Old National Bancorp /In/ Q1 FY2026 Earnings Call

Ladies and gentlemen, welcome to the Old National Bancorp First Quarter Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for 12 months. Management would like to remind everyone that certain statements on today's call may be forward-looking in nature and are subject to certain risks, uncertainties and other factors that could cause actual results or outcomes to differ from those discussed. The company refers you to its forward-looking statement legend in the earnings release and presentation slides. The company's risk factors are fully disclosed and discussed within its SEC filings. In addition, certain slides containing non-GAAP measures, which management believes provide more appropriate comparisons. These non-GAAP measures are intended to assist investors' understanding of performance trends. Reconciliations for these numbers are contained within the appendix of the presentation. I'd now like to turn the call over to Old National's Chairman and CEO, Jim Ryan for opening remarks. Mr. Ryan?

Good morning. Earlier today, Old National reported first quarter 2026 earnings that exceeded our internal expectations and analyst estimates. We carried strong momentum into the year and our performance in the first quarter reinforces our confidence in the full year plan. This quarter demonstrates disciplined execution as we have reliably delivered quarter after quarter. We delivered robust loan growth, powered by continued strength in our core deposit franchise and disciplined funding management in a highly competitive market. We controlled expenses and generated strong fee income, which helped offset net interest income pressure from typical seasonality and the recent subordinated debt issuance. Credit performance remains solid, supported by healthy liquidity and capital levels. We also acted decisively on capital returns, repurchasing shares during the quarter, including reducing Bremer's trust position in Old National, and we intend to deploy the remaining authorization over the course of the program. Bottom line, we are executing and we expect to keep building from here. Our priorities remain clear: drive organic growth and return capital to shareholders. Organic growth starts with talent, and we are investing accordingly. We recently announced a strengthened commercial leadership team, promoting proven internal leaders and adding experienced bankers from several super regional institutions. Our team is focused every day on winning new clients and deepening existing relationships and building the next generation of bankers. Our commercial pipelines are at record levels, and our talent pipeline is as strong as it has ever been. We are also accelerating efficiency and scalability through technology and AI investments supporting positive operating leverage. As a result, we delivered a record adjusted efficiency ratio that remains in the top decile of our industry. On the operating environment, the quarter brought a higher-for-longer rate outlook and continued industry uncertainty. Old National is built for this backdrop. Our balance sheet remains neutral to the short end of the curve, our granular low-cost deposit base helps contain funding costs and our strong underwriting and straightforward community banking model positions us to perform through volatility. Importantly, nothing we are seeing changes our outlook. Loan pipelines are at record levels. Momentum is building, and we remain confident in our full year expectations. To close, we're off to a great start in 2026, and we're executing against our commitments. Our focus remains on organic growth and disciplined capital return. This is not a time where we need acquisitions to achieve our objectives. I want to thank our team for delivering a strong quarter and for staying relentlessly focused on our clients. With that, I'll turn the call over to John to walk through the quarter's financial results in more detail.

Thanks. As Jim mentioned and as summarized on Slide 4, we delivered another strong quarter and a solid start to the year, reflecting continued momentum in organic growth, disciplined expense management, stable credit performance and increased capital return with robust capital levels. Beginning on Slide 5, we reported GAAP first quarter earnings per share of $0.59. Excluding $0.02 of merger-related expenses and a noncash expense associated with the final distribution of a legacy First Midwest pension plan, adjusted earnings per share were $0.61. Results were driven by better-than-expected loan growth and fee income along with well-controlled expenses. Credit remained stable with less than 20 basis points of non-PCS charge-offs. Our profitability profile as measured by return on assets and on tangible common equity remain top decile versus our peers. Capital finished the quarter with CET1 over 11% and we grew tangible book value per share 6% annualized and 11% year-over-year despite absorbing the majority of Bremer one-time charges, better-than-expected balance sheet growth and returning capital to shareholders in dividends and share repurchases. Specifically, during the first quarter, we returned $151 million to shareholders. On Slide 6, you can see our quarterly balance sheet trends, underscoring strength in our liquidity and capital positions. Our loan-to-deposit ratio remained 89% and the CET1 ratio is comfortably north of 11%. Again, we compounded tangible book value per share year-over-year despite the impact of the Bremer close merger charges over the past year and the increased pace of capital return. We repurchased 3.9 million shares during the current quarter and 6.1 million shares over the last year. With dividends and repurchases, our combined payout ratio was 64% of first quarter adjusted net income to common. As we've stated in the last several quarters, the best investment we can make today is ourselves. On Slide 7, we show trends in earning assets. Total loans grew 8% annualized from the last quarter, led by 16.9% annualized growth in C&I. Production was diversified across our commercial book and the next few quarters should be supported by record high pipelines of $5.5 billion, up nearly 14% from year-end levels. The investment portfolio was essentially unchanged from the prior quarter with portfolio purchases offset by changes in fair values. We expect approximately $2.4 billion in cash flow over the next 12 months. Today, new money yields are running about 83 basis points above back book yields on securities. Strong loan growth, ongoing repricing across both loans and securities and continued deposit pricing discipline supports stable to improving net interest income and net interest margin over the course of 2026. I would point out that the first quarter was impacted by two fewer days, our subordinated debt issuance in late January and the spread dynamics inherent in this quarter's loan production, which was skewed decidedly toward near investment-grade floating rate C&I. Moving to Slide 8, we show trends in deposits. Total deposits increased 4.2% annualized, primarily driven by commercial and retail growth and partially offset by seasonally lower public funds balances. As a reminder, first quarter is the low point for our public funds deposits with those balances typically rebuilding over the second and third quarters. Noninterest-bearing deposits declined slightly to 23% of total deposits from 24% in the prior quarter, partly reflecting the seasonal factors I just mentioned. Despite remaining on offense with respect to client acquisition in a competitive deposit environment, we were able to decrease total deposit costs by 8 basis points and lowered interest-bearing deposit costs even better, 14 basis points linked quarter. We achieved an approximate 93% beta in our exception priced book in conjunction with the Fed cuts in the fourth quarter. These actions resulted in a spot rate of 170 basis points on total deposits at March 31. Overall, our deposit strategy performed as we expected, and we successfully achieved the down-rate beta that we had targeted for this rate cycle. Slide 9 shows our quarterly income statement trends. As I mentioned earlier, adjusted earnings per share were $0.61 for the quarter, and our profitability remains peer leading. Moving on to Slide 10, we present details of our net interest income and margin, both of which reflect my prior comments around day count, the nature of this quarter's loan production and the impact of our subordinated debt issuance. You'll note that we remain neutral to short-term interest rates, and we have a total of nearly $8 billion in fixed rate loans and securities expected to reprice over the next 12 months. Slide 11 shows trends in adjusted noninterest income, which was $122 million for the quarter, exceeding our guidance. While most of our fee businesses performed in line with our expectations, we again saw better-than-expected performance within mortgage despite typical seasonal patterns in that business and within capital markets. In both cases, this was driven by the mid-quarter dip in rates. Continuing to Slide 12. Adjusted noninterest expense was $354 million for the quarter. Run rate expenses remained well controlled, and we generated positive operating leverage, both quarter-over-quarter and year-over-year. We reported a record low 46% adjusted efficiency ratio, and we have now realized 100% of the $111 million of annual run rate cost saves that were anticipated with Bremer. On Slide 13, we present our credit trends. Total net charge-offs were 26 basis points or 19 basis points, excluding charge-offs on PCD loans. Criticized and classified loans increased $113 million this quarter as Bremer loans transitioned to Old National's asset quality framework consistent with our due diligence expectations. Legacy Old National upgrades partly offset this increase. Nonaccrual loans to total loans decreased modestly, the fourth consecutive quarter of improving performance trends due to active portfolio management. The first quarter allowance for credit losses to total loans, including the reserve for unfunded commitments was 122 basis points, down 2 basis points from the prior quarter, primarily driven by charge-offs on PCD loans and loan growth in lower risk portfolios. Consistent with the fourth quarter, our qualitative reserves incorporate a 100% weighting on the Moody's S2 scenario with additional qualitative factors to capture global economic uncertainty. Lastly, given the continued focus on loans to nondepository financial institutions, we'd again like to emphasize that our exposure is de minimis. All said, MDFIs are approximately 1% of total loans; all are performing and, like other businesses that we bank, most are long-standing client relationships. Slide 14 presents key credit metrics relative to peers. As discussed in past calls, we've historically experienced a lower conversion rate of NPLs to NCOs as compared to our peers, driven by our approach to credit and client selection. That continues to be the case, and we remain comfortable around the credit outlook. On Slide 15, you can see our capital position at the end of the quarter. Regulatory ratios and TCE were stable linked quarter as strong retained earnings were offset by the robust quarterly loan growth, share repurchases and merger-related charges. Still, tangible book value per share was up 6% linked quarter annualized and 11% year-over-year. Our peer-leading profitability profile continues to generate significant capital, which opened the door for capital return late last year. As previously mentioned, we repurchased 3.9 million shares of common stock during the first quarter and have $383 million remaining under our program. Lastly, of note, while not yet finalized, we would clearly expect a capital benefit under the proposed capital rule changes. This would mainly come from reductions in RWA treatment within our mortgage book and changes to the treatment of unfunded commitments over one year. Obviously, these changes, if finalized, could present meaningful capital optionality. In any case, we feel confident in our plans to continue to execute on our buyback plan, which runs through the end of February. Slide 16 includes our outlook for the full year 2026, which is unchanged from our prior guidance. We believe our current pipeline supports full year loan growth of 4% to 6% and based on the results of the first quarter, we suspect we may trend to the higher end of this range. We anticipate continued success in the execution of our deposit strategy and expect to meet or exceed industry growth in 2026, generally in line with our asset growth. Our NII guidance remains unchanged, and our balance sheet remains neutrally positioned to short-term interest rates. Obviously, the exact path of NIM and NII in 2026 will depend on growth dynamics, the shape of the yield curve, the absolute level of rates in the belly of the curve and the competitive landscape, but our base case outlook assumes the Fed has done for the balance of this year and that the 5-year, which has been volatile year-to-date, stabilizes at about current levels. We expect our fee businesses to perform well, supported by a robust loan pipeline that is driving capital markets activity, along with continued momentum in our wealth management and brokerage businesses. To that end, we believe we would trend towards the higher end of our full year fee income guide. Expense guidance is unchanged despite a lower-than-expected outcome in the first quarter, but this is due to a robust talent pipeline and our expectation of continued investment in operational excellence. As a reminder, second quarter includes normal seasonal factors such as merit increases. Our expectations for credit and income tax rates are unchanged. In aggregate, you'll note that we expect full year results that yield 15% plus growth in earnings per share and again, feature positive operating leverage with peer-leading profitability, good growth in fees, controlled expenses and normalized credit. To close, the first quarter sets the tone for the rest of 2026, and we are on the front foot. We intend to stay there. Organic loan growth was strong and pipelines are healthy. We maintain a granular low-cost deposit franchise and our credit book remains stable. That gives us the flexibility to invest in ourselves in talent and in capabilities while continuing to return capital to shareholders. As Jim said at the top of the call, Old National enters the balance of 2026 with good momentum and added conviction in our ability to execute. With those comments, I'd like to open the call for your questions.

Operator instructions. And our first question comes from the line of Scott Siefers with Piper Sandler.

John, I was hoping you could please walk through sort of the major drivers of net interest income momentum going forward. I know you touched on the seasonality in the first quarter and the impact of the subordinated debt issuance. Because I think the year started a little weaker than at least the market had expected, those idiosyncratic factors notwithstanding. But you kept the guide; I think the quarterly NII will need to average about 5% higher through the remainder of the year to get to the midpoint. So just sort of what gives you confidence in the guide and what are the major puts and takes you see.

Yes. So first and foremost, we've got a more cooperative yield curve today than what we had on average for the first quarter. So that will be a helper. Then we've got $5.5 billion sitting in the pipeline, up 14% year-over-year, and we feel really good about the growth outlook. What's driving that is a little bit more balanced production in terms of CRE versus C&I than what we saw in the first quarter. So I think the spread implications of that are favorable to us as we look forward into second and third quarters.

Okay. Perfect. And then that sort of touches on the second one, which was sort of the margin specifically. Presumably, that beneficial mix shift in the loan portfolio should be helpful. But when we think about the launching point of the 3.55% margin, any other factors that would cause it to jump up from here? I think in your prepared remarks, you suggested stable to improving for both NII and the margin.

Yes. I think stable to improving is the right way to think about it. Recall, we will get four basis points back on day count and so that will kind of be a launch point there. And yes, I think stable to improving is the name of the game for this year.

And our next question comes from the line of Ben Gerlinger with Citi.

I just want to double check on some numbers. You said loans at the higher end of the range. You're building out a bigger team and hiring. Are you saying the higher end of the range on expenses? Or is it still within that guidance despite the lower core in the first quarter?

I'm going to walk back one thing you said. We said loans at the high end of range, NII guidance is unchanged, fees at the high end of range and expenses are unchanged despite a better-than-expected outcome in the first quarter. That piece of the guide on the operating expense side is really due to the talent pipeline that Tim and Jim are building. I think we're having more conversations today than at any other time since I've been at Old National, and we're really excited about that pipeline.

I apologize. It was on hires. I just wanted to kind of push you a little bit here. Things are looking good and you're hiring and setting up — the hires today are obviously not impacting much for growth in 2026, call it more of a 2027 and 2028 story. Both look good. Why not be more aggressive on the shareholder buyback or return?

Look, we feel really good about where capital is. We fully intend — we've got $383 million left on this existing authorization. We would fully intend to use that through the end of that authorization in February. A combined payout ratio that's close to two-thirds of what we generated in the first quarter and still being able to support loan growth, I think is a pretty good place to be. So we feel comfortable with where we are. If those capital rules become final, we'll have some additional optionality and will clearly think about what we're going to do with that, incremental to everything we're doing today.

Incremental to everything we're doing today.

Exactly.

Our next question comes from the line of Brendan Nosal with Hovde Group.

Starting off on loan growth. I know you've been working towards these numbers for years in terms of the bank's growth capacity, but it really feels like something clicked this quarter and will continue to click through the balance of the year. Has anything changed environmentally in your favor? Or is this just the culmination of a lot of effort?

We're leaning into go-to-market strategies. We're really focusing on sales excellence and being tighter in who we're targeting, how we're targeting and leveraging the full breadth of products and our platform. We've seen that come together nicely this quarter, and we like the trends that we see in the record pipelines. We think that will continue to come to fruition. As we add more bankers and more talent, we like the opportunity to continue to drive that growth going forward.

Maybe pivoting to capital. I heard the commentary on the proposed capital rules and the benefits that would drive. You mentioned that opens up the option set down the road. Near-term you have buybacks and lack of interest in M&A at present. But longer term, if you and others are sitting with more capital, what does that allow you to do longer term?

For us, I think you'd see a reduction in RWA roughly in line with what others have estimated for midsized banks. On our balance sheet, the two biggest drivers of that are the LTVs in our one-to-four family book and the treatment of line utilization over one year. Some banks shortened commitments to avoid higher weights; Old National never did that. The capital treatment on that piece of our book would be favorable. I think in total, it could be up to 100 basis points, give or take, on CET1, and that is not a level that we're going to run the bank at. First and foremost, that would support continued organic growth; secondly, return of capital. It's also about getting comfortable with where the industry settles: what are the right CET1 and TCE ratios to run the organization long term. We believe we have a lower risk model and should be at the peer average or lower, but there's work to define what normalized levels should be.

And our next question comes from the line of Chris McGratty with KBW.

On the Basel discussion, the 100 basis points you referenced is ballpark. We've heard many banks talk about balancing CET1 and TCE, with one going as far as saying 8% might be the right number for TCE. How do you view the interplay between the two? I know rating agencies care about both.

Those are the two metrics, and we've long been sensitive to both. We feel good about where we are in TCE as evidenced by our capital returns and a combined payout ratio of 64% of the quarter's core net income while still supporting organic growth. We still need to determine industry long-term targets and what's appropriate for Old National, but we feel good where we are.

From a stress testing perspective, we feel good about our capital levels and could push harder, but there becomes a point when under stress, having higher capital levels causes less pain. We're trying to figure out the right long-term view and not get caught up in short-term windows. We also need to balance other stakeholders.

On deposit pricing, if the forward curve is right and there are no more cuts — if the 170 basis point spot is flatlined until the Fed moves again — are you essentially flatlined until the next Fed move?

I think we still have some opportunity in the back book. We've got some opportunity with brokered deposits as well, but the material decreases in spot rate are probably behind us if the Fed is done for the year, which is our base case. Deposit competition is intense but rational, and the environment around specials has stayed a bit frothy longer than we'd have hoped for as an industry.

And our next question comes from the line of Janet Lee with TD Cowen.

When I look at Slide 10 on the impact to net interest margin, that 19 basis point negative impact from rate and volume mix. Relative to 5.88% total loan yields for the quarter, should we expect loan yields to increase in the second quarter as the rate impact is decreasing or basically gone? The first quarter had an overly high concentration of higher-quality C&I loans, which carry lower spreads. That's not bad, but I want a sense of a good loan yield to start off as we head into the second quarter. Also, could you talk a little more about what you're doing on the AI front that is helping efficiency and expense enterprise-wide?

You've got the moving parts. On margin, about ten basis points of the impact was day count for us. The balance was largely due to funding costs. There was a de minimis amount from churn in the book, maybe four or five basis points on loan yields. Going forward, like margin, loan yields are stable to improving and will depend on business mix of production.

When I look in the pipeline, a greater portion is being driven in community markets where we see less competition and strong market share. A larger part of our pipeline for the second quarter is in core middle market, third- and fourth-generation companies where you can tend to get a little more spread on that as well and good core operating deposits with those loans. So compared to the first quarter, we see mix shifting toward loans with slightly better spreads.

Got it. That's very helpful. I'd also love to hear a little bit more about what you're doing on the AI front that you mentioned earlier and how it's helping efficiency across the enterprise.

Like others, we are investing in AI. We've set up an AI center of excellence within our technology and data teams. Our progress to date is a lot of singles and doubles. A real example: we had legacy Power BI code that we lifted and shifted into a new data environment; it was clunky. We applied AI and what would have taken some of our best programmers a month to clean up was done in a week. That's a practical example of productivity gains. We have interesting use cases, and probably the first deep dive for us will be in risk management. Embedding risk into the first line requires many checks; that is a perfect AI use case. I think the cost of building that will be a fraction of what it would have been three years ago because of AI advancements. We're excited about it and expect it to free dollars to invest in revenue-facing talent.

And our next question comes from the line of Brian Foran with Truist Securities.

If loan growth momentum continues and we think about scenarios where it could be above your guide, do you think earning assets will be growing at the same level? Or is there some point where if loan growth is higher, we should expect you to moderate securities and cash a little bit?

It's fair to think about everything generally growing in lockstep. So as loan growth goes, the liquidity and securities book would grow with it.

On the Basel discussion, it's early, proposals could change. You referenced specific areas getting better treatment. Do you think this is big enough where from a strategic standpoint you might do more hiring or focus certain types of lending, or deemphasize others? Is this a big enough move that you'll remix the business to optimize around it?

It's a little early to say for sure. One area to watch is the one-to-four family treatment; the regulators seem to be trying to encourage banks to be back in that business more meaningfully. That could have interesting implications we'd think through if it became permanent.

And our next question comes from the line of Brandon Rudd with Stephens.

If I could drill in on loan yields a bit: do you have the purchase accounting accretion for the quarter?

Not handy, but it was roughly unchanged. The net of purchase accounting accretion and interest collected on nonaccrual was a wash; no material impact on overall margin.

For the other side of the balance sheet, you mentioned deposit cost competition. A superregional last week said the Midwest is a bit more competitive than other regions. Since your footprint stretches across the Midwest, are there markets in particular that are more competitive than others?

In the Midwest, not really. Our most competitive market is probably Nashville. We don't have a large back book there relative to other markets. Most of our markets are competitive but rational.

Some large national players are offering very high rates that primarily compete with our wealth and private client businesses, which can be challenging at times.

And our next question comes from the line of David Chiaverini with Jefferies.

On expenses, can you talk about areas of investment and how we should think about positive operating leverage? To the extent you're guiding to decent operating leverage, where should we look for that to show up?

We're modeling pretty decent positive operating leverage for the year. When we stack it up against peers, we were either number one or number two on that metric for the quarter. Our expectation is to continue to drive quarter-over-quarter and year-over-year positive operating leverage. We walk into every budget cycle with that as a guiding principle. It's important to us and something we're focused on delivering in 2026.

Great. Shifting to pipelines, you said loan pipelines are up 14%. Any particular industries driving that?

They're pretty balanced with no real industry concentration. We've seen a nice pickup in CRE pipelines and CRE is building. C&I remains strong. Markets like Minnesota have building momentum and pipelines higher than they've been in the last 18 months. It's a good mix of CRE and C&I with no industry concentration.

And our next question comes from the line of Jared Shaw with Barclays.

Looking at components of deposit pricing, it seems the exception book has driven most of the downward pressure on deposit costs, and the non-exception book might be going up a little. Can you talk about the dynamics there? Is there emphasis on moving more weighting toward exception pricing?

The exception book is where we saw the uprate beta and that's how we've historically managed deposit costs at Old National. It's where we've experienced the down-rate beta as well, and we're pleased with how it's performed. Don't forget seasonal factors: public funds balances are at a low point in the first quarter and rebuild in the second and third quarters, and there's seasonality in noninterest-bearing deposits on both the commercial and public sides. Those factors can explain quarterly moves in deposit costs.

Okay, great. And a little more on the leadership changes in commercial banking: Chris was mentioned. Is there any specific expertise he brings in terms of lending verticals that would alter the pace or areas you're hiring in?

Chris' background is diverse and we're excited about what he brings. Primarily on the C&I side — asset-based lending and core middle-market banking — which is the old-school banking we're known for. Chris will help drive growth there. At the same time, John Thurston on corporate banking brings depth and we're looking at ways to grow there as well. We're excited about the depth both bring to our growth plans.

And our next question comes from the line of John Arfstrom with RBC Capital Markets.

We were just in Minneapolis yesterday. I didn't see you in the Skyway.

No, I had a seatbelt on my office chair. Can't leave my desk. A few follow-ups. John, you said the yield curve may be a little more cooperative now. What changed and what is more ideal for you guys?

The five-year came back to around 3.90% which is helpful and there's a bit more steepness in the curve. A slightly better belly is helpful for us.

Following up on positive operating leverage: you flagged a record adjusted efficiency ratio this quarter of 45.7%, which is great. Are you saying that could go lower?

I think we'll try to keep it where it is or maybe grind it lower.

The tension is we don't want that efficiency ratio number to inhibit investing in our future—investing in growth and in talent. If we're successful converting this talent pipeline, the breakeven is an 18-month kind of scenario. The people we're hiring are often top decile performers and come at higher cost. I don't want the 45% number to stop us from investing in our future. If we have to raise the expense guide because we successfully recruit great talent, that's a good problem to have.

Fair. I don't want to say it's good enough — we want to keep pushing, but that's strong.

I agree. If you look at our history, it's remarkable progress.

One final question on the buyback: you flagged a piece that you purchased from the Bremer trust — how much is left there? Were those negotiated transactions and what's the plan? How much did you get from the trust?

We flagged that transaction when we did it. It was around $50 million of stock purchased. We put a filing out on that. The trust sees long-term value in ownership; we expect them to maintain long-term ownership and we are sensitive to the concentration they bring. No material change to their ownership other than the $50 million we reduced. The lockup expires quickly, but based on our recent conversations, we don't anticipate material changes in the near future. We have right of first refusal to support the market should they choose to sell, but we don't anticipate that based on conversations.

There are no further questions at this time. I'd like to turn the call back to Jim Ryan for closing remarks.

We appreciate everybody's support. As usual, we'll be here all day to answer any follow-up questions. Thanks so much.

Ladies and gentlemen, this concludes Old National's call. Once again, a replay, along with the presentation slides, will be available for 12 months on the Investor Relations page of Old National's website, oldnational.com. A replay of the call will also be available by dialing (800) 770-2030 access code 9394540 and this replay will be available through May 6. If anyone has additional questions, please contact Lynell Durkol at (812) 464-1366. Thank you for your participation in today's conference call, and you may now disconnect.