All right, good. Good afternoon, everybody. Thanks for sticking with us. We're pleased to have Old National Bancorp joining us next. Jim Ryan, the Chairman and CEO on stage, and John and Mike in the audience. Thanks a lot, everybody. Jim, I guess starting off, it's been a little over a year since Bremer closed. Looking back, what did you learn from that integration process and what worked particularly well, and how would you describe the focus of Old National today versus what it was when the merger first closed?
Great question. At the end of the day, we still believe this is a people business. As much as we want to focus in on technology and ways we support our clients digitally, where we think we are best is when there is a relationship involved, and that's a people-driven business. Paying attention during any kind of integration to the people is the most important thing we can do. My predecessor, Bob Jones, used to say, "People are the most important asset," and we fully embrace that. Culture. I was telling the last group, we were talking about being on the road, and last year I made 52 market visits during our Bremer integration.
Much of that was centered in on the legacy Bremer footprint, bringing our two teams together, out seeing in front of clients. Still spend a lot of time in Chicago. That's the most important thing we can do, I think, as CEOs, is to be a culture champion. When we do our engagement surveys, that's the feedback we get from our team members. They love our culture. My job is to be able to be there to support our team.
I still spend a lot of time, too. I think about we've been interviewing a lot of people lately, and I personally still spend time interviewing a lot of folks that want to join the organization, and that could be a relationship manager in an existing market, maybe a new market. It could be a leader we're trying to hire that's several layers down from myself, but I still spend a lot of time, and I'm not there to test them for their technical knowledge. I'm there to test them for the culture part.
Are they going to be additive to our culture? Are they going to make our organization even better? While that has been our focus historically, it continues to remain our focus. Despite investments in technology and the new AI world. I think for the longest time, I think honestly, as I think about, I know we'll get to kind of the AI questions here in a little bit, but that is the moat around our clients, is that relationship. As long as we have that, we have the ability and the right to win.
Yeah. As you grow, become a bigger, more diversified franchise, how resilient do you think that culture can be, and how big can you sort of bring that model? What's sort of the natural limit on that?
That's a really great question. We think about that an awful lot. As we become bigger, is there that tipping point, where necessarily so you have more layers and you have maybe a little more bureaucracy in your organization. I like to believe as long as I'm CEO, whether that's today at roughly $75 billion or tomorrow at some bigger size, that people focus and that culture focus won't change. It's who we are in our DNA. It's what makes a special and unique place to work. It's what attracts talent to us. I think we all have to guard against that.
I joke about hiring Tim Burke, who's our President and COO, a little over a year ago, and I made him come to Evansville six times, and I made his wife come twice. All eight of those times were interviews, including his wife. We want to make sure that we bring people to the organization who share our similar values, but also make our culture better. Tim was sitting in Cleveland. I think all things being equal, he would've rather stayed in Cleveland, but it was important for him to be at the headquarters so we could spend an awful lot of time together and focus on culture. I think those are the things we're going to continue to do in order to be successful.
Yeah. Shifting over to growth. Loan growth guidance was raised this quarter. What's giving you the confidence to raise that outlook, and what are you seeing so far in the third quarter that reinforces that view?
Yeah, I would just start with we still feel really good about the guidance we gave at the last quarterly earnings conference call. We started out believing the year was kind of a mid-single digit year. We believe that is the normal run rate for our business. If you think about GDP plus two to three points, we think that is the right place for us to run. We are going to grow as fast as the markets, then we are going to steal a little bit of share. We continue to steal a little bit of share away from everybody. The first half of the year ran a little bit faster than we would have anticipated.
I think that is chalk it up to, again, having great people in the right place at the right time to go off and execute. Pretty vibrant markets. We surprise ourself. We are still sitting at record pipelines when we ended the quarter. I know there is lots of questions around the macro environment today that we can talk about, but despite that, I think we feel really good in our guidance. Now, we did project out the back half of the year to be more normal-like. So more mid-single digit, but overall for the year, we would run ahead of where we originally anticipated when we were thinking about 2026 at the end of last year.
Yeah. You said commercial pipelines reached another record quarter this quarter. Beyond just the economy, what is driving the momentum on the commercial side?
Yeah. It is really interesting. We have had a generational succession in our commercial business. We had a number of senior-level officers retire in the last year. A natural planned succession that we had lots of insight into, including Mark Sander, who was the President and COO, who joined us out of the First Midwest partnership. So we were able to bring Tim Burke. He was able to think about what staff we needed as a $75+ billion organization. So we were able to promote a bunch of people internally. We also brought some fresh faces in.
One of the things that I asked Tim to think about, as we become a bigger organization, we need to make sure we have the systems and accountability in place to run a bigger geography, more people. So Tim has done that himself. He has brought in a leadership team that is capable of doing that has been there, done it before, coming out of some super regionals and some national organizations. I think that kind of fresh energy into our business.
I joke a little bit. You have more energy at the middle part of your career than you do at the end of your career. We had, again, a handful of retirements in our commercial business. We have replaced them all. We are stronger today. That is nothing to take away from the folks that retired. They are all amazing folks. They remain my dear friends. But we have this incredibly strong new leadership team in our commercial business, and I think they are doing a really good job of going out and hiring and attracting talent.
They are doing a really good job of ensuring that we bring the best of Old National to our existing clients and new clients. I think that is allowing us to go off and actually do better than we would have maybe anticipated at the start of the year. The economy is good. Obviously, there is some uncertainty around kind of that macro backdrop.
We have rates now, and we can talk about energy prices, and we could talk about trade uncertainty. But that has been there for the last couple of years, right? I think it is just we are executing better today than we had been. I give a lot of credit to our leadership team, but I give more credit to the team we brought in to continue to go off and be in front of our clients.
Great. Great. Competition remains intense across most of the industry. How would you characterize the competitive environment today on both the lending and deposit side? Where do you think you have the clearest advantage?
It is a great question. It is as competitive as it has been, both on the deposit and the lending side. Let us start with the deposit side. That gets a lot of talk track, right? What I would suggest is we really have not seen much change in the competitiveness. It was competitive two years ago. It was competitive three years ago. It remains competitive. I think that the difference may be kind of our expectations heading the year. We expected a couple of rate cuts. We expected at the end of last year, a couple rate cuts. We did not expect as much balance sheet growth coming out of that.
I think coupled with everybody thought maybe rates were going to be a little bit lower, maybe not as much balance sheet growth. I think those two things have really caused maybe a difference in what was perceived to be a different part of the cycle. Today, now we're talking about rate hikes. We're talking about strong balance sheet growth, which means every dollar matters on the deposit side. I would call it rational, and pretty much unchanged from what we've seen in the last few years.
We're out still competing for deposits. Our goal is to match fund our loan growth with strong low-cost core deposits. So far, we're able to do that and feel good about. None of that's changed from what we thought about at the end of last quarter and when we talked about earnings. The lending side. Again, I think that the spectrum we're playing, which is that small and medium-sized business, I think gives us a little bit of an advantage.
We have a lot of national and super regionals in our space, and they tend to focus in on a larger client than we typically are after. I think because of that, it doesn't mean that there aren't a plethora of smaller banks and some other like-sized banks in our marketplace, but we compete very effectively. We're after full relationships.
We're not trying to be the fourth or fifth bank on a large syndication. We're trying to have full relationships. Sometimes we partner up with each other, which is really great. We have like-sized banks that we partner up, and we go against some of the larger banks, but we're trying to earn those full relationships, even if that means giving up a point or two of growth. I'd much more have a full, deep relationship and less growth than otherwise a less profitable, just.
Yeah. Have you noticed any meaningful change in customer behavior due to the broader macro uncertainty around rates, tariffs or economic policy, or are commercial customers just continuing to move forward in this environment?
Yeah. I think this last round of higher for longer. The tariff story changes by the day, as we know. It's too early to tell with this last round. Is there a tipping point coming? We're not seeing it today. We're not feeling it today. I think our borrowers are getting used to. Our clients, excuse me, are getting used to the noise. They seem to be able to navigate through a lot of noise. To the extent that so far it really hasn't affected their businesses in dramatic ways to maybe want to change how they see the future. So I think for the rest.
This year is going to shape up to be a good year, I believe. Knock on wood. This year is going to be shaped to be a good year for our industry. I don't see-- This last little bit of news. We're so sensitive, every little bit of news in our business, right? I think everybody's always looking. Bank analysts are some of the most pessimistic people I've ever met and are always looking for the shoe to drop. You know who I'm talking about out in the audience and online here. I feel like our borrowers or our clients are accustomed to dealing with an ever-changing landscape, and they're really resilient.
A lot more optimism on the ground versus in the room.
Correct.
Yeah. I think one of the interesting things from the quarter was that your NII guidance remained constructive despite some near-term margin. About the path forward, how do fixed rate asset repricing, loan growth, deposit pricing and balance sheet opportunities work together to drive growth?
Yeah, I think that's the right perception. We were just heading into the room here. We were looking at that higher for longer, and we were looking at the reinvestment rates today are higher today. The fix-to-fix is stronger. We do have, I don't know, $8 billion of kind of fixed asset repricing. Yeah. Around that number. We feel like there's plenty of upside, just in terms of what that means for reinvestment opportunities both on the loans and the security side. Then we think about, naturally, our balance sheet is asset sensitive, and every day it gets a little bit more asset sensitive.
So, to the extent that we see one, two, three hikes here in our future, we think that means generally good things for our ability to continue to reprice. Most of our production, if you look at our commercial production, the front half of the year is variable rate. I mean, like 90% of our production's on the variable rate side, which has caused a little bit of consternation just from investors looking at coupons coming on. They're seeing the lower coupons. It's just because they're all coming out of variable rate.
Yeah.
We like that profile heading into probably this higher for longer and potentially a rate hike cycle.
I guess, what's the durability of that fixed rate asset repricing tailwind?
I think some of the original expectations we laid out there were like 100 basis points on the security side, 60 basis points on the loan side. I think that's all gotten better. If we look at the fix to fix, that's all gotten better since then. We think it holds up pretty well, just given where we've seen the five-year move pretty strongly in the last little bit here.
Yeah. This time last year, we were talking about lower rates. Now we're talking about higher rates. You talked about the front half of the year seeing good production on variable rate loans. How are you thinking about balance sheet changes and expectations going forward here now, in terms of where you want to be putting on product in terms of fix and float?
We really let our clients dictate in terms of what rate risk management they want to choose. Many of our clients that are doing these variable rate loans are utilizing our hedging services, and that's why we've seen really strong capital markets fees in the first half of the year. It really doesn't matter for us whether they want to do fixed or whether they want to do a floating rate.
Anything large size, we really want to keep that to the floating side, and then use the hedge to offset their risk. Then we'll manage any rate risk on the back end. For us, I think, again, just being naturally asset sensitive, I think this sets up well for this kind of environment. That's without any management actions. We have some strings we can pull. I think that even makes it better.
Yeah. Maybe shifting to the fee income side. Fee income has been one of the strongest parts of the quarter, and you raised full-year guidance. What gives you confidence that that momentum is sustainable rather than cyclical here?
Yeah. John wants to remind everybody in the room and everybody listening that the 2Q print was the print you should be using for your fee income going forward. That first quarter ran. I'm sorry, 1Q. He's correcting me real time here. It's 1Q. I stand corrected. Thanks for having our CFO and treasurer in the room. The 1Q is the right number. 2Q ran a little bit stronger. Capital markets was really nice throughout the entire year, and I think that just bodes well. When we have a strong commercial pipeline, strong commercial closings, we're going to run better in the capital markets fee income side.
Treasury management and Wealth Management continue to be a source of strength. We continue to invest both those businesses. Both those businesses are important to our future. We really love our mortgage business, but obviously with rates where they're at, it's just a softer expectation [audio distortion] business. That is [audio distortion] I've been really happy with the success we've seen in treasury management and wealth. Those are areas we want to continue to invest in and think about how do we need to continue to grow and expand.
John and Tim Burke and I were recently talking about ways we want to strengthen our fee income businesses. That's an area of focus for the next handful of years, is continue to drive higher percentage of our total revenue coming out of our fee businesses. Much of that will come out of the existing businesses and ways we can accelerate growth there. Then to the extent that it makes sense to augment those businesses. I'm not here to announce anything new today, just other than we know we need to drive higher fee income. That'll be a focus of ours going forward.
When you look at that future investment in fee income, is that getting a bigger wallet share from your existing customers, or is that an opportunity to expand the customer base? Leading with fee income and then maybe backfilling with-
Yeah, I think it's both. I think the good news is we see plenty of opportunity in our commercial book to cross-sell Wealth Management. It's shockingly low how much cross-sell we have there. Again, with the really quality people we have in place and the quality leadership, we think there's plenty of opportunity in that. We're trying to build out more sophisticated treasury management product set as we have increasingly opportunities with larger sized clients. So I think that's a real growth opportunity for us. The capital markets product set, there's probably one or two products we could add in there to kind of strengthen our capabilities there.
Again, as we have the opportunity increasingly to serve a more middle market client opportunity set. To the extent that there are other fee income businesses that we are not in today, I think we continue to explore what those look like and what makes sense to invest. Again, nothing to announce today other than this is an area that we know we need to concentrate on.
When you look at the expenses, the efficiency ratio continues to improve despite some of the investments you have been making. How should we think about balancing operating leverage with the opportunities that you just mentioned to make hires and bring in systems and products to expand the long-term revenue opportunity?
That is a great question. We start every budget cycle. We are in the middle of our current budget cycle for next year, and we start every budget cycle thinking that our expenses should grow no more than GDP, so call that low single digits, and drive revenue growth on top of that. So have that positive operating leverage contribution. For us, to the extent that we want to spend more money than that kind of low single digit, kind of natural inflationary growth, we have to find ways to fund it. That just becomes more efficient, more effective.
We do a really good job of being really disciplined. I know maybe every bank thinks they do the same good job, but I can tell you from just my firsthand experience, sometimes our CFO is not seen as the nice guy around the organization. Sometimes he is seen as the bad guy in the organization because he is holding the line. He holds the line with me on expenses. It is always a healthy tension between wanting to invest and grow in the business and the need to drive positive operating leverage, and I think we find the right tension there.
We have made no secret that we are really active in terms of bringing new people into the organization. We continue to do that. So we continue to find ways to invest in people. Both, I think in the client-facing side, which we have done a lot of here lately, but also in the support side, just becoming a bigger, more sophisticated organization.
So we are not short-changing that as well. We find ways to drive efficiency. Every single day, we are looking for ways to drive efficiency. I meet regularly with our Head of Operations about initiatives that he has underway to drive more efficiency and effectiveness. We just try to plow that back into the business so the next expense line doesn't need to grow any more than that mid-single digit.
A component of that spend, I'm sure, is going to be AI. How AI has become really a focus across, obviously, the industry and all industries. Where are you seeing any tangible use cases today inside the bank, and how do you think AI can help improve that productivity and efficiency and profitability over time?
Well, let's just start with, you have to wade through a lot of information coming at you about AI, and you're trying to figure out what's real, what's not real. We recently had somebody in the office, and we were going through a couple of pitches they had for us relative to new initiatives. In those pitches, there was one thing I was able to call out immediately. It didn't feel like there was going to be an opportunity to be a better bank or more efficient bank because of it. They had just implemented something similar at a larger organization, and I said, "Well, what savings did they drive?" They didn't drive any savings out of it.
Then we recently just completed a We're in the middle of a pilot phase where we were looking at something in our risk management area by using AI, and we thought we were going to have access to this proprietary database, and turns out they weren't as far along as they thought they were. So we're constantly driving what's real, what's not real, what can we implement versus others. Having said that, we're doing some pretty amazing things today. We're developing internal tools today using internal people that are really driving some great outcomes.
Nobody is seeing, I don't think, dramatic efficiencies yet, at least in our space, seeing dramatic efficiencies, but we're accessing information like we've never accessed it before. You know there's productivity gains, just hard to monetize those productivity gains. The use cases we're having in our data world, we're driving some great access to data that we haven't had as easily as we're able to achieve those things today.
Obviously, we look at our credit world and how do we go to market with the commercial world, and how do we get more effective there? I think that's a combination of using really great partners who have some of these tools in front of them, but also implementing the tools ourselves. As I go out and talk to other CEOs and we compare notes, I'm the Chairman of the Mid-Size Bank Coalition. I'm on the Board and Vice Chair at the ABA. I have a lot of access to a lot of other organizations. As I go out and benchmark ourselves, I feel like we're at or better than most of the organizations that we're speaking with regularly.
I think we're all waiting for that revolution to happen, and it's coming. I think you can kind of feel it. Whether some of the predictions are true that we heard over the weekend or not, this is an area that we continue to invest in, and believe long-term that our industry is going to have to drive efficiency gains. Those gains will ultimately, I think, be plowed back into our client relationships. We can't stop investing in that space. I don't think it also takes away from I think those are the self-funding aspects that will allow us to keep expenses very manageable and drive ultimately positive operating leverage.
Great. On credit, you've continued to express confidence in the credit outlook and metrics improved again in second quarter. What trends are you seeing across the portfolio today, and are there any sectors or borrower groups that you're spending more time monitoring?
I don't think our guidance has changed at all. I think we've had that same level of the same feeling we had as we ended the last quarter as we do today. We're not seeing broad-based demonstrated weakness. We feel really good about our ability to continue to work out any criticized or classified loans. We're not seeing anything in any geography that gives us any kind of pause. Overall, I think the credit book is just getting stronger. Again, that's a knock on wood moment, but yeah, we feel as good as we did as we ended last quarter.
Historically, Old National's experienced lower conversion of non-performers into charge-offs than I think a lot of peers. What do you think differentiates your approach, and why do you believe the credit outlook remains favorable with that?
Yeah, it's a great question. We continue to have loans that we put in that criticized and classified bucket refinanced out at par, and by other banks. Sometimes the government interestingly enough, in some of their programs. We have this philosophy of calling it early. I use this analogy, and it may be somewhat of a morbid analogy, but when our clients are maybe getting a little sniffle, we want to treat them first. We want to treat them early and put them in the hospital, and make sure they come out healthy on the other side.
We're not waiting for that to get materially worse before we put them in the hospital. I think that's where banks will wait sometimes too long. A majority of our non-accrual loans are paying as agreed. That's just a historical philosophy we have, and we think it serves us well to call it early. That allows us to-- Sometimes our criticizing costs, they generally run higher than our peers. But if you go back and look at relative to charge-off rates, we usually have less volatility and less total charge-offs relative to what that leading indicator might suggest. That's just a historical philosophy that I think has served us incredibly well.
Yeah. On capital you remain active on buybacks while supporting strong organic growth. How are you thinking about optimal capital levels over the longer term, particularly if we get some of the benefits from Basel III revisions that could create some more capital flexibility?
Yeah. We obviously want to use capital today to support our organic growth. The good news is at very high teens ROATCE levels. We have plenty of capital generation to support organic growth and continue to optimize our capital through buybacks and dividends. As we publicly stated, acquisitions aren't a part of our current thinking, and don't anticipate that changing anytime here in the future. Really focused in on that. A lot of investors talk to us today about acquisitions, and we can talk about that at some point. But for us, that capital generation is significant.
So it's more of a challenge about just managing the buyback program and investor feedback was like, if you're accruing capital that could be a signal that you may be interested in M&A, and we didn't want to give that signal. We wanted to make sure we managed through that. So, the share purchase program will be a continued active part of that. Basel III, once we have clarity around that, could allow us to even think a little bit more about stronger buyback program.
One of our binding constraints typically tends to be our tangible common equity ratio, which today we believe plenty of tangible common equity ratio. The problem becomes in environments of stress. People look at that TCE number. Today, they're not paying that much attention to it. They're paying attention, obviously, CET1 and everybody believes we've got enough CET1+ more than enough. Plus, if we get some relief from Basel III, which could be 100 basis points more to us, that even gives us more flexibility.
But ultimately, at the end of the day, we got to make sure that we both look at what our regulatory capital requirements are, but also our real tangible equity, that we need to in a different kind of environment, a more stressed environment. So, both those things are ways we have a healthy tension, but I think it generally supports just given our high earnings rate, more buybacks in the future for us.
If we're able to have you join us a year from now and investors view Old National differently than they are today, maybe a higher stock price, what do you think is going to be the biggest driver of that change?
We strive for consistency every single day. We do not want to wake up and surprise you as an analyst, our investor base, our team members, our clients, our communities, right? We strive for that consistency. This is old-fashioned, basic banking concept, right? For us, the highest compliment we can get is you delivered what you said you were going to deliver, and you did a little bit better. That is the ultimate compliment for us is we achieve what we said we are going to do and we did it the right way. We believe in no easy shortcut ways to growth.
It is old-fashioned basic banking, a really granular deposit base, a really granular loan base, not taking outsized risk, in footprint business by and large. The highest compliment we give is if people go back and look, I think, at our history here, they would say whether there was coming off a partnership or coming off of a period of organic growth, you did what you said, and you did it slightly better.
Great. I think that is probably a good spot to end it on. Thanks very much for joining us. Hope you have a great rest of the day.
Well, Jared, I just want to thank you all. I was just leaning in before our meeting here to let them know that I was really pleased with the meetings we are having here today, and thanks for your support. We appreciate the opportunity to be here today. Thanks.
Great. Thanks so much.