Old National Bancorp (ONB) Earnings Call Transcript & Summary

Great. Thanks, everybody, for joining us this afternoon. We're happy to keep the mid track -- mid-cap bank track going with Old National. We're joined by Jim Ryan, Chairman and CEO. Old National is $70 billion based in Evansville, Indiana. So thanks very much for joining us.

Great. Thanks for the opportunity to be back again this year.

Yes. Maybe just to kick it off, a little bit of an update on how things are going and maybe a little bit of an overview.

Yes. Really, things are really consistent with what we've seen so far this year. We closed on our Bremer partnership on May 1. We're working feverishly towards the integration, which will happen here very soon in October. And that seems to be going better than expected. I feel really good about that partnership and really our ability to build scale and density in a place like Minnesota, which we care deeply about, adding North Dakota and a few other markets in Western Wisconsin. I feel really good about that. And overall, I think as we've seen some optimism come out in today's, I think, sessions, we feel a lot of that same optimism today.

Great. Just given all the news and the noise in the broader economy, how would you describe commercial customer sentiment here? And what's the outlook from the conversations with clients?

Yes. We just recently conducted our annual survey of commercial clients. And I think despite all the noise around tariffs, there was just an awful lot of optimism out there. And our clients are really finding ways to deal with whether it's through price increases or changing supply chains or just thinking about the business. They're accustomed to dealing with and overcoming these obstacles. And I feel like a vast majority of our clients are feeling more optimistic this year over last.

Do you think that's going to translate into better utilization as we move forward?

I think so. We saw a little uptick in the second quarter. There's some questions around was that inventory build and will that be repeatable in the back half of the year. But generally, I think our clients are still feeling really good, and things are staying relatively strong.

You referenced you recently closed on the acquisition of Bremer. Congratulations on the early approval. What's the early read on that now that it's in-house? And any areas that especially excite you compared to when you were first looking at it?

Yes. We always knew we were going to find really quality people in a quality organization. And I was just in Minnesota last week, I had the opportunity to travel with several leaders and the relationship managers and calling clients and visit with some team members. And again, every time I'm back in Minnesota or North Dakota, I just continue to get reaffirmed about the quality of the organization in terms of people. I mean we just have outstanding people. And what's really gratifying is they have deep, deep relationships in their communities, with their clients. That's still a place where those relationships, the community involvement matters. And so when you have a quality organization that was involved in its communities and supported it, both from volunteerism and philanthropy, that's our business model. And so community banking 101. And so we do that exceptionally well. Bremer was great at it, and we're just going to continue to build on that great success and drive deep relationships. So I'm just -- it's just more affirming every single time I'm there about the quality of the people and those relationships they're bringing to the table for us.

You've been referencing loan production and pipelines have been strong recently. That hasn't really translated into bottom line balance sheet growth or loan growth. What's been driving that? And what could change to lead to faster loan growth as we move forward?

Yes. I mean we have -- we always had strong pipelines, as you noted, and production was really good in the first half of the year. Where we saw maybe a little bit more pressure was on the paydowns. Some of those intentional just portfolio management, and some of it was unexpected. I think we're seeing, going forward, a little bit stronger. The production continues to be strong for us and maybe less paydowns. So a little bit more optimistic as we finish the second quarter and heading into this quarter just in terms of the overall growth profile. But again, I think that's the sentiment we're seeing repeated over and over by participants here today.

We have a few questions for the audience. Maybe we can run through those now, and that can be some of the conversation topics as well. So the first one, what's your current position in Old National shares today? One, overweight or long; two, market weight; three, underweight or short; or four, not involved is probably the better way to say it.

Are we going to tell the truth? Or are they trying to psych everybody out?

They'll tell us. There you go.

Thank you, by the way, everybody.

Current holders. Number two, which would have the largest impact on improving relative valuation of the shares of Old National? One, better margin performance; two, above peer loan growth; three, better expense control; four, credit quality outperformance; five, more active share repurchases; or six, an accretive bank acquisition. So loan growth coming out of the deal, almost half. I think that's the best path. What will organic loan growth be at Old National in 2026? One, 3% to 5%; two, 5% to 7%; three, 7% to 9%; or four, 9% plus? 5% to 7%, 90%. That seems where many of the mid-caps are today. Okay. And then four, in which market does it make the most sense for Old National to pursue higher market share through inorganic or organic investment? Indiana; Illinois; Minnesota; Tennessee; or other? So Tennessee. I guess there's maybe some opportunity there with some news in the market, but Indiana and Minnesota as well. Anything -- are you looking at that? Any markets that you feel have a competitive advantage from your standpoint?

Well, I'd say all of the above. And by the way, I agree with all the answers, all the questions and the answers that came back from the audience. I do think Tennessee presents some unique opportunities for us right now. There's obviously a certain noise that's out there right now, and there could be more noise in the future. We -- Tim Burke, our new President and COO, just joined us in the last 60 days, and I've asked him to prioritize finding new talent across our footprint, but especially there in Tennessee where we just feel like there's great opportunity and just the natural growth dynamics, right? It makes sense to invest more in talent. And then you add on top of that any disruption that might happen. It just feels like the right place to invest at the right time. And I think we're well positioned to do that. We've got a great team that's on the field already. But I do think -- one thing that limits us is we have a small set of distribution, particularly in the Nashville MSA. Our retail distribution is a little bit smaller than we'd like it to be and subscale. We probably need to continue to invest there, but continue to find great talent across Tennessee and potentially even broadly outside of Tennessee as we just pursue opportunities that might come our way in terms of talent acquisition. I think that makes a ton of sense for us. But having said that, Minnesota, Chicago and broadly across both Illinois and Minnesota and all of our markets make a ton of sense. We're finding great opportunities. Tim and I spent an awful lot of time at lunch today discussing the opportunities that we're seeing coming out of other regional banks, large national players who like our style of banking, who like how fast and nimble we can be with our client set. And we need to continue to double down on that opportunity to grow talent and take advantage of this.

Great. Second quarter earnings, you increased the outlook for net interest income and fee income. What's driving that increased confidence? And I guess, what could change to either support that or potentially put that higher guidance at risk?

Yes. Obviously, a bigger balance sheet is super helpful when it comes to our net interest margin guidance. We feel really good about where we're positioned. It's becoming increasingly clear that the Fed will do at least one or more cuts yet this year. As we have stated, we tried to get to the position where we were relatively neutral and short end of the curve and didn't have to wait too much for that. Obviously, the steepness of the curve always will matter for banks, and we're no exception to that. To the extent that it gets a little bit steeper, that could really benefit us. To the extent that rates fall a little bit faster, we could potentially -- we have some repricing that we can continue to do, not only within our own book, but also in the brokered CD book. We have about $7 billion of fixed rate between loans and investments that will reprice here. So to the extent that curve remains steep, that is a real opportunity to grow NIM here.

How is the deposit pricing dynamic -- or are the deposit pricing dynamics in the market, are you seeing the sort of beta expectations holding up? And what about customer preference over deposit mix shifts?

Yes. So I think things are very rational overall. We have been unapologetic aggressive when it comes to deposit growth. Tim and I have spent a lot of time in his first 60 days talking about how we're going to continue to ramp up our deposit growth by just holding ourselves more accountable, but we're not shy to take the opportunity to grow the deposit book. And sometimes that does come at slightly higher rates. We have a pretty good allocation to the municipal deposit base, and those can be seasonally in or out depending on what's going on, and they're very predictable. But that can also drive a little bit of our total deposit cost. But I would characterize it as very rational. We're obviously sensitive to what's going on in terms of the competitive dynamics. And we'll have to see what happens with these first couple of rate cuts, how aggressive [ is ] everybody be? But I think it's going to be rational and as expected.

Yes. You talked about the $7 billion of fixed rate asset repricing opportunity. What's sort of been going on with the CRE paydowns and payoff activity? Are you seeing the competitive landscape changing for exits there?

Yes. I think we saw a kind of reopening of that market. Everybody was -- there was many, many banks that got out of the real estate markets in the last couple of years, and then they all came back in, it feels like at the same time. I think we saw good flows in the capital markets, which we are suggesting is a good thing. It's a good thing for us, a good thing for the industry to have that velocity happening in the system. And I think that allows us to have really strong portfolio management. So those dynamics are as competitive as we've seen in the most recent handful of years, which -- but again, I would chalk that up to a good thing. It might hurt occasionally. You might have a few more paydowns than you might expect. But I think overall, that's a good thing for our industry. It's a good thing for Old National just to have a strong CRE kind of liquid market.

Yes. Does it change your appetite for adding new CRE here?

No. I would say, look, we believe in that asset class. We have pretty good -- we have a really great team that works in that business and fundamentally believe that, that's where lots of opportunities still exist for us. Having said that, as we've said before, we're incredibly focused in on the C&I market and our ability to be successful there and grow. Again, I think that's where I think about a lot of the talent acquisition will come in that C&I talent base. I think there'll be some great opportunities for us to grow there since we have such a strong CRE team today. But -- so we're not afraid of it. But having said that, I think I'd like to see C&I grow a little bit faster than we've been able to grow our CRE book.

Anything from the audience, any questions? Happy to expand the question. Shy group. I guess maybe talk a little bit about the expected path for expenses, especially after we see some of the cost savings coming out of the deal. Where do you see the need for some investments as you continue to grow from here? And how should we think about that in terms of overall expense growth?

Yes. I mean the great news is, as we said, post our Bremer partnership, we set aside a few of the cost savings dollars for future investment in ourselves, and we have a lot of flexibility in how we use that. I think the good news is, I think initially, we thought a lot of that investment dollars were going to be allocated towards just being a bigger bank and so building out infrastructure that's not necessarily accretive to revenue and maybe more back-office oriented or support oriented. I think the good news is we're having more flexibility in those conversations. It feels like the regulatory environment is more conducive to pushing any kind of dollar thresholds higher in terms of what a large financial institution means. We haven't seen any actual results out of that yet, but it just feels generally broadly and more conducive to maybe spending a few less dollars on that and maybe a few more dollars on revenue and growth initiatives. And so today, we're sitting around a 50% efficiency ratio. We think that's pretty good for a bank our size. But at the same time, I don't feel like we're underinvesting in the area. If we're going to go off and spend money outside of what we've already kind of promised to Wall Street, I do think it's going to be in the talent acquisition area. Again, almost my entire conversation with our new President over lunch today was about growing the workforce and finding ways to continue to add to that. So I don't anticipate any big changes coming out of that, other than that will be a place we'll continue to spend money. I think we've got the right plans and initiatives in place. And a lot of that self-funding is just our technology investments are all over. We'll continue to roll those dollars into new products. We met with our core service provider this morning, talked a little bit about their initiatives and their plans and how they can continue to support our growth and feel really good about that. And John is really good. We're getting ahead into the budget season here. We always start with a mindset of positive operating leverage. So now that's incumbent upon Tim to drive the top line. John is going to watch the bottom line, and we're going to come together and drive positive operating leverage every single year. And quite frankly, the tailwind that will come off our partnership helps us so much -- so tremendously that it makes our jobs a little bit easier in a year like this where we have just that significant tailwind. And again, I don't think we're that unique in terms of our core business, but we are unique in having the benefit of this bigger balance sheet and to take advantage of the mark-to-market on the Bremer assets.

We spend a little bit of time on the credit side, how you're looking out over the next 12 months just in terms of the trajectory of credit migration and your thoughts with the provisioning level or reserve level here and where that could go?

Yes. I think we have said we're kind of in this new normal for Old National. Legacy Old National was arguably underlevered and probably didn't take as much risk as we could have to drive higher returns. And so we kind of feel like we're in this range now where it's the new normal for Old National. So I think what you saw in the first half of the year will continue to shine in the back half of the year and as we look out to '26. So -- and for us, that's a little bit higher than where we historically have been, but I think it's the right level for us today. As we look out, we've been, I think, aggressive in identifying any demonstrated weakness and putting it into the right buckets. Now the good news is we put it in the right buckets, we're not feeling like, boy, we have material loss content here. We feel like we've got appropriately graded. We're watching and monitoring closely. We're actively working with those borrowers for plans to remediate any deficiency. And a lot of this, they got caught up in the higher level of interest rates and how it hurt their cash flows. But we feel really good about where -- if it's a real estate property, where they own the property at. And I think we've got a lot of expertise still on our side, both on the credit and workout side. So I think we're in a really good spot. And just I would call it a more normal year for the back half of the year and the same for '26.

Capital is still strong after the close, especially with the lower-than-expected purchase accounting accretion marks. What are your thoughts on optimal capital ratios today? And how should we think about the path of capital management going forward?

Well, because of our very high earnings, if you look at our, I think, on the maybe median to slightly lower than median payout ratios and our very high capital generation, capital is going to come back to us quicker than we thought. We closed the deal and realized that we ended up with better capital ratios than we thought we're going to have. So John and I are in active discussions around what that capital return looks like. Obviously, it's going to be organic growth first always. And then we're looking at our capital projections. We're weighing that against what are the capital markets and ratings agencies needs relative to return of capital. But I do think, as we indicated earlier, I think there's an opportunity. We have a program in place today. And I do feel like we're cheap on an earnings basis. I do think there's an opportunity for us to think about when is the appropriate time to turn back on the buyback. And we're getting closer to every single day that we click along on the capital side. So we feel really good about that trajectory.

What about additional deals from here? You were able to get a good deal with Bremer. You closed it quickly. As you just said, a lot of capital. You have some regulatory tailwinds. Is that still an active part of the planning?

Well, it's interesting. So we -- obviously, there was an announcement today, and it was a little bit of an eye-popping multiple. They're all paying attention to that. I think we're going to look back and just know that those earliest deals were the best deals you could do. And so for us, I'm glad we did the deal when we did. We're in a position where we don't need to do anything, right? We could just focus on being the best bank we can be, the most profitable bank we can be, continue to work on the organic growth side, continue to hire great talent, continue to make the investments of just being a better bank, being an efficient bank. I think that's job #1 for sure. We're going to look at this capital return and make sure we have the right payout relative to our growth of capital. And I think thirdly, then we'll think about what a next partnership might look like. But again, we're not -- there's no markets we've identified where we absolutely have to be bigger in. And we feel really good about where the financial metrics are. So we're in the enviable position that we can be -- we can look a lot, but we don't have to pull the trigger. And again, if deal values are going to head to where the deal print we saw today happens, there's -- this is a good time to be on the sidelines, kind of watching it all happen, happen around us. I would be remiss if I didn't just remind the audience, we talked a little bit about the cost savings and efficiency that we'll really feel the full effect of the efficiencies and all the cost savings from our Bremer partnership starting in the first quarter of next year. That's when we'll realize 100% of that. The conversion happens pretty late into the fourth quarter and plus there's always kind of a trailing 30 days that we run out some of the staffing needs and get all the rest of the cost savings out. So really, the first quarter is when you'll see the full impact of the cost savings and the efficiencies we'll drive out of this partnership.

Great. Check again to see if there's any questions in the audience? Yes? Pam. All right. [ Want to take ] her to the microphone.

So I've just been hearing a lot about kind of large banks getting a lot more aggressive, especially on the loan side, and that's been impacting spreads. I think you've made some comments about that on the earnings call. So I would love to hear just how that has evolved. So maybe that's the first question. The second question: I'm curious on your thoughts about some of these super regionals coming quite downstream on the M&A side. Like I think the targets we've seen with [ HVN ] and PNC have been more targets I would have thought for a bank kind of more on your side. So how that changes your thoughts on just, I guess, the competitive landscape for both loan deals and also kind of M&A deals?

Sure. Let me start with the M&A since it's kind of the hot topic of the day. I think we are surprised a little bit about -- but I think you fish where the fish are. And I think that's what you're seeing right now is a reflection of what's available versus what they'd maybe like to do. And I think it also helps them sharpen their skills up a little bit if they haven't done a transaction in a while. So I don't think there's -- that's surprising. But in terms of impact, right, I think the deal said it was around 5% of total assets. I mean, it seems relatively small. But again, I think it's an important market for them. And so I'm sure they thought that was the right play. It's hard to tell on the competitive environment. It's always competitive. I mean I just -- I don't -- there's never a time where it's not competitive. I mean, I guess we've seen when some of the regionals, the super regionals went on risk-weighted asset diets, there was a little bit of a slowdown in some of the competitive environment and some of the big banks just dropped some asset classes altogether like real estate and other places like that. So -- but everybody is back in, but it's -- we're used to dealing with that. Despite the number of banks we see, for example, in Chicago, at the end of the day, it only comes down to a handful that we're really competing with. And it comes down to having great relationships. And where we have great relationships, we can win. And we're still seeing nice positive spreads. I think we're around 110 basis points on new deals versus -- on the fixed rate side. So when we reprice the book, it's about 110 basis points. Interesting enough on both the fixed income securities portfolio, but also on the loan book. So that's a nice little pickup in spread as we reprice that $7 billion towards NIM. I don't know, Pam, did I get all your question or you can drill me later.

Anyone else? Great. Well, thank you very much. Appreciate the...

Thanks for the opportunity to be here, Jared. Really appreciate it. Look forward to talking with everybody over the next couple of days.

Great. Thanks.