That session is with Old National, Jim Ryan and John Moran here. Both old friends. Covered you a long time, and just happy you guys are here. Your bank has changed a lot, since I started covering the company, but maybe for the benefit of everyone in the room, give us, Jim, an overview of Old National and company description.
Well, John, thank you for the opportunity, and thank you to RBC for allowing us to be here. We got a great lineup today and happy to do this, this chat. Old National just turned 190 years old in November, and I get an email of, I think it's Axios that sends emails out in the morning, and today's email about Chicago. Chicago turns 188 years old today. Old National's two years older than Chicago. I thought that was an interesting fun fact for the day. Started in Southern Indiana. You know, today we're just north of $50 billion in assets. Pro forma for our Bremer transaction, which I'm sure John will talk a little bit about today, will be 70, you know, plus billion dollars. You know, honestly, I joke around a little bit. We started in Indiana.
Our building, our headquarters spot is in the exact same spot it is. Started in 1834. Really our banking business is not that fundamentally different than when we got started, really. You know, we're helping clients in our communities. You know, we're the pillar, the strength of many of our communities revolves around, you know, the business community, and Old National's a big important part of that. So we've been able to take that model and kind of replicate it, you know. First it started in Southern Indiana, and then it moved to Western Kentucky and Southern Illinois, and then slowly and gradually kind of moved north, you know, up into Central Indiana, Northern Indiana, and then across the Midwest. Today we find our biggest market is the Chicagoland area.
Our second biggest market is John's hometown of the Twin Cities, which has been a fantastic, you know, market for us. And in fact, we liked it so much, you know, we found our next partnership there, with Bremer Bank, you know, which brings a lot greater scale and density to us in the Twin Cities, but also adds some really nice markets across Minnesota, South west Wisconsin, and North Dakota, which John, I don't think you had that on your bingo card that we'd be in North Dakota this year. Old National, old-fashioned basic bank. We talk about this. We do banking the hard way. There's nothing particularly glamorous about what we do. It's just bread and butter, blocking and tackling, whatever analogy you wanna use banking.
Wake up every single day, think about how do we get a little bit better and how we serve our clients, how we support our communities, and how we help each other out. I always say if 4,000 of us do that every single day, you know, really good things are gonna happen. You know, this strategy, you know, it's again, John's seen it from maybe the messy days to now where I have some pretty good, nice tailwind behind us here has allowed us to produce nice organic growth, has allowed us to produce, you know, top quartile profitability ratios, and really put us in a position to kind of remain on the offense.
Being clean and kind of disciplined about this, you know, whether it was, during COVID, you know, we remained on the offense both in terms of hiring people and growing our client base. The liquidity crisis of 2023 that we don't really wanna talk about, right? We remained on the offense, right? Not only did we go out and make new loans, we grew deposits during a really difficult environment. And I think that basic banking model, you know, people always say, well, what's special? What's unique about you? It's like, well, what's unique about us is we do it the old-fashioned way, you know? And that's sometimes in today's world always isn't what people wanna hear, but that's what that consistency and that ability to be successful despite tough times, whether it's interest rates, liquidity, credit, you know, we're gonna do better than most.
We've been able to do that for 190 years in total.
Okay. All of these sessions are open for Q& A. So if anyone has questions, just put up your hand and we'll get you a microphone. Jim, that was pretty upbeat. As we were saying earlier, the stocks are down big, and I think people are, you know, everybody that I talk to is thinking about the economy and tariffs and just all of the turmoil is what it feels like. How are you feeling about the economy in general and your markets and any kind of impact you're hearing from clients that might slow things down?
Yeah. So, you know, it's funny, we laughed a little bit this morning. I don't feel any different this morning than I did last night. I don't know what to say other than we're not seeing great client impacts today. We're combing through the portfolios. We're looking for, you know, where we might see, you know, any challenges ahead of us. I'm of the belief that, you know, we're gonna sort through how these tariffs are gonna potentially impact us in a relatively short period of time. And then I think we're gonna get back to business as usual. We have all this tariff discussion. I would say, you know, there's some clients that are continuing to do the projects they need to do, continue to grow and expand, and they haven't stopped.
And then there's some subset of clients that are kind of like, whoa, let me pause. Let me assess the environment. Let me see, you know, how I need to react. But I think businesses are generally, you know, whether it was COVID, you know, maybe the greatest example, they find a way, they figure out a way to get it done. If you think the types of businesses we have, which are those small and medium-sized businesses in the Midwest, they figure out a way to get it done. And whether it's through higher prices temporarily or maybe they've changed supplier networks. I think our businesses in the Midwest are gonna figure out how to navigate this. And I don't see it as a down, whatever banks are down today.
I don't see that impact today. But again, you know, I tend to be optimistic by nature, but I think our businesses will figure it out.
Economy in general feels okay to you?
Economy’s good. Economy’s good. You know, I think when obviously going through the cycle last year, the election cycle last year gave everybody a little bit of pause to figure out what was gonna look like, and there was a lot of, you know, business, you know, interest, you know, post-election. I think that was probably, you know, probably a little bit too excessive, to be honest with you. I think it was still, we’re growing at a moderate pace, and our clients still feel really good about it.
Okay. John, maybe bring you into this a little bit. You've been in the sell-side chair, you, and you've got a lot of other experience too, but talk about your loan growth guide and, and as a CFO, how you think about lower end versus higher end of the loan growth guide and, and maybe handicap for us.
Yeah. Still seeing nothing today that would shake us off of the four to 6% for the year that we put out there. Pipelines have grown nicely. Fourth quarter, as you know, was impacted a little bit by some elevated pay downs and line utilization that ticked down a touch for us. Other competitors of ours have been seeing that kind of stuff earlier in the year last year. We saw it in fourth quarter. So far in first quarter, that feels pretty normal, or normalized levels, so probably not the headwind that it was in the fourth quarter for us. I think it'll build as we go through the year, so 1Q will probably be a little bit softer, but 4%-6% for the year still feels really achievable.
I think if we can get past some of this tariff noise and things kind of calm down, it could be toward the higher end of that range. And I think if things stay a little bit more muted, it'd be the lower end of that range. But I think today, John, we've put together a platform that is capable of putting up sort of GDP plus growth year in, year out, no matter what. And we don't have to go. Jim says this really well. We don't have to go out and hit triples and home runs in every single one of our markets to do that. All we gotta do is go out and play a little bit of small ball and things will take care of itself.
You know, I'll also add, you know, we have a unique opportunity here where we had modeled up selling up to $2.4 billion out of the Bremer Commercial Real Estate book at, you know, around close. And so, our capital projections came in in the quarter a little bit stronger. The core, you know, for the Bremer franchise is a little bit stronger. Rates have kind of helped us a little bit here from where we originally marked this. W e actually have some flexibility around how much of that we ultimately end up just selling. And I think that will allow us to kind of manage out, you know, kind of loan growth expectations for the year as well. W e have a little bit of built-in tailwind that maybe others don't have, to help kind of boost the year.
Okay. That's a good point. I wanna talk about Bremer in a second, but just kind of the sources of the loan growth. What do you think would be the key drivers of the growth for the year?
I think it's pretty broad-based, and it's across markets. C&I's been a little bit stronger than CRE here, of late, and that makes sense just given demand drivers in the CRE space. But again, you know, as rates, particularly in the belly of the curve have come down a little bit, it could get a little bit better on commercial real estate as well. So, pretty broad-based.
Seasonality-wise, first quarter is typically a little bit slower.
A little bit slower for us usually. Last year bucked that trend, but yeah, normally 1 Q a little bit slow, and then it builds throughout.
We feel good about the pipelines where they stand today and they're growing.
Yep. Okay. Good. Let's talk about Bremer a little bit. Just size Bremer and talk about the key financial assumptions around that before we dig in a little bit more.
Yeah. W e were not heroic in anything that we assumed in this M& A model. You know, so again, pro forma, $70 billion in assets. We expect that to come in in the middle of this year. So far everything's tracking well on the regulatory approval side of things. You know, but I think for modeling purposes, middle of the year is still the right way to think about that. You know, their 4Q came in a little bit better than what we had sitting in the model. It's only one month in January, but January looks pretty good for them too. So feel good about what we have in the M& A model. We floored their performance at 85 basis points of assets. I would suggest to you that that's fairly conservative.
I think we'll outperform that. Really good bones on that franchise, and we've been up there a lot interacting with their people and their clients, and everything feels, if anything, a little bit better than what we had assumed kind of going in.
Okay. Talk a little bit about how the deal came together.
Yeah. Obviously, you know, there's a lot to unpack in that question. You know, that was this is a franchise that is owned 86% by a trust. The trust was created by the original founder of the bank. There are three trustees. They had some disagreements over the last handful of years. And the good news is we were able to develop relationships with both sets of parties, both with the owners, who are the trustees, for the trust and Jeanne Crain , the CEO, who I admire just a tremendous amount. And for us, having those relationships really matter. We were able to demonstrate, you know, our commitment to community, which is very high, because of the nature of the ownership structure there.
I think in the philosophy the bank has had, there probably wasn't a bank that was like them, as much like them as any, anybody else. We were that very compatible organization. And obviously, you know, we didn't have deep insights into the competitive nature of the process. And there were banks that were interested. But again, I think I take this as, look, being prepared, being ready, being have a balance sheet that you can be offensively minded in nature, I think allowed us to ultimately be the winner there where either other people were distracted with either regulatory issues or balance sheet issues or deals on their own.
And so it was a great opportunity for us to really come along a very compatible organization in a market that we care deeply about and are passionate about and build scale and density in that market that we're deeply passionate about. And so it was really kind of a home run, you know, from that perspective. I mean, pricing set aside, you know, I think that this was a very meaningful deal that obviously continues to bring us scale. You know, we gave guidance, as you know, for the full year and just on that guidance alone, based on our margin projections, you know, I think we're running towards a sub 50% efficiency ratio, very high-teens profitability ratio.
But this kind of just complements all that and builds scale and density in a market that we care about. So all those numbers even get a little bit better, as you know. I mean, it was really kind of a, I would say, unicorn kind of opportunity for us.
Yeah. I think Anchor and Klein, you did Anchor and Klein, and some people were critical of pricing on that, but this folds in nicely.
Absolutely.
Yeah. Just accentuates it, so it feels like maybe you're feeling a little better about Bremer at this point.
Yeah. I mean, we felt really good going into the deal, but we spent an awful lot of time in the Twin Cities and places like St. Cloud. And I was in Fargo at the end of February and feel really good.
And February. Exactly. I know.
Yeah. And if you can go to Fargo in February and feel good, I mean, you can feel good anytime of the year. So it was, you know, we really the people. I've had a chance to meet with a number of clients. I'm going back here soon to do some more visits. I mean, you know, we feel really good about the team members and the client opportunities that are ahead of us. And really being embraced as an alternative, right? We know that Minnesota has, you know, historically, you know, two very large banks and Wells and U.S. Bank who have a big part of the share of that marketplace.
We are a great alternative to those two organizations and fit kind of nicely in the, you know, we have a $70 billion balance sheet, but we got a little bit more of a community bank type feel.
Okay. So a lot of questions on regulation. You seem to have bucked that trend. You've been able to get deals closed. You've been able to get them through quickly. Nashville was a quick approval process. What gave you the confidence to go ahead with something like that when others are kind of saying, let's just wait and see on M& A?
Yeah. I think that's that kind of mindset of just kind of always being in a position to have confidence that you've done the right things. You've made the right regulatory investments. You have the right regulatory relationships. We don't take it for granted that the relationships are always gonna be there, right? That's a part of working those relationships. Quite honestly, it's working those relationships with the folks that are in the room here, right? Them having the confidence that we can go off and execute. I think just like all of life, you know, I always tell our people in our company, individuals still matter. Relationships are incredibly important to how we win business, right?
Yes, we need to be competitive in technology and yes, we need to have good products, but ultimately our success really rides on the fact that we have some of the greatest people in our industry working for us and they develop amazing relationships with all of the stakeholders. And that's just our philosophy. I think that gives us the confidence that you know whether it's a big opportunity or small opportunity that comes along like Bremer, it's a little bit bigger that this was the right time at the right place.
Okay. Anything you'd like to see eased or changed from a regulatory point of view?
You know, I think like always, you know, we're always interested in consistency and application, and again, you know, I feel like it's very constructive today. We've always enjoyed excellent regulatory relationships, particularly with the OCC, who is our primary regulator, and, you know, obviously lots of changes going inside, you know, all of the agencies today, but I think just that consistency and approach and very constructive approach, which is, you know, I think under the previous Trump administration, what I would say that the tone was just constructive. All the same rules applied. It was just a constructive tone, and I think that's what we're, you know, that's where we're at today is just a really healthy and constructive tone. You still have all the regulations, you gotta comply.
But when you start with a healthy and constructive tone, I think makes the lives a little bit easier for all the parties involved.
Yep. Okay. A little bit on the margin, John. How do you kind of view the puts and takes around your current guidance and how do you think about the margin progression from here?
Yeah. W e feel really good about where we're positioned. We've, we've got the balance sheet about as neutral as it can be. So short rates don't really matter. We think that we've bottomed out here in 3 Q, 4 Q flattening, and then on a core basis, a little bit of, you know, sort of modest expansion in the, in the front half of this year. And then obviously we, we kind of reload with, with Bremer in the back half of this year. We'll see a good step up in, in net interest margin and NII dollars. But yeah, I feel, feel really good about where we're positioned.
You know, rates in the belly of the curve have been volatile, at times helpful, at times a little bit of a headwind, but fixed asset repricing is a factor for us in the next year, and belly of the curve matters.
Yeah. What's helpful and what is a headwind?
Some steepness. I mean, it's nice to be. I think we de-inverted there, late last year, and survived, I think the longest inversion in anybody's memory, right. It's tough to make money when you're a bank and you're fighting an inverted curve. I think de-inversion was good. A little bit of steepness in the curve from where we are here would be helpful for us.
It's a slide in our marketing book, John. It's buried in there, but yes. Talk about asset repricing and kind of the magnitude of the repricing and what you're seeing.
Yeah. W e've got quite a bit coming out of the securities book, about $1.5 billion between Princeton and principal Interest. That was about 180 basis point pickup at the end of last quarter when we set the guidance, and then likewise on the fixed asset repricing out of the loan book, we got another $3 billion -$3.5 billion of fixed assets coming back at us every year. Bremer's got good fixed asset repricing too. So that'll be helpful for the target as well.
Okay. And how about on the deposit side? What do you see in deposit pricing and competition in general?
Very rational. Very, very rational so far, and actually we're, we're very pleased with how the, how the deposit strategy has played, has played out. We, as you know, managed all of our up beta in the exception-priced book. The down beta on that book is running north of 90% from when we started to move it. The retention has actually been very pleasantly surprising. We, we fully expected to have to do a little bit of test and learn in that book on, on the way down, but so far retention rates have been running north of 90% there as well, so I, I would say if anything, the strategy on the way down here has, has outperformed our expectations by just a touch, and you know, we continue to work that book hard every day.
Okay. So it seems like a pretty favorable environment, margin outlook for you guys.
Yeah.
Okay. Okay. Good. Non-interest bearing, does it feel like it's bottomed and back to seasonality?
Yep. I think that's right. I think that's exactly right. We actually grew it in the third quarter of last year. It was flattish in the fourth quarter. And then I think we're gonna see seasonal trends this year. And overall it'll be growing in line with the core deposits.
Okay, and you mentioned the short end doesn't matter as much to you. You mentioned that a few minutes ago. What's a better rate environment for Old National? What's a more challenging rate environment for Old National?
I think if we could dream the dream and have the perfect curve, we might see just a little bit more relief on the short end, some steepness, a little additional steepness. I think that would be the perfect environment. You know, higher for longer, if it just kind of stays the way that it is, it may ultimately impact our ability to realize our down beta as quick as we would like. I still think we'll ultimately realize, you know, the same 40%-ish that we saw on the way up, we'll see on the way down, just might take us a little bit longer to get there.
Okay. So generally favorable, favorable net interest income outlook, maybe a little better from Bremer. Feel good about the pipelines, generally a positive message.
Correct.
Despite the noise.
Yeah.
Right.
Remain on the offense.
Okay. Fee income guidance, I would say, you know, it suggests modest growth, and then at Bremer contributions later. What's the confidence level in achieving these targets and maybe the key drivers of what you expect on fees?
High confidence. And within those lines, there's a couple that are growing better than others, right? I think one place that we've invested pretty heavily over the last couple of years, wealth management, we're starting to really see that bear fruit. And so our wealth business, I think, we've got high expectations and that's growing at a pretty good clip. The other place is, you know, treasury management, which for us is a pretty good business, and growing faster than fees overall, but I think has the potential to be a really good business. And we're, you know, we've got some additional investment teed up in that area. I look, I think our partner has a couple of good product capabilities in that space that we're gonna look to leverage as well.
I think that that could really accelerate for us.
I was gonna ask a little bit about that later, but $70 billion in assets. I think treasury management would be a more important piece of your business going forward. What, what do you need to do there? Do you feel behind at all?
You know, I would say that the platforms we've built today are really commensurate with the size of the organization we've been. But to your point, you know, we feel like there are some opportunities to add some additional services, and those additional services and products are really just more integration directly with our clients through our systems as opposed to reporting systems and, you know, payment systems. W e're actually out, you know, hiring a new CIO right now. We're interviewing some internal candidates, but we've also got some amazing external candidates who really can strengthen, you know, our knowledge here and really help us build what we think is, you know, kind of appropriate, you know, mid-market treasury management set of capabilities.
And now that we are bigger and we have that balance sheet, we've hired just an amazing amount of talent, both in the Twin Cities and Chicago and other places like Nashville. We've hired more middle market type talent. I think that will just augment, you know, a really strong team that we brought alongside that really deserves those products to be more successful.
Okay. And remind us on the wealth strategy. Pre-Bremer, we talked about it every quarter on the call in terms of what you were doing and the investments you were making. Has it succeeded, you know, to basically meet your expectations and what is the overall strategy?
Yeah. I mean, I think we've really transformed our wealth business, from being kind of a sleepy, somewhat sleepy fiduciary type business to more of a, you know, investment wealth, high net worth, type focused business. You know, we certainly have products that serve every single size and type of client. But what we've added is on that kind of higher end. We've got an institutional business. We've got this high net worth business through 1834, which is a separate brand we created. Our head of wealth management actually sits in the Twin Cities and joined us, you know, five years ago to help really transform that business. And what we've seen is really strong growth out of it. And as John said, well, we've seen great growth. I have even higher aspirations, you know, for that business.
And so to me, it's continued investment in people. I think we got much of the right products. We could trade it, you know, created some alternative platforms and some securities lending opportunities off that platform that I think will even augment growth even further. But we'll continue to add the right level of resources, you know, for that business to take the growth. Even so, you know, it'd be great to, you know, I always dream of having that like called out during the quarterly conference calls because it's growing so fast, right? And that's the type of expectations we have around that business.
Yep. You've done well there.
Yeah, and I think as some of those new teams mature and non-competes kind of burn off, you get some acceleration in that business, but it's been good. The other thing is, you know, we fished a couple of people out of Bremer's wealth business that are working at Old National today. W e're kind of bringing the band back together in Twin Cities with better product capability, and I think that could be really interesting up there over time.
Okay. Good. On expenses, we'll pivot to expenses, but talked about mid-single digit growth and expenses. As the CFO, you know, talk about maybe some of the pressure points and where you see some opportunities as well.
His CEO is the pressure point. He always wants to go out and invest and grow, and John brings me down to reality all the time.
It's funny when I was the strategy guy, I was like, let's dream the dream. Yes, yes, yes. And now I'm the CFO and I feel like I'm Dr. No. But, yeah, yeah. I think, look, every budget that we walk into as a guiding philosophy and kind of an operating principle, we're trying to generate positive operating leverage year in, year out, right? and I think that we've got a long history of growing our core expenses at a rate that's a little bit below what normal long-term inflation would look like, right? And the way that we're able to do that is we're getting a little bit better in the back of the house, a little bit better in the middle office. We're recycling those saves into technology and client-facing opportunities, right?
I think that's more of the same, right? So on a core basis, coming into this year, we're up very modestly on a core basis. And then if you kind of look at our run rate, add Bremer in and take away the 25% of the saves that we expect to be realizing by the end of this year, and you'd get to a number that [audio distortion] 2025, so we feel good about our operating expenses. We did, as I think you know, and probably most of the room knows, hold back a little bit on cost saves out of the Bremer transaction, so 30% is the number that we've got out there.
We think that that allows us to make a significant down payment on the kinds of investments that we need to make to be a larger bank operating at--
I'm just gonna ask that. I mean, as you think about your 70 and obviously some of your peers have said as you get to that level, you start being treated or maybe looked at as a category four bank. How much pressure is there?
I think the good news is the regulators understand, you know. [audio distortion] There's some tech talent because of all the Fortune 500 companies that are located there. There's really an opportunity to leverage that. And that's quickly become, you know, both a risk and tech hub for us, it right in the Twin Cities. W e're gonna be able to leverage those Bremer team members to really help with the required regulatory investments in order to be a bigger bank. And obviously we gotta have a way to kind of finance that through, you know, these net cost savings.
Okay. How long do you think you're on the sidelines from an M&A point of view?
You know, we said this before. We were really focused on growing tangible book value, you know, pre-Bremer. Bremer was just this unique opportunity that came along. We weren't looking for it. I would suggest that we're in that same box again. Like, our job is to execute on Bremer and make sure we drive all the value out of it we can possibly, you know, for our shareholders. So, you know, I think that means we're focusing on organic growth first. You know, we're gonna have a ton of capital coming back to us. If you just look at the projections based on, you know, some of the purchase accounting and, you know, hopefully we have enough organic growth to support that.
I think we need to look at potentially, you know, returns of capital, you know, to the extent that that exceeds just given our high profitability ratios that are likely to occur. I'm not eager or anxious to go off and I'm not actively looking for any opportunities. And I would rather, you know, be known as that very highly profitable, you know, organic growth machine that's growing and [audio distortion].
A couple minutes left if anybody has anything. Kevin.
[audio distortion] Revolutionized our business yet. We're definitely open to it all. I think ultimately for the banking industry, AI is ultimately gonna be these things that are completely embedded in all of our applications, right? And make all of our lives a little bit easier on the margin. I think the revenue idea is a really interesting idea. Can we use it to generate more revenue? Historically, we're thinking about being more efficient, more effective, and quicker in our decision-making capabilities. You know, I think there's a lot to be written about that. But I assure you we're keeping pace with the industry.
In the interest of time, I think we'll, we'll wrap it there. But guys, thanks for being here. Great message.
Thanks, John. Thanks to our team.