Conference Transcript - ONB 2026-09-15

Operator

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.

Jim Ryan, CEO

Thanks a lot, everybody. you know jim i guess you know starting off uh it's been a little over a year since bremmer closed looking back would 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 uh you know great question um at the end of the day uh 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 um you know where we think we are best is when there is a relationship involved and that's a people-driven business so paying attention during any kind of integration to the people is the most important thing we can do you know my predecessor bob jones used to say people are the most important asset and uh we fully embrace that so um culture uh culture culture uh i was telling the last group uh we were talking about you know being on the road and And last year I made 52 market visits, you know, during our Bremer integration. Much of that was centered in on, you know, the legacy Bremer footprint, bringing our two teams together, out seeing in front of clients. Still spend a lot of time in Chicago. But, you know, that's the most important thing we can do, I think, as CEOs is to be a culture champion. And, you know, when we do our engagement surveys, that's the feedback we get from our team members. They love our culture. And so my job is to be able to be there and support our team. You know, I still spend a lot of time, too. I think about, you know, 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 for 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? And so, you know, while that has been our focus historically, it continues to remain our focus, despite investments in technology and, you know, the new AI world, I think, for the longest time. I think, honestly, as I think about it, 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.

Operator

You know, as you grow, become a bigger, more diversified franchise, how resilient do you think that culture can be, and how big can you, you know, sort of bring that model? What's sort of the natural limit on that?

Jim Ryan, CEO

You know, that's a really great question. You know, we think about that an awful lot. As we become bigger, you know, 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 us special and unique place to work. It's what attracts talent to us. So I think we all have to guard against that. You know, 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. Both all eight of those, you know, times were interviews, including his wife. We want to make sure that, you know, we bring people to the organization who share our similar values but also make our culture better. And, you know, Tim was sitting in Cleveland. I think all things have been equal. He would have 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. So I think, you know, those are the things we're going to continue to do in order to be successful.

Operator

Shifting over to growth, you know, 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?

Jim Ryan, CEO

Yeah, I would just start with we still feel really good about the guidance we gave at the last quarterly earnings conference call. You know, we started out believing the year was kind of a mid-single-digit year. And, you know, we believe that is the normal run rate for our business. If you think about GDP plus, you know, two to three points, we think that is the right place for us to run. You know, we're going to grow as fast as the markets, and then we're going to steal a little bit of share. And 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. And I think that's chalked it up to, again, you know, having great people in the right place at the right time to go off and execute. And pretty vibrant markets. We surprise ourselves. We're still sitting at record pipelines when we ended the quarter, and I know there's 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'd run ahead of where we originally anticipated when we were thinking about 2026 at the end of last year. Yeah.

Operator

You said commercial pipelines reached another record quarter this quarter. Beyond just the economy, what's driving the momentum on the commercial side?

Jim Ryan, CEO

Yeah. It's 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 plan succession that we had lots of insight into, including Mark Sander, who was the president of COO, who joined us out of the first Midwest partnership. And so we were able to bring Tim Birkin. He was able to think about, you know, what staff we needed as a $75-plus 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, you know, we need to make sure we have the systems and accountability in place to run, you know, a bigger geography, more people. And so Tim has done that himself. He's brought in a leadership team that's capable of doing that, that's been there and done it before, coming out of some super regionals and some national organizations. And so 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. And so we had, again, a handful of retirements in our commercial business. We've replaced them all. We're stronger today. And that's nothing to take away from the folks that retired. They're all amazing folks. They remain my dear friends. But we have this incredibly strong, you know, new leadership team in our commercial business. And I think they're doing a really good job of going out and hiring and attracting talent. They're doing a really good job of ensuring that we bring the best of old national to our existing clients and new clients. And I think that's allowing us to go off and actually do better than we would have maybe anticipated at the start of the year. So the economy is good. You know, obviously there's some uncertainty around kind of that macro backdrop, and, you know, we have rates now, and we can talk about energy prices, and we can talk about, you know, trade uncertainty. But that's been there for the last couple years, right? I think it's just we're executing better today than we had been, and 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.

Operator

Great, great. You know, competition remains intense across most of the industry. How would you characterize the competitive environment today on both the lending and deposit side, and where do you think you have the clearest advantage?

Jim Ryan, CEO

It's a great question. It's as competitive as it has been, both on the deposit and lending side. I think that let's start with the deposit side. That gets a lot of talk track, right? And what I would suggest is we really have not seen much change in the competitive news. It was competitive two years ago.

Operator

It was competitive three years ago.

Jim Ryan, CEO

It remains competitive. I think that the difference may be kind of our expectations heading the year. We expected a couple rate cuts. And so we expected at the end of last year a couple rate cuts. We didn't expect as much balance sheet growth coming out of that. So 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. And so today, you know, now we're talking about rate hikes. We're talking about strong balance sheet growth, which means every dollar matters on the deposit side. But I would call it rational and pretty much unchanged from what we've seen in the last few years. You know, we're out still competing for deposits. You know, our goal is to match fund, you know, our loan growth with strong, low-cost core deposits. And so far we're able to do that and feel good about – none of that's changed, you know, from, you know, what we thought about at the end of last quarter when we talked about earnings. The lending side, again, you know, 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. I mean, we have like-size 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, you know, a less profitable, you know, just like me.

Operator

Have you noticed any meaningful change in customer behavior due to, you know, the broader macro uncertainty around rates, tariff for economic policy or commercial customers to continue to move forward in this environment?

Jim Ryan, CEO

Yeah, I think this last round of, you know, hire for longer, you know, the tariff story, you know, changes by the day as we know. It's too early to tell on what this last round, you know, is there a tipping point coming? We're not seeing it today. We're not feeling it today. but you know I think our borrowers are getting used to our clients excuse me are getting used to the noise and they seem to be able to navigate through a lot of noise and 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 and so I just I don't see this last little bit of news you know we're so sensitive every little bit of news in our business right and 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 and you know who I'm talking about on the audience and online here so I feel like I feel like our borrowers or our clients are accustomed into dealing with an ever-changing landscape, and they're really resilient.

Operator

A lot more optimism on the ground versus in the room. I think one of the interesting things from the quarter was that your NII guidance remained constructive despite some near-term margin. How do fixed rate out thing, loan growth, deposit pricing, and balance opportunities work together to drive the growth?

Jim Ryan, CEO

Yeah, I think that's the right perspective. And, you know, we were just heading into the room here. We were looking at, you know, that higher for longer, and we were looking at the reinvestment rates today are higher today. The fixed-to-fixed, you know, is stronger. We do have, you know, $8 billion of kind of fixed asset repricing. Yeah, around that number. And we feel like there's plenty of upside, you know, just in terms of what that means for reinvestment opportunities, both on the loans and the security side. And then we think about, naturally, our balance sheet is asset sensitive, and every day it gets a little bit more asset sensitive. So, you know, to the extent that we see one, two, three, you know, 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, you know, in the front half of the year is variable rate. I mean, like 90% of our production is 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 because they're all coming on at variable rate. So we like that profile heading into probably this higher for longer and potentially a rate hike cycle.

Operator

What's the durability of that fixed rate asset repricing tailwind?

Jim Ryan, CEO

I think some of the original expectations we laid out there were like 100 basis points, you know, on the security side, 60 on the loan side. I think that's all gotten better. You know, if we look at the fix-to-fix, that's all gotten better since then. So we think it holds up pretty well just given where we've seen the five-year move pretty strongly in the last, you know, little bit here.

Operator

You know, 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?

Jim Ryan, CEO

You know, we really let our clients dictate, you know, in terms of what rate risk management, you know, they want to choose. You know, many of our clients that are doing these variable rate loans are utilizing, you know, our hedging services, and that's why we've seen really strong capital markets fees in the first half of the year. So it really doesn't matter for us, you know, whether they want to do fixed or whether they want to do a floating rate. Anything large side, you know, we really want to, you know, keep that to the floating side and then use the hedge to offset, you know, their risk. And then we'll manage any rate risk on the back end. And so for us, I think, again, just being naturally asset sensitive, I think this sets up well for this kind of environment. And that's without any management actions. You know, we have some strings we can pull. You know, I think that even makes it better.

Operator

Maybe shifting to the fee income side, you know, 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?

Jim Ryan, CEO

Yeah. You know, 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. 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, you know, it's just a softer expectation for the business. And, you know, I've been really happy with the success we've seen in, you know, markets 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. And, you know, John and Tim Burke and I were recently talking about ways we want to strengthen our fee-income businesses. And that's an area of focus for the next handful of years is continue to drive, you know, higher percentage of our total revenue coming out of our fee-income businesses. Much of that will come out of the existing businesses and ways we can accelerate growth there. And then to the extent that it makes sense to augment those businesses. And, you know, I'm not here to announce anything new today just other than we know we need to drive higher fee-income. and that will be a focus of ours going forward.

Operator

When you look at that investment, 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 things?

Jim Ryan, CEO

Yeah, I think it's both. 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. So, 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 a 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, you know, client opportunity set, you know, and to the extent that there are other fee income businesses that we're not in today, I think we can do explore what those look like and what makes sense to invest. Again, you know, nothing to announce today other than this is an area that we know we need to concentrate on.

Operator

You know, when you look at the expenses, the efficiency ratio continues to improve despite some of the investments you've been making. How should we think about balancing operating leverage with the opportunities, you know, that you just mentioned to, you know, to make hires and bring in systems and products to expand the long-term revenue opportunity?

Jim Ryan, CEO

Yeah, that's a great question. You know, we start every budget cycle. You know, we're 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, you know, kind of GDP. so-called low single digits and drive revenue growth on top of that. They'll have that positive operating leverage contribution. And so for us, to the extent that we want to spend more money than that kind of low single digit kind of natural, you know, inflationary growth, you know, we have to find ways to fund it. And that just becomes more efficient, more effective. You know, 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's seen as the bad guy in the organization because he's holding the line. He holds the line with me on expenses. And it's always a healthy tension between, you know, wanting to invest and grow in the business and the need to drive positive operating leverage. I think we find the right tension there. You know, we have been, we've made no secret that we're really active in terms of bringing new people in 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've done a lot of here lately, but also in the support side, just becoming a bigger, you know, more sophisticated organization. So we're not shortchanging that as well. and find ways to drive efficiency. Every single day, you know, we're 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. And so 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.

Operator

You know, a component of that spend, I'm sure, is going to be AI. You know, 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?

Jim Ryan, CEO

Well, let's just start with you have to wade through a lot of information coming at you about AI. You know, 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. And in those pitches, there was one thing I was able to call out kind of immediately, like, you know, it didn't feel like there was going to be an opportunity to be a better bank or more efficient bank because of it. And they had just implemented something similar at a larger organization. And I said, well, what savings did they drive? Well, they didn't drive any savings out of it. And then we recently just completed a – we were 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 it turns out, you know, they weren't as far along as they thought they were. So we're constantly driving, like, what's real, what's not real, what can we implement versus others. Having said that, you know, 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. And you know there's productivity gains. It's just hard to monetize those productivity gains. The data, 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. You know, we're obviously, you know, we look at our credit world and how do we go to market, you know, with the commercial world and how do we get more effective there. I think that's a combination of, you know, using really great partners who have some of these tools in front of them but also implementing the tools ourself. So as I go out and talk to other CEOs and we compare notes, you know, I'm the chairman of the Mid-Sized Bank Coalition, I'm on the board and vice chair at the ABA. I have a lot of access to a lot of other, you know, organizations. And 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, you know, 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. And those gains will ultimately, I think, be plowed back into our client relationships. So we can't stop investing in that space. But I don't think it also takes away from – I think those are the self-funding aspects that will allow us to keep expenses, you know, very manageable and drive ultimately positive operating leverage.

Operator

You know, 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?

Jim Ryan, CEO

You know, 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. You know, we are still really good about our ability to continue to work out, you know, any criticize or classified loans. You know, we're not seeing anything in any geography that gives us any kind of pause. and overall I think the credit book is just getting stronger you know again that's a knock on wood moment but yeah we feel as good as we did as we ended last quarter.

Operator

You know historically old nationals 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?

Jim Ryan, CEO

Yeah it's a great question you know we continue to have loans that we put in that classified bucket refinanced out at par and by other banks sometimes the government interestingly enough in some of their programs but we have this philosophy of calling it early so 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 and we're not waiting for that to get materially worse before we put them in the hospital and I think that's where banks 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 and that allows us to sometimes our criticizing class sometimes they generally run higher than our peers But if you go back and look at, you know, relative to charge-off rates, we usually have less volatility and less total charge-offs relative to what that leading indicator might suggest. But that's just a historical philosophy that I think has served us incredibly well.

Operator

You know, 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.

Jim Ryan, CEO

Yes, we obviously want to use capital today to support organic growth, and 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. You know, as we publicly stated, acquisitions, you know, aren't a part of our current thinking and don't anticipate that changing any time here in the future. You know, we're really focused in on that. And, you know, a lot of investors talked to us today about, you know, 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, like, just managing the buyback program. And, you know, and investor feedback was, like, if you're accruing capital, you know, that could be a signal that you may be interested in M&A, and we didn't want to give that signal, so 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, you know, a stronger buyback program. One of our bonding constraints typically tends to be our tangible common equity ratio, which today we have, you know, 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 to, obviously, CET1, and everybody believes we've got, you know, enough CET1 plus more than enough, plus, you know, 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've got to make sure that we both look at, you know, what our regulatory capital requirements are, but also, you know, our real tangible equity that we need 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.

Operator

You know, if we're able to have you join us a year from now and investors view old national, you know, differently than they are today, maybe a higher stock price. What do you think is going to be the biggest driver of that change?

Jim Ryan, CEO

We strive for consistency every single day. You know, we don't 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? And so 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 achieved what we said we were going to do, and we did it the right way. We believe in no easy shortcut ways to growth. It's old-fashioned basic banking, a really granular deposit base, a really granular loan base, not taking outsized risk. in footprint business by and large. And so the highest compliment we give is, and, you know, if people go back and look, I think, at our history here, they would say whether it was, you know, coming off, you know, a partnership or coming off of, you know, a period of organic growth, you did what you said, and you did it slightly better.

Operator

I think that's probably a good spot to end it on. Thanks very much for joining us. Hope you have a great rest of time.

Jim Ryan, CEO

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're having here today, and thanks for your support. We appreciate the opportunity to be here today.