Old National Bancorp (ONB) Q2 2026 earnings call transcript

Good morning. Earlier today, old National reported record second quarter results for 2026. In short, this was an exceptional quarter of old national. We achieved record adjusted EPS along with record net income and a record efficiency ratio. We also generated approximately a 20% adjusted return on average tangible common equity and adjusted ROA of 1.39% and continued to produce strong profitable growth across our company.

These results show what happens when we stay focused on the fundamentals, growing high-quality relationships, maintaining discipline, credit, and expense management, investing in talent and technology, and building tangible book value over time.

The strength of our franchise was clear throughout the quarter. End-up period loans increased by $1 billion or 8% annualized, driven by robust, high-quality commercial production. Commercial production reached $3.5 billion and our period-end commercial pipeline hit a new record of $5.6 billion.

We remain actively focused on winning new business where we can develop full relationships, meet our return expectations, and maintain the strong credit profile that has long been a national.

P-income was another bright spot. We experienced broad-based strength across all P-businesses. This diversification is intentional. As we grow, we are building a stronger, more balanced earnings engine that is less reliant on net interest income.

We also continue to demonstrate strong operational discipline. We delivered record gap and adjusted efficiency ratios with the adjusted ratio at 45.2%, marking our seventh-straight quarter of positive year-to-year operating leverage. We are investing in technology, AI, and process improvements to make old-national, more scalable while remaining disciplined with expenses.

That balance is key. We are investing for growth while maintaining operational efficiency. Credit quality remains a key strength. Nonacruals decreased by $50 million or 10% from the prior quarter, and net charge-offs were consistent with our expectations.

We stay diligent and proactive in managing credit. Our loan portfolio is well-diversified. Our underwriting standards remain rigorous, and we believe our straightforward community banking model positions us well through economic cycles.

Our capital position continues to be strong. Tangible both value per share increased 14% year-over-year. Our CET-1 ratio was 11.09%, and we returned a $163 million of capital to shareholders through dividends and buybacks.

We will continue to approach capital allocation carefully, supporting organic growth, investing in the business, maintaining strong capital levels, and returning capital shareholders.

In summary, this was a record-breaking quarter and another clear example of old-national successfully executing its organic growth strategy. We delivered strong loan growth, broad-based fee income, record efficiency, solid credit metrics, and return significant capital back to our shareholders. We do not need to rely on acquisitions to meet our goals. Our focus stays the same, growing organically, deepening client relationships, investing in our people and platform, managing risk carefully, and creating long-term value for our shareholders.

With that, I'll turn the call over to John to discuss this quarter's financial results in more detail.

Thanks. As Jim mentioned, and has summarized on slide four, we delivered a record quarter, driven by strong organic loan growth, discipline expense management, stable credit performance, and increased capital return. Beginning on slide five, we reported gap to Q earnings per share of $0.65, excluding $12.1 million in merger-related expenses, and a $13.2 million valuation gain on the settlement of the Bremer pension plan adjusted earnings per share were also $0.65.

Results were driven by better than expected loan growth and strong fee income, along with well-controlled expenses. Credit remained stable with 22 basis points of non-PCD charge-offs. Our profitability profile, as measured by return on assets and on tangible common equity, remained top-desile versus our peers. Capital finished the quarter with CET1 over 11%, and we grew tangible book value for share 11% annualized from the prior quarter and 14% year over year.

We delivered this growth even as we absorbed Bremer one-time charges, generated better than expected balance sheet growth in the first half of the year, and returned capital. Specifically, during the second quarter, we returned a total of $163 million to shareholders in the form of increased cash dividends and share repurchases. On slide six, you can see our quarterly balance sheet trends underscoring continued strength in our liquidity and capital positions.

Our loan deposit ratio increased modestly to 91% and the CET1 ratio remains above 11%. Again, we compounded tangible book value for share year over year despite the impact of the Bremer merger charges over the past year and the increased pace of capital return.

We repurchased $107 million or $4.4 million shares during the current quarter and 10.5 million shares over the last year. With dividends and repurchases, our combined payout ratio was 65% of 2Q net income to common. As we've stated in the last several quarters, the best investment we can make today continues to be in ourselves.

On slide seven, we show trends in earning assets. Total loans grew 8.3% annualized from last quarter, led by balance growth in both our CRE and our CNI portfolios. Production was also diversified across our commercial book and predominantly floating rate. The next few quarters should be supported by a record high pipeline of $5.6 billion, up 17% from a year ago.

The investment portfolio grew modestly with purchases coming on at higher yields. We expect approximately $2.3 billion in cash flow over the next 12 months. Today, new money yields are running about 100 basis points above back book yields on securities.

Strong loan growth, ongoing repricing across both loans and securities and continue deposit pricing discipline supports net interest income growth over the course of 2026. On the NIM, I would point out that 2Q margin was impacted two basis points by the full quarter effect of our sub debt issuance in late January and lower sofa rates during the quarter, without which margin would have been up slightly.

Moving to slide eight, we show trends in deposits. Total deposits increased 3.4% annualized, primarily driven by commercial and public fund growth, partly offset by seasonal tax outflows in retail deposits. On interest bearing deposits remained 23% of total deposits consistent with the prior quarter and, like our loan pipelines, deposit pipelines remained very healthy. We were able to decrease total deposit costs by one basis point and lower interest bearing deposits a similar one basis point link quarter, all while remaining on offense with respect to client acquisition in a competitive deposit environment. Overall, our deposit pricing strategy continues to perform as we expected.

Slide nine shows our quarterly income statement trends. As I mentioned earlier, adjusted earnings per share were a record 65 cents for the quarter and our profitability remains fewer leading.

Moving on to slide 10, we present details of our net interest income and margin, both of which reflect my prior comments around the full quarter impact of our sub debt issuance and lower sofa rates in the quarter. We anticipate growth in NII dollars to be supported by strong asset generation, stable funding costs and fixed asset re-pricing. Also, the combination of our higher floating rate production and earning asset remix opportunities positions us well.

Slide 11 shows trends in adjusted non-interest income, which was $140 million a quarter exceeding our guidance. We saw better than expected performance within all our fee businesses. The other income line was elevated this quarter by approximately $10 million due to market value adjustments, higher bully income and an asset recovery. While these items are core, we would expect this line to run rate closer to one queue levels for the balance of the year.

Continuing to slide 12, adjusted non-interest expense was $360 million to the quarter. Run rate expenses remain well controlled, driving positive operating leverage both quarter over quarter and year over year, while delivering a record low of 45% efficiency ratio. On slide 13, we present our credit trends. Total net charge-offs were 26 basis points or 22 basis points excluding charge-offs on PCD loans.

Criticized the classified loans declined $109 million this quarter, while non-accrual loans decreased to 91 basis points of total loans, marking several quarters of improving performance driven by active portfolio management. The second quarter's allowance for credit losses to total loans, including the reserve for unfunded commitments, was 121 basis points down one basis point from the prior quarter, primarily driven by charge-offs on PCD loans and improved credit quality.

Our qualitative reserves continue to incorporate a 100% weighting on the Moody's S2 scenario with additional qualitative factors to capture global economic uncertainty.

Slide 14 presents key credit metrics relative to peers. We have continued to experience a lower conversion rate of NPLs to NCOs as compared to our peers, which is driven by our approach to client selection on the front end and credit workouts on the back end. We remain comfortable around the credit outlook. On slide 15, you can see our strong capital position at the end of the quarter.

Tangible book value for share was up 11% annualized link quarter and 14% year over year. Regulatory ratios and TCE remain stable link quarter with strong earnings absorbed by quarterly long growth and continued share repurchases. As previously mentioned, we repurchased $107 million of common stock during the second quarter and we have $277 million remaining under our program. We continue to believe we would see approximately 100 basis points of capital benefit under the proposed Basel III capital rule changes.

These changes, if finalized, would obviously increase capital flexibility. Slide 16 includes our outlook for the full year 2026. While our overall expectations remain largely unchanged, we have increased our loan growth and non-interest income guidance from the prior outlook provided. We believe our year to date results and current pipeline support full year long growth of 6-8%. Our NII guidance is unchanged but updated for the impact of our sub-dead issuance.

The exact path of NIM and NII in the back half of the year will obviously be dependent on growth dynamics, the shape of the yield curve, the absolute level of rates in the middle of the curve, and the competitive deposit landscape. Our base case outlook assumes no Fed rate actions this year and a stable five-year treasury. Given our strong loan growth outlook, our ability to effectively manage our funding costs, ongoing fixed asset repricing, and earning asset remix opportunities, we believe our balance sheet is well positioned and we see more opportunities than challenges in the back half of the year.

We have increased our non-interest income guidance to reflect two Q's out performance and expect our core fee businesses to continue to perform well. Our outlook for expenses, credit, and tax rates are all unchanged.

In addition, we expect to fully utilize the remaining by-back authorization opportunistically over the course of the current plan period, which runs through the end of February 2027.

In aggregate, you'll note that we continue to expect full year results that yield 15% plus growth in earnings for share, and again, feature positive operating leverage with peer leading profitability, good growth in fees, controlled expenses, and normalized credit.

To close, our first half performance underscores the strength of our franchise, the consistency of our execution, and the durability of our business model. Organic loan growth remains strong, pipelines are at record levels, and credit performance continues to be stable. Our fee businesses are performing well, and our continued focus on efficiency and profitability gives us the flexibility to invest in the franchise while returning capital to shareholders.

As Jim said at the top of the call, old national enters the second half of 2026 with strong momentum and increased conviction in our ability to execute. With those comments, I'd like to open the call for your questions.

Good morning. Just starting off here, maybe on Capitol, really sharp, organic, long growth, not only this quarter, but expected for the full year plans to use the full buyback authorization. Is the overarching message on Capitol today that you'd like to your current levels and more or less want to tread water here?

Yeah, I think you've got that right. We feel really comfortable with where we are. Obviously, we've got strong capital ratios, plenty of capital support, organic growth, and continue to lean into a return of capital to shareholders. So that's sort of Plan A, organic and capital return. I think that still allows us to grow tangible book value for share at a nice club as well, given the high earnings rate.

Yeah, I think you're reading that one right as well. There's a lot of puts and takes, but candidly, we see more opportunities than challenges heading into the back half of this year. And we tried to spell some of those out and prepare the remarks, but just to underscore them, strong organic growth in the first half, which sets us up with higher average earning assets than we had expected. Still got a great opportunity on fixed asset rate pricing. That's 100 basis points on securities, 60 basis points on loans. The silver headwind that we saw in the second quarter is not likely to repeat, and in fact could become a tailwind later this year.

And then we believe we've got meaningful earning asset remix opportunities in front of us. And then just a reminder, we do pick up an extra day in both the third quarter and the fourth quarter. And so that'll be helpful too. So when you add all that up, we think NIM and NI should be improving in the back half of this year all else equal.

Yeah.

Yeah, I feel really good about our core fee businesses are performing really well, and we continue to expect them to do well in the back half of this year. Wealth management has been terrific. If investment has been good, obviously that's an area that we've been investing in over the last several years, and we're starting to see the fruits of that.

The mortgage business was very solid for us in the second quarter. Pipeline there is down a little bit, but we continue to be maybe a little bit more enthusiastic than the average bank on the mortgage side, and part of that is really just the team that we picked up down in the Nashville market, which has been really additive to what was already a good mortgage platform here.

And then cap markets has been strong, and that sort of follows pipeline and production, and with pipeline where they are reasonably bullish on our ability to continue to grow that pipeline too.

Yeah, for sure. So we look, the deposit environment continues to be competitive. We have said that it's been competitive for the last three, four years. I mean, I don't view it as any more competitive than it has been. Stock rate was pretty much right on top of where we were on the quarter, and I'm sure you noticed we pulled down total costs of basis points. We believe that we're demonstrating that we can keep our funding costs pretty stable, even while staying on offense with respect to new client acquisition.

I think that's right. That's part of what we're trying to say by earning asset remix opportunities. I think we've got some inside of loans, probably some optimization to do and then also a little bit of earning asset optimization around the liquidity book. So I think earning assets would probably lag slightly what we're able to do in terms of asset generation on the loan side.

I think we're in terms of new versus run off, we would see, our expectation would be that the asset churn that we've seen in the last two, three quarters improves somewhat from here. And part of that was we were working out of some class by criticized that had pretty high coupons on the loan side. So I think that that headwind debates and we've got some earning asset remix opportunity that is margin and creative.

But in terms of like absolute dollars of incremental new coming on funded with incremental new, probably neutral-ish. I think I think the better opportunity for us is the remix.

Sure.

Morning, Daniel. This is Tim. Yeah, we are starting to see that come to fruition in second quarter production. And certainly as we look at the pipelines in Q3 and beyond, we are seeing those skew larger, specifically in our growth markets, where the opportunities tend to be larger to begin with. So that is a focus of ours. And we continue to see pipelines grow in that regard. But we continue to do a lot of really granular core CNI middle markets, lower middle markets business that's driving production and driving our pipelines forward. So it's a good mix of leaning into the opportunities that come to us in our smaller core markets, as well as larger expansion markets.

Yeah, I would say, you know, when you look at what's driving the pipelines, it's core CNI business. And we feel really bullish about, you know, the investments we're making in that business and the growth we're seeing in the pipelines, you know, half of all the loan production we had in Q2 was from CNI. We continue to see those pipelines grow. And as you know, with those types of relationships, we're getting the whole relationship. So you're getting, you're seeing deposit pipelines grow in line with that CNI loan pipeline growing. So we see that as a continual opportunity for us to drive good deposit growth.

Our spreads have been pretty consistent the last couple of quarters. Obviously, first quarter's production was skewed remember decidedly investment grade and floating rate. And that had a little bit of an impact. But you know, last couple quarters, we've been we've been pretty steady in terms of kind of core balance, commercial activity. It's down a little bit from where it was a year ago, but pretty steady over the last couple quarters.

Yeah, we're competitive. We're not the top of the market in most of the that we're in today. We are in some of our tour markets where we don't have back book cannibalized running some specials that are, I think we would describe them as a little bit a little bit steaming where we're trying to be a pain in the neck for somebody else that that has a bigger presence in some of those markets. But you know, I think southeast for us Nashville is probably an example of where things are a little bit a little bit hotter. But most of the rest of our markets have been have been stable and competitive.

No, I think we're just obviously trying to balance all the tension, right, which is how do we continue to build tangible book value at the same time, you know, invest in our business, invest in the organic growth that we have, and return, you know, the leftover back to our shareholders, right? And I think we kind of threaded that needle this quarter and kind of thread the needle for the rest of the year. You know, obviously, John said, depending on what happens with Boswell, that could give us even more flexibility going forward. But we do have, as you know, a very high earnings rate. And so we have to return capital back to our shareholders, because even after all those other things that we're investing in, we'll have access.

Well, I do obviously give this a lot more flexibility than capital return. And I do think we'll continue to look at the dividend, you know, but we do like the flexibility that the buyback program gives us.

Yeah, I think on a blended basis, it's probably a mid to high single digit line item in terms of growth for us in aggregate. When you peel that back, though, I think there are pieces of that business that'll continue to grow double digit, right? I think we would all be, you know, we're really enthusiastic about what we see going on on the wealth side of things. And again, that's an area that we've invested pretty heavily in over the last couple of years. And I think that we're starting to realize some real good momentum in that business. And then the cap markets line as we continue to build additional capabilities, sophistication, go up cap a little bit in terms of our our CNI client base.

I think there's tremendous opportunity in that line item for us as we look forward a couple of years.

You know, the leadership changes we announced were more a reflection of the growth of our organization, you know, the growth of our markets. We've had some succession, you know, gone through, I would say generational succession in our commercial business. And so we put some new leaders in place and wanted to recognize, you know, their contributions and their leadership for the for the organization. And then the operating group was more recognition of kind of informally how we operate today and more closely aligned to my direct reports. So I, you know, really, the day to day organization health led is really unchanged with just adding a couple new folks that have assumed new positions here recently. So no, no big changes there.

Yeah, I think it looks certainly we would hope, you know, 23% of total deposits, it's stable, you know, there's there's a little bit inter-quarter sort of seasonal factors at play in 2Q if you're looking at kind of point-to-point balances. But clearly, you know, we want to grow households in the community bank. We want to grow primacy and operating accounts in the commercial bank. And I think if we can take care of that, we should be able to grow non-interest bearing and operating accounts at a pace that's in line with our overall deposit growth.

Sure. Yeah. Look, we're still relatively neutral in terms of our positioning. If the forward curve played out exactly as the forward curve sits today, I think we'd get that hike at the very end of the year kind of late October. It would be a de minimis impact to 2026, but probably a modest helper because we'd have, presumably, so far, would start to run in front of that rate. And that would help out on the adjustable rate piece of the loan book. And we'd be able to hold back some of the funding costs to increase, we believe.

Sure.

You know, it's a good question. It's sort of like the long-term structural margin of a bank enough to your point. It's like the first time in a long time that we've had a pretty normal looking curve or more normal anyway than what we've operated with for five years, 10 years, maybe, I don't know. It's been a long time. And I feel like, you know, you're probably in the right zip code, right? When we think about it, again, we tried to give you the puts and takes, definitely seeing more opportunities in the back half of this year than there are challenges.

And so, I think, you know, where we are plus some is probably the right place to think about a long-term structural margin for a company like Old National in a normal environment.

Yeah. So, we bring it in every February. We'll talk about it again with the early part of next year. I think for now, we're going to stay the course.

And look, it's a, you know, it's a double-digit risk-free rate of return for every share that Mike and I can put away. And we like that. That's not a return that's available to us anywhere else in the bank today.

That I would just add, it's a balance between obviously having enough organic growth, which we do, balancing that investment, but also I'm sensitive to, you know, having strong capital ratios, maintaining those strong capital ratios, because well, you know, maybe people are more comfortable in being lower today. That's not always the case. And then obviously we want to grow tangible book value. So, I feel like we're striking the right balance for today. Now, if Bowser does get finalized, then obviously there's an opportunity to look at that. We want to make sure we remain a competitive dividend and probably have some opportunities down the road to look at that dividend a little bit closer. So, I hear you.

But I think we're striking the right balance for today. And when tomorrow comes, we'll definitely take a look at it.

Yeah.

Morning, Jared.

Not materially, at least not for us in where we are kind of playing. I think, again, we saw this a little bit in the first quarter, like, bigger stuff that's closer to investment grade. There's probably some compression there. But this quarter's production was was more balanced and sort of traditional for us.

I think they improve on a little bit of remix. And again, I think the, I don't want to say goofiness, but the idiosyncratic nature of what happened with so far in the second quarter is unlikely to repeat. In fact, could become a little bit of a tailwind in third quarter and fourth quarter.

You got it.

Morning, John.

Hi there, John. Yes. There you go. Okay. All right.

It was a really good quarter and I think we sustained momentum in both the pipelines and Tim brings with him some increased rigor in that sector that I think is going to start to pay dividends also. And so you'll feel really good about our outlook there. And public funds, that was the other piece of the strength in the quarter. And again, as you know, that's a little bit seasonal for us. So 2Q3Q is pretty good. And we expect 3Q to be even a little bit better than 2Q on that piece of the business. And then, you know, seasonally softer in 4Q and 1Q there. But yeah, feel good about our ability to get into growth deposits.

And then back to our, you know, CNI strategy of really leaning into the full relationship that a CNI strategy brings. And we continue to see the production and pipelines grow. And you know, we feel bullish about that going forward.

Obviously, you know, we've been on a path for ever since they came CEO to really spend time building on our treasury manager business. And I still feel like, you know, we have a number of innings to go there. And we're working really diligently on continuing to build that. And so I just see, you know, long-term bullish on our ability to continue to do that. And, you know, we've grown, as you know, we've grown dramatically. So our clients have changed a little bit, particularly gotten bigger in places like Chicago and Minneapolis. And the demands are different than our historical, you know, kind of core legacy markets. So that's an area we'll continue to invest in. I am a big believer in the wealth management business.

And so we'll continue to invest in there. I think we've got great opportunities to continue to grow there. And then the mortgage business, you know, I think that's a, you know, it's a core business of ours. It's a footprint business. And while it can be seasonal, obviously, you know, we're just a long-term believer that that's a good complement to our wealth management business, a good complement to our community banking business. So, you know, there's nothing that we're looking at. If we just had this new fee income business, we'd be better.

It doesn't mean we will continue to augment those existing businesses and look for new opportunities to add services and products in there. But yeah, we've got to find ways to grow our fee income businesses and try to find more balance in our NIAI versus fees long-term. And so it's just, it's nothing particularly sexy about it, but just getting up every day and grinding on it and getting better.

And I would just add on the capital markets side, there's some opportunities as John mentioned earlier that we're looking at to develop new fee products that we think will augment our ability to, you know, continue to go up market. But as Jim said in the past, we feel very confident about the product set that we have today in being able to service all the clients and prospects that we're looking at.

Thanks, John.

Thanks, Joel. Really appreciate everybody's support today. The team will be available all day long for any follow-ups and questions. Thanks and have a great day.