has come together really nicely and really looking forward to taking advantage. In fact, we had a board dinner down there. I guess it was maybe 3 weeks ago now. And once a year, we take our board, we travel to one of our markets, and we were able to bring our Board to National this year. And we had a client event with 150-plus clients show up for dinner at the Country Musical Hall of Fame. And it was a fantastic event, warm reception. The former Board members, clients, all coming out to support us. And so I've been really surprised. Obviously, there's a lot of great banks, that bank in Nashville and Tennessee broadly. But I've been surprised about the receptivity that our team has felt for the opportunities. I think there's just so much growth there. I think that will -- again, if we're there and we're at the right place with the right people. And I'm convinced as much as our business wants to talk about, I don't have my phone in front of me, but as much as our business wants to talk about, that phone and mobile technology and things that are required to do banking today, and many of the clients we do business with, we have to be competitive with technology. But more importantly, we got to have strong relationship managers who can build deep and long-lasting relationships. And so I think that's a key to success for us. John, you want to comment on the synergies?

Yes. So we're on track for the cost saves that we outlined when we announced the deal. We'll hit the run rate on those by the end of the fourth quarter of this year. So that sets up 2025 with a little bit of a tailwind on the operating expense side of things. Revenue synergies were never modeled and we don't put those into our M&A model ever, but are fairly obvious. And I think the easiest one would be that wealth team that Jim mentioned. That's a high-performing group and cross-selling into the existing CapStar client base should be a good opportunity for us.

When you're speaking with your borrowers, especially commercial borrowers, what's been the sentiment from them? And what's the -- what's needed to sort of spur organic demand on their part. We've heard from some other banks that's rates, some that is more certainty around the political environment or the economic environment, as you're talking to clients here, what's the sort of the sentiment of the broad setting now?

It's interesting. So many of our clients are coming off some record years. And certainly, an un -- less than clear political environment doesn't help make long-term decisions. And so -- and then I think the economics have kind of followed where it's a little bit weaker than it has been in the past. So I think the clients are still in a strong position by and large. They're just down from -- or flat from some pretty strong years in the past here. So I'm not sure so much interest rates is around clarity, around the political environment and clarity around -- I guess, if anything, a rate cut here in September could give a -- maybe a confidence signal to the market that the Fed is prepared and willing to take action as it is the benefit from the rate -- lower rates, I think it's more of a confidence signal than anything. But I think our clients feel pretty good about the world. Certainly, in the real estate environment is more challenging given the cost of labor and materials and the absolute level of interest rates to start new things. And so clearly, I think having some rate cuts will help existing clients but also help new projects get off the ground a little bit faster.

Maybe shifting over to the deposits and funding side. It seems like deposit costs are really plateaued in advance of rate cuts. Can you talk a little bit about how competition on the funding side has been and how you're expecting trends, especially in DDA to be progressing.

Well, since I'm blessed to have John up here with me. I'm going to throw this one to John.

Yes. So look, I'd say deposit competition is still fairly intense. It's starting to mellow out a little bit and abate, especially as we've got more clarity around what the path of Fed action might be here later this year. We've been on apologetically on our front foot. We are really focused on continuing to fund what's better than average loan growth with core deposits. But I do think that there's an ability to kind of start to ratchet things down here as we get into the back half of the year. For us, where we'll do that is mostly in our exception price book, 31% of total deposits, 38% of our transaction accounts. A good chunk of those are actually indexed contractually and so they start to move kind of right away and the balance of when we think we'll be able to move pretty quick.

And we have almost $7 billion in deposits that are coming due in the next 12 months. So really an opportunity to look at those costs. And so we've been really deliberate on managing that duration into relatively short maturities.

When you look at the CD book, what are your thoughts around CD pricing? Is that still going to be a lower duration portfolio as rates go lower? And do you still need a 5% rate to really be bringing in new dollars and deposits here?

So duration in the CD book, we've intentionally brought in meaningfully over the last 12 months or so. And so every, especially in the bank over the last -- particularly the last 6 months, kind of targeted at the 5-, 7- and 9-month duration. And so those will start to spend. And the answer is no, I don't think we're going to need a 5 to bring in new CD funding here in the not-too-distant future.

So between the new rates and the roll rates, we should see some pretty high beta or relatively high beta on that time deposit side. I guess as you look over the last few years, it does feel like you've seen a little bit of a disintermediation of the deposit relationship in banking, the way you saw it on the asset side, maybe over the prior 20 years. What have you learned about your deposit base over the last few years?

Let me start at the high level. I don't think this was always appreciated, but it became pretty acute in early 2023. Our granular approach to banking whether that be on the deposit side or the loan side, I think it served us incredibly well. And we've also always had a really balanced business mix, if you look at our loan portfolio, look at our deposit portfolio, the fact that we have these almost 300 stores, it's a costly model to run, but it really allows you to attract community banking, retail, checking and savings accounts, which gives you a lot of diversity in times of liquidity scares, but also in terms of your ability to kind of hold your deposit cost in check because of the relatively low dollar balances that exist in kind of traditional checking accounts. So I think from that perspective, I think that got lost a little bit in our industry when money was so cheap and so easy and the highest I think our industry saw that, that industry concentration can hurt you in a significant way. John, do you want to add on to that?

Yes. I think granularity is part of the secret sauce at Old National. I think our top 20 depositors are 6.5% of the total deposits. That's a little bit different. I would argue that most banks that are kind of in the $50 billion to $100 billion asset range. And I think we feel good about where our transaction account balances are today that's kind of bottoming out the last of the cash sorting is kind of we think behind us. And it will be a battle for primacy, right? I mean we absolutely want to bring in noninterest-bearing operating accounts, both in commercial and in community and a long track record of doing that.

On the commercial DDA side, how active are you with ECRs and how much of a part of the negotiation for relationships is that -- I mean, should we expect to see some sort of rapid decline in that as we go forward?

We haven't really done much with ECR, we've -- where we've managed that more is on exception price on rates.

It might be a good lead into kind of our broader treasury management strategy for our commercial client base. And that's an area we continue to invest in. We recently appointed a new leader who joined us from CIBC in Chicago. And so we're making significant investments in both leadership and team members as well as product capabilities to really serve that middle-market client base. And so hopefully, that will allow us to both grow noninterest-bearing deposits in a meaningful way, but also the fee income associated with that set of product capabilities. And so really pleased that's an investment that will pay long-term dividends for us, along with some other fee income businesses we can talk about.

Yes. I mean that's a good starting point. You do have a diverse fee income business segment, which areas you're most focused on sort of investing in here expanding capabilities that you feel is going to drive better profitability.

Yes. I'll maybe start. I've been really passionate about the wealth management business at our organization. We built out a new leadership team. Many of those leaders came from larger super regional organization. He's been able to attract talent. In fact, the team we started with the Nashville really came out of relationships that they had with each other. So he's been able to attract talented organization, both at a leadership level but also at a relationship management level. We've invested in new product sets to serve that client base. We've really made an attempt at really integrating the wealth management business with our banking business. So it's not siloed. And particularly, if you think about loan and deposit opportunities on the private banking side, that's been an important part, I think, of this early success we've had there. And I said organically, we're growing in the kind of mid-plus single-digit rate in that business. I'd like to see even go faster. I think there's opportunities to go faster because of our operating model, I think we can provide a level of personalized service for both retail brokers to have accounts all the way to high net worth. We recently created a new high net worth division called 1834, which is -- happens to be the year we were actually founded, there's life tie into our 190 years here of being around. But we've had some great success early on in attracting some high net worth. We build out robust financial planning capabilities in that business. And that's, I think, allowed us to grow assets. We're just taking a little bit more hands-on relationship and management approach than historically we've taken. And I think it's separating ourselves from some of our peers as well. John, do you want to comment on maybe a couple of other fee income businesses?

I think we touched on treasury management a little bit. That's clearly an area of investment for us. And then the other one, capital markets has been a small, but I think a good grower for us. Most of that business is customer swap related, so -- and a little bit of FX and then obviously, the other fee line for us that can be meaningful is mortgage a couple of years back, that was a $40 million line of business for us.

We're kind of roughly half of that right now, so that could be meaningful upside for us.

On the mortgage side, where you see rates having to go to really spur that demand? that'd be one of the questions we asked the audience earlier on, but...

Yes, No I think today, our posted rates around 6% for a 30-year and 5 5/8% for 15 years. So I don't think we're that far from -- these are places that hopefully make long-term sense for people. And then if rates do get materially better from here, there's opportunities to refinance. I think some of the biggest constraints continue to be availability, housing stock. I mean that's across the country, right, continue to be probably the biggest challenge we have into getting more people into homes, especially affordable homes, is our ability to do that. We've created special programs to make sure that we're doing our part to help with the affordability side, so I don't know if it's so much rate driven as it is, just general, and probably some confidence like we talked about on the commercial side, what's going to happen in the next 12 months? I think that will be important for us to see that uptick in that business.

You talked about -- when you look at some of these other fee income businesses, like you mentioned capital markets and cards integrating that with the rest of the business, what's needed to expand that? Do you have to make some more investments in technology? Is it really just culturally getting people to be selling the full products and services? And when could we see sort of an acceleration of growth in some of those lines?

Yes. I think part of it is selling the whole relationship. I think there's opportunity inside the bank to do that better. I think we're pretty good at it today, but I think we could always be better there. And in terms of investment, I think we've made some significant investment on the wealth side. There's probably a little bit of investment yet to go, in treasury management, some of the other things that we're talking about. But for a very long period of time, Old National Bank is sort of a 2% to 3% annual OpEx per year kind of increase. And so we try hard to self-fund those investments.

John made a great point. For our average small business, lower middle market client, we have all the product capabilities that we need and really don't need a lot of new technology. Where the new technology really comes into play? I think is now because we're a large organization, we have the opportunity to serve larger clients. And so some of the product suites that we need and some of the technology we need, it is not -- we don't see it having a meaningful impact on our noninterest expenses but it is an opportunity that will grow deposits and fee income along the way.

On the expense side, I think, John, you mentioned you've been seeing some good progress on the identified cost savings from CapStar, just in general, how -- have you been able to find more cost saves after you've done some of these deals? And how successful have you been in terms of really maximizing the opportunity on the expense side?

Yes. I think if you look at our track record, we kind of put out targets that we're going to achieve and kind of know that we're going to get them. Things could come in a little bit better from time to time, but I don't think that's going to be our experience in Nashville. We're focused on hanging on to talent down there.

On the cost savings side and just efficiency and client experience side, we've been really focused in on building out stronger, more scalable backroom to support the organization. That's been a critical part of our success. And I think that's where we really allow ourselves, whether it be the IT space, or the processing side, we've been able to kind of self-fund some of these improvements and really allowed us to keep expense growth in pretty reasonable check over the last handful of years and really keep our efficiency ratio despite what has been a challenging environment to keep our efficiency ratio in kind of that low 50s range. And hopefully, whether it be investments in wealth or investments in treasury management, we'll continue to find dollars to do that.

Yes, I was going to say, as you look at the expanded asset size and your growth plan, where do you think you need to make some incremental investments on the tech side? Or is it just building out that wealth in...

I think it's more product specific wealth and treasury management just to make sure that we have, we'll continue to invest in the infrastructure of the organization. As we get bigger, we'll continue to invest. But again, nothing from an outsized perspective, that's just not consistent with kind of normal growth, and so those will come, but it won't come -- our ideal environment is where we have that kind of 2%, 3% kind of year in, year out kind of cap on expense growth.

We have a couple of questions for the audience. Maybe we can shift over to those, let's see we'll get those up. So first question, I was asking the audience, what's your current position in Old National? Over rate, market rate, under rate, or not involved? A minutes, a few seconds here. So you have a couple owners and a couple of people that could be potential and someone on the short side, it feels like what we've seen so far over the last few days is a relatively large portion of people not yet invested. So it feels like we are seeing more people looking at the group, which is good. But 57% over rate. We can do it.

Thank you, thank you for those, and those of you not involved, we'll be happy to talk with you afterwards.

Alright the second question, how many basis points in the rate cuts do you need to see for commercial loan demand to be impacted by Fed action, 25, 50 basis points, 100 basis points or 150 or more basis points. Alright everybody with a 100 basis points, so it feels like a trend as well.

Good question is how long will it take you to go 100.

Yes, yes. And what's driving the time to go to a 100. Third question. Where will CD preliminary rates be by mid-2025, less than 4%? 4.5%? 4% to 4.5%? 4.5% to 5%? Or greater than 5%? Most people in the 4% to 4.5% range. It sounds like you may think that was on the higher end or right around there.

I think I probably have voted 1.

Alright and then our last question. Which would have the most impact on improving Old National's valuation? Above peer loan growth? Better relative margin performance? Stronger fee growth? Better expense control? Credit quality outperformance? More active share repurchase? Or an accretive bank acquisition? Let me see -- so we've seen it a lot, it's top line growth, better margin performance from that is with loan growth and fee income growth. Let's see if there's any questions in the audience, happy to pass the mic. No? Well, maybe you can speak a little bit about the margin and some of the trends you're seeing there as we look out over the next year and a year in our model, assuming 325 basis point rate cuts. I guess how do you feel about the dynamic, margin dynamic? And especially the loan yield dynamics with that type of a backdrop.

Yes, we feel really good about where we position the balance sheet. Roughly 18 months ago, we were pretty asset sensitive. We, by design, targeted the middle of this year to get to neutral. And we feel good about where we're positioned. Got there a quarter early, CapStar closing a quarter really helped us out a little bit. And when you go through the puts and takes here, I really do feel the asset side is going to -- we all know going to reprice pretty quickly, 53% of our book is floating. But that exception price book at 31% of total 38% of transaction, the CD repricing that we already talked about and then what we've done on the borrowing side of things, we really feel like we've positioned ourselves to have the liabilities dropping pretty much lockstep with assets. And so we feel good about where we are for this year, whether we get 1 cut or 3 cuts or 0 cuts, frankly. It's not going to be a big difference to NII dollars. Next year as we look out, I think it's all about our ability to continue to generate quality assets and a little bit of steepness in the curve would be beneficial for us.

If we saw a 50 basis point cut in September, would that give you a little more air cover to be more aggressive on the funding negotiations? Or would that send caution signs to clients?

I think 50 basis points could give us a little bit more air cover to be trapping rate a little bit quicker. Yes. I think 50 basis points, followed by another 50 basis points, maybe people start to say like what's going on? But 50 basis points in September would be okay.

And then with that backdrop, as you look at NII, sort of the longer over the trajectory through next year, do you feel like we're in a spot for strong growth coming off of maybe a [ 12.31 ] level with that rate backdrop?

I think a little bit of steepness in curve, fixed asset repricing as a tailwind. I think 2025 could set up pretty good.

We shift over to credit. Historically, you've run with a relatively high level of criticized loans, but haven't really seen much flow-through to charge-offs. Can you give a little discussion around your grading criteria, are you just a tougher grader and you're quicker to move things to criticized? Or how are you handling the migration, the credit migration to losses?

Great question. And that has absolutely been our history, where we've just been really tough graders. Quick to call any credit migration. And as a result, we recognize and there's a couple of us out there in the industry that run a little bit higher than our peer levels. And the analogy I use, which is kind of a crude analogy, is that we really want to get them to the hospital so they can walk out on their own 2 feet and get them cured. And so we believe that's the right philosophy for a bank like ourselves. It's also, I think, we've been more patient to allow the least cost resolution for both them and us. As levels increase here and as an industry, I think we're seeing increasing levels here. I think patience, we're probably a little bit more aggressive in terms of how we think about how much patience we give. But if the borrowers are working with us, we're working with them, we want to ensure the best possible resolution for everybody involved. But rest assured, we'll continue to have that discipline of staying on top of because we think ultimately, that's best served for our shareholders is to be aggressive in calling the grades accurately when there is credit duration.

As we've gone through this quarter and as you look at towards the end of the year, do you feel like you're going to have to have more accommodations for those credits? Or does the rate environment get a little bit of natural protection in that?

Certainly, anything that might happen in the rate environment would be helpful, I think, for borrowers, right? So that's a good thing. But we'll actively continue to work with our borrowers and make sure we have an active plan for all of those that fall in that bucket. And ultimately, we want to make sure that we manage those levels to the right spot.

How is the accuracy of your credit marks been on recent deals? And how much protection do you still have on balances that you've acquired?

Yes. So there's a $190 million discount against the acquired book. There's up 4% allowance against the PCD loans. So we think we've got plenty of cushion. And actually, one of the things that comes up sometimes is if you're just running screens on us, our reserve to loans looks kind of lighter versus peers at 108. But if you pro forma for the accounting noise, it's in the deals, we're actually closer to 161 basis points on that measure. But we feel really, really well reserved. Historically, those marks have been, I would say, pretty conservative and they tend to work out a little bit better than how we have them modeled when we close the deal.

Maybe on capital, you've continued to accrete capital after the deal, your capital ratios are certainly strong by any measure. How should we be thinking about capital management from here, what your targets for midterm and long-term required internal require capital levels are.

Let me start at the 20,000-foot level, and have John dive a little bit deeper. But from my perspective, I think the industry is still trying to figure out what are the right capital levels for this environment. And we've got a lot obviously a lot of talk about Basel III and what that means and how that might potentially impact banks like Old National. I think it's to be determined. You've got Moody's who has a view, what does Moody's think of and the rather rating dates do you think of the right capital levels for this environment? You have the regulatory view? So I mean, I think continuing to let capital grow in this environment is the right spot to be in, obviously helps tangible book value per share growth. And so that's the plan for the near term here until maybe things get sorted out. We're in no rush to do anything different than what we've been doing this last year.

Yes. And so CET1 at 11% feels behind left unchecked. We'll tack on about 100 basis points of that ratio every year. The other ratio that we're sensitive to it and sometimes we get picked on for it, but we're sensitive to TCE, and it wouldn't be a bad thing to let that grow a little bit at these levels. And after that, we'll kind of continue to think about other options on capital.

Do you think an 11% is a long-term or midterm need to stay there?

Well, I think we'll hit there by the end of the year.

We actually have a question, there's a microphone.

[indiscernible]

We were on review for downgrade, and we came off review.

You can't go [indiscernible] you came off with [indiscernible].

Unchanged with the rating. Good question.

Any other questions? Well, I think that's what I was hoping to accomplish. I really appreciate your time. I think if we can all join together and thank you for coming. That's great.

Thank you so much for the opportunity to be here.

Great. Thanks a lot.