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 states: seven states across the Midwest. Here from the company, we have CEO James Ryan, presenting.
Thank you. Thanks for the opportunity to be here today.
Oh, sure. No problem, James. All right, why don't we get started kind of up at straight from the top? You know, 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? You know, 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 turn 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.
Mm-hmm.
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. You know, we're about approximately $50 billion in total assets, and kind of old-fashioned, basic banking, where we take deposits in our footprint and turn around and lend them out. We have some nice fee income businesses in our treasury management and wealth businesses, and obviously mortgage and, you know, when mortgage is good. But yeah, I mean, just an old-fashioned, basic bank. You know, 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 key CIBs and national banks in our footprint.
But we compete very effectively across that. 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-
Mm-hmm.
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, 2.5 years ago. Tell us about how that merger's going now that you're on the other side?
Absolutely. You know, 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, you know, our board is net stronger as a result of the merger. Our management team is net stronger as a result of the merger. Our balance sheet, our financial performance is net stronger as a result of the merger. And really it, while we have had a long history, this was something that we really haven't done this transformational in the past. So it was an all hands-on deck effort, to you know, 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 market 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. You know, we had a pro-growth attitude about that. We tried to take 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.
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. You know, 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 the cultural integration. Even before legal close, you know, 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.
I think that allowed us to go in once we legally closed, to really get off to a strong start, you know, with all of our newest team members, and really allowed us to continue that kind of path towards growth, getting the cost savings, you know, executing on the integration activities. So, again, we're really proud of our accomplishments, and I think the performance really speaks as a, as a great proof point for the efforts of all of our team.
Sure. Maybe, so kind of talk about some recent events. Kind of early in the springtime, the mini banking crisis really kind of roiled the large cap bank sector. How did the March bank failures impact your business? And how have deposit trends been since then? How have you managed to keep such a low deposit beta?
You know, great, great question. You know, the reality 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 was a lot of conversations going on. I personally only had a handful of conversations, you know, during the most stressful of that, which I think is a pretty good barometer for how our clients were feeling. And I think the good news is, our clients, because of our long history with them, you know, being around for 189 years, and even the organizations that we've acquired throughout the years or partnered with, really had those deep relationships as well. So it really allowed us to navigate, you know, which were pretty tumultuous times, pretty successfully.
In fact, you know, we've obviously grown deposits year to date. And I really stacked that up well against, you know, almost any other organization out there in our space. And you know what? I think it also starts with the fact that we have an incredibly granular loan base that comes with an incredibly granular deposit base.
Mm-hmm.
You know, 80%+ of our accounts are 5 years and older, you know, with an average balance of $25,000 and less. So really, you know, on average, relatively small balances. Again, this is old-fashioned, you know, community banking here, that really allows us, I think, to be thought of a little bit differently than maybe some of the largest, you know, peers or largest banks in the country. And so it really kind of business as usual. And I would say those kind of trends, you know, we're able to obviously update everybody in the second quarter. You know, trends continue to be, you know, the same from the last time we reported.
Nice. You know, I think that makes a nice segue into credit quality. As a bank with historically strong asset quality, what are you seeing in your markets from a credit perspective? Any markets or asset classes specifically that are showing any signs of weakness? Have you been changing any of your credit and underwriting criteria?
Like everybody else, we are taking a deep dive through the portfolios, you know, looking for any signs of weakness. So far, I think, like the industry, we're really seeing no systemic weakness. You know, Old National has always prided itself on having a relatively low charge-off history. And we spend an awful lot of time, you know, getting 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 we think about office, but our office exposure tends to be relatively de minimis in total.
You know, there are other sectors that are on everybody's radar, like multifamily. We're really good on the multifamily products that just given the high demand and where our properties are primarily suburban, you know, type multifamily product. So right now, you know, knock on wood, we're really not seeing any systemic weakness and feel, you know, generally really good about, you know, where we're heading in the back half of the year.
Okay, great. Give me another question. How would you feel about M&A now, given the current environment? Is it possible to get a deal completed? Would you be interested in any new geographies beyond the Midwest?
Yeah. So that's a great question. I do think, you know, M&A is going to take some time to come back to more robust sets of announcements. Obviously, there's a couple things maybe standing in the way. I think everybody's thinking about their own balance sheet and their own liquidity positions. We're in a pretty strong position here, but there's some roadblocks there, right? The balance sheet marks, which will take some time to get to the point where everybody can stomach, you know, what those are going to apply and earn back appreciation with them. I feel good about our regulatory relationships and our ability to continue to look at partners.
But at the same time, you know, if you look at our ability to grow our tangible book value per share, you know, given our kind of top decile return on average tangible common equity and our average dividend payout ratio, we have a really strong, you know, growth, expected growth around our tangible book value per share. And so it has to be a relatively high hurdle for us, to consider, you know, looking at a deal today to interrupt that projected growth line. But I think it's possible, and I think for the right opportunity, you know, we would be interested. You know, and I think that opportunity looks like something that has a—that looks like us.
It has a really strong deposit franchise, has good, solid credit quality, and has a strong, 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, you know, have balance sheet marks which are reasonable and allow the transaction economics to make sense.
Mm-hmm. You know, during the conference, a lot of the recent Basel III Endgame proposal has kind of made a lot of interest. Now, now, does the additional regulation of the $100 billion threshold change your mind at M&A?
I think the interesting spot for a bank like Old National is $50 billion. You know, 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 our size today, and I think it's a real advantage, you know, as we head, and we got plenty of growth, you know, path forward until we reach $100 billion. It's something we have to keep an eye on, and I do think that, you know, over time, as an industry, you know, we will definitely hold higher capital, more liquidity.
We'll probably have some higher investments in people, you know, 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.
All right, great. You know, 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? You know, what lines of businesses or markets are driving that growth?
Yes, we've had really strong loan growth in the first half of the year. And what we've said is, you know, mid to high single digits for the full year, which probably implies a slightly, you know, lower back half of the year. And it's really been broad-based. The interesting thing is, you know, last year we did about $9 billion in new commercial loan production, about a $2 million average loan size. We continue that into this year, in a couple different ways. I mean, we continue to have, you know, relatively low share in very dynamic markets. I think about markets like Chicago and Minneapolis, Milwaukee, Indianapolis, Louisville, 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 regionals and some of the national banks that have joined our team. And that new talent is really driving great growth opportunities for us. And what's also interesting, and there's been a little bit of buzz at the conference here, about how, you know, some of the banks maybe are on a 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 growth because they just kind of look out a little bit farther forward, for us. So I'm excited about that. You know, that continued, you know, granular approach.
You know, we are best at this space when working with owner-operators. You know, those small and medium-sized businesses are really where we excel at. And again, as we think about who we're all competing with, it doesn't take the best technology, right? You have to be competitive in that space, but yet oftentimes those relationships are based on people, right? And those people are the most important part of the buying decision, and that's where we continue to excel. So I'm long-term bullish on our ability to continue to have, you know, peer or above peer growth, just based 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 in 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. You know, I think about Nashville, really two different approaches. You know, Nashville was an opportunity that we actually led by hiring our wealth management team that came out of a super regional bank. And that team joined us and were off to great success. And one of the reasons, you know, 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'd hoped, you know, with their previous institution. So it really allowed us to be able to sell and bring the full bank, you know, to their client set. So when they came on board...
In fact, you know, it was interesting. We were servicing, you know, we didn't have a commercial team in place to help our wealth management team there. And really, we were trying to service them out of some adjacent markets. And really because of their need to continue to have, you know, greater access, really forced our hand to make sure we found a great team to bring alongside them. And so they've been off to great success. It's really a complement to the wealth management business. You know, the Detroit market was a little bit different, where we had been in and around Michigan for, you know, probably 10 years now or so.
And it was really complementing, you know, what we already built in Michigan, but we had really not gone as far as being in kind of the Metro Detroit area. And so really building on that and hired some just great, great folks there, opened an office there. In fact, we had a reception in Detroit not too long ago, and I was absolutely amazed at, you know, we had 100+ clients show up for this event. I was absolutely amazed at their enthusiasm, their interest, and their kind of, you know, 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 we look like today, right? And so we saw that opportunity for us to be successful.
We've got a large client event coming up here in Nashville in a couple of weeks, and I'm excited about that. But interestingly enough, you know, we've had the same experience when we've gone to St. Louis, and we've gone to Kansas City and had these types of client events. We get that same kind of feedback, you know, because we're that kind of old-fashioned, basic bank, right? And they kind of get their heads around that. And 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 have some of the best people that are in the marketplace serving each one of those communities.
I think it's really allowed us to excel and be more successful, despite being, you know, relatively new names in some of these places.
Great. In addition to, like, the traditional banking business, you've also been investing in and expanding the wealth business, specifically in 1834. Can you tell us a little 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 the wealth management business. We've done a really good job of investing in talent in that space to augment our existing wealth management business. Historically, we serve relatively, you know, modest-size 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, you know, clients from, you know, 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. You know, it's, it's interesting, that business is a slightly higher efficiency ratio business than our traditional banking business is. And those, those returns take a little bit longer to come. But we've made substantial investments in the people and the 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 tell our ability, how we plan to service, really leading with financial planning, versus leading with maybe asset management, we have great success.
I think, you know, 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, you know, we tend to lead with team members. We tend to bring all of the right resources and surround individual clients with a team of resources around them. We're where, quite frankly, some of our peers, some of our biggest banks in the space just don't do it that way anymore, and I think that allows us to drive even maybe greater success than we hope for.
Okay, great. Maybe moving on to expenses. Old National has made significant headway in reducing its 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 in on the last 10 years. We will continue to do so going forward. You know, we got in this pretty enviable spot of having a sub of 50% efficiency ratio, like I said. It's something that we're going to continue to walk and work on. We've spent an awful lot of time here recently building out an automation team, and with the hope that we can continue to build automation into our processes. It does two things, right? It reduces our cost to process, but it also improves the client experience.
I really believe that the next evolution for Old National is spending time in this automation space, ultimately driving what it, what it takes to invest in our business. I think it'll allow us to give us, you know, building out stronger processes, adding more technology to that. I think will really help us, you know, to the extent that there are going to be margin headwinds in our industry going forward, you know, just with where we're at with the Fed cycle here. I think this will help us offset, you know, any kind of challenges and revenue headwinds that we'll be facing.
I'm excited about that, but I'm as excited about the client experience opportunities to improve those client experiences as I am, you know, continuing to have a you know, kind of top quartile efficiency ratio.
Great. Maybe I just have one last-
Sure.
Question. You mentioned earlier, you know, kind of the importance and focus on tangible common equity. Maybe you could just kind of give us your capital priority and strategies for that.
Yeah, great question. Obviously, first and foremost, we want to make sure we have enough, you know, tangible common equity to invest in our organic growth. Again, I believe we're going to see an opportunity to continue to grow at or above where our peers are growing. We want to make sure we have enough for that. Secondly, I think, you know, we think about opportunities for capital, you know, deployment back to our shareholders, right? What do those opportunities look like? And then lastly, I think we're going to think about, you know, those inorganic growth opportunities like M&A. Our conversations with our board are really focused on how do we continue to create shareholder value? How do we continue to drive, you know, shareholder interest in us?
I think having that consistent quality growth and tangible value per share, and again, given our leading, you know, return on average tangible common equity profile and our average dividend payout ratio, that line should lead our peers, you know, as we look into the future. 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 so we'll just end it there.
Sure.
Everyone, please join me in thanking Jim for his presentation.
Appreciate the opportunity to be here today. Thank you very much.