Old National Bancorp (ONB) 2025 Q4 法說會逐字稿

Welcome to the Old National Bancorp fourth quarter and full year 2025 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 contain 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 those 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. Before we get started, I want to congratulate the Indiana Hoosiers for a perfect season and winning the national college football championship. You've made our state incredibly proud.

Earlier today, Old National announced strong fourth quarter earnings, marking an exceptional year that set new organizational records for adjusted earnings per share, net income, and the efficiency ratio. Our 2025 results were driven by a focus on the fundamentals, core deposit growth to support loan expansion, positive operating leverage, disciplined credit management, and healthy liquidity and capital ratios.

Once again, we showed our unwavering commitment to shareholders, clients, team members, and communities. Our peer-leading fourth quarter profitability was highlighted by an adjusted return on average damage of common equity of nearly 20% and an adjusted ROA of 1.37% and an adjusted efficiency ratio of 46%. These outstanding quarterly results further reinforce the momentum behind our 2025 record performance that John will discuss later in the call.

In the fourth quarter of 2025, we successfully completed a systems conversion and integration related to our Bremer Bank partnership. This was a major effort executed exceptionally well, and I want to thank our team members once again for their relentless focus and hard work throughout this process. The conversion reaffirmed the strength of our discipline integration framework, which truly sets Old National apart.

As we have stated, driving tangible book value per share growth is a key priority. This past year, we grew tangible book value per share by 15% despite the impact of closing our Bremer partnership, the associated one-time charges, and repurchasing 2.2 million shares in the back half of the year. We were made committed to strengthening tangible book value per share while continuing to drive tier-leading profitability.

Looking ahead to 2026, we will maintain the right balance between building capital organically and returning capital through share repurchases, supported by our peer-leading return on average tangible common equity. As I mentioned last quarter, the best investment we can make is in ourselves. Our focus remains on organic growth and disciplined capital returns to maximize shareholder value.

We started 2026 with strong momentum, and we will continue to strengthen our core fundamentals by investing in talent, technology, and client-facing capabilities. These efforts will ensure we remain strong, scalable, and positioned for long-term success.

Thank you. I will now hand the call over to John to read the financial results in more detail.

Thanks. On slide 5, as Jim mentioned, fourth-quarter 2025 was a strong finish to a highly successful year marked by records in adjusted EPS and efficiency, with peer-leading profitability, improvement in already durable credit metrics, and significant capital generation despite closing Bremer which solidified our position in Minnesota while adding attractive funding in North Dakota. Speaking of our latest partnership, I'd be remiss if I didn't mention that the conversion of Bremer was one of our smoothest and most successful integrations ever.

For the quarterly details on slide 6, we reported GAAP 4Q earnings per share of $0.55, excluding $0.07 of merger-related expenses, Bremer pension plan termination charges, and the reduction in our FDIC special assessment accrual. Adjusted earnings per share were $0.62, a 5% increase over the prior quarter, and a 27% increase year over year.

Results were driven by a stable margin, better-than-expected growth in fee income, and well-controlled expenses. Importantly, credit improved with an 8% reduction in total criticized and classified loans and low levels of non-PCD charge-offs. Our profitability profile as measured by return on assets and on tangible common equity remained top decile against our peers.

Lastly, our capital position has rebuilt quickly with CET1 over 11%, and we grew tangible book value per share over 17% annualized. On slide 7, you can see our quarterly balance sheet trends highlighting our strong liquidity and capital. Our deposit growth over the last year has continued to keep pace with asset growth, and the loan to deposit ratio is now 89%.

We grew tangible value per share by 4% from 3Q and 15% over the last year, even with the impact of the Bremer close and absorbing approximately $140 million of merger charges year-to-date while repurchasing 2.2 million shares since we restarted the buyback in the third quarter of 2025. These liquidity and capital levels continue to provide a strong foundation as we head into 2026.

On slide 8, we show trends in earning assets. Total loans grew 6.4% annualized from last quarter. Production was up 25% and was strong throughout our commercial book. Despite strong production, our pipeline is up nearly 15% from the prior quarter.

Higher production levels were again partly offset by strategic portfolio management as evidenced by our lower criticized and classified levels due to payoffs. The investment portfolio was essentially unchanged from the prior quarter, with portfolio purchases offset by changes in fair values. We expect approximately $2.9 billion in cash flow over the next 12 months.

Today, new money yields are running about 94 basis points above back book yields on securities. The repricing dynamics for both loans and securities combined with loan growth continue to support stable to improving net interest income and net interest margin over the course of 2026, with the first quarter impacted by two fewer days.

Moving to slide 9, we show trends in deposits. Total deposits increased 0.6% annualized. And core deposits excl brokered decreased about 3% annualized, primarily driven by seasonally lower public funds balances.

Non-interest-bearing deposits grew to 26% of core deposits from 24% in the prior quarter. Our use of brokered deposits increased in alignment with the aforementioned public funds seasonality. Even with that increase, our brokerage levels remained below peer levels at 6.7% of total deposits.

The 17 basis point link quarter decrease in our cost of total deposits played out as we expected with Fed cuts in our offensive posture with respect to client acquisition. We achieved an approximate 87% beta on rates in our exception price book in conjunction with the Fed cuts in the quarter. These actions resulted in a spot rate of 1.68% on total deposits at December 31.

Overall, we remain confident in the execution of our deposit strategy, and we are prepared to proactively respond to the evolving rate environment. Slide 10 shows our quarterly income statement trends. As I mentioned earlier, adjusted earnings per share were $0.62 for the quarter with all key line items in line or better than our prior guidance.

Moving on to slide 11, we present details of our net interest income and margin, both of which increased as we had expected and guided. Modest margin expansion was supported by deposit repricing.

Slide 12 shows trends in adjusted non-interest income, which was $126 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 and capital markets. In both cases, this was driven by a somewhat more favorable rate backdrop for these businesses.

Continuing to slide 13, we show the trend in adjusted non-interest expenses of $365 million for the quarter. Run rate expenses remained well controlled, and we generated positive operating leverage on an adjusted basis year over year with a record low 46% adjusted efficiency ratio.

We realized approximately 28% of the anticipated Bremer cost saves in the fourth quarter. And as a reminder, the saves from Bremer are expected to be fully realized in the first quarter. This is reflected in our 2026 guidance, which I'll get to in a few slides.

On slide 14, we present our credit trends. Total net charge-offs were 27 basis points and were 16 basis points excluding charge-offs on PCD loans. Criticized and classified loans decreased $278 million or approximately 8%, and non-accrual loans decreased $70 million or approximately 12%. This improvement is reflective of the continued focus on active portfolio management. Notably, in our commercial real estate portfolios, we saw upgrades and payoffs exceed downgrades by a 2 to 1 ratio.

The fourth-quarter allowance for credit losses to total loans, including the reserve for unfunded commitments, was 124 basis points, down 2 basis points from the prior quarter, primarily driven by the decrease in criticizing classified loans. Consistent with the third quarter, our qualitative reserves incorporate a 100% weighting on the Moody's S-2 scenario with additional qualitative factors to capture global economic uncertainty. Lastly, given the increased focus on loans to non-depository financial institutions, we'd like to emphasize, as we did last quarter, that our exposure is de minimis.

Slide 15 presents key credit metrics relative to peers. As discussed in past calls, we have 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 16, we review our capital position at the end of the quarter. All regulatory ratios increase link quarter due to strong retained earnings, partly offset by robust quarterly loan growth and Bremer merger-related charges. On the GAAP capital front, TCE was up about 20 basis points, and tangible value per share was up 4% in quarter and 15% year over year.

We expect AOCI to improve approximately 11% or $55 million by year end. Our strong profitability profile continues to generate significant capital, which opened the door for capital return earlier this year. As previously mentioned, late in the quarter, we repurchased an additional 1.1 million shares of common stock, taking our total to 2.2 million shares for the year. We don't view growing capital and returning capital as mutually exclusive in 2026.

Slide 17 includes updated details on our rate risk position and net interest income guidance. NII is expected to increase with the benefit of fixed asset repricing and continued growth.

Our assumptions are listed on the slide, but as we do each quarter, we would highlight a few of the primary drivers. First, we assume two additional rate cuts of 25 basis points each in 2026, which aligns with the current forward curve. Second, we assume the five-year treasury rate at 375 basis points. Third, we anticipate our total downrate deposit data to be approximately 40%, which is in line with our terminal uprate betas and our 4Q experience. And fourth, we expect non-interest-bearing deposits to remain relatively stable.

Importantly, our balance sheet remains neutrally positioned to short-term interest rates. As such, the path of NIM and NII in 2026 will depend on growth dynamics in the shape of the yield curve, the absolute level of the belly of the curve, and continued deposit data management more than the absolute level of short-term rates.

Slide 18 includes our outlook for the first quarter and full year 2026. We believe our current pipeline supports one cu growth of 3% to 5% and full year long growth of 4% to 6%. We anticipate continued success in the execution of our deposit strategy and expect to meet or exceed industry growth in 2026 and generally in line with our asset growth.

We expect fee income to remain strong given a supportive rate backdrop for mortgage and capital markets, as well as continued progress in wealth management and brokerage. Expense guidance incorporates a full quarter run rate on Bremer cost savings and typical seasonal factors in the first quarter. Other key line items are highlighted on the slide. You'll note that we expect full-year results that yield significant growth in earnings per share and again feature positive operating leverage with a peer leading return profile, good growth in fees, controlled expenses, and normalized credit.

In summary, echoing Jim's opening comments, 2025 was exceptionally strong. We completed the core systems conversion and integration associated with our Bremer partnership. That partnership created a leading bank franchise in Minnesota and added valuable funding with good market share in several markets in North Dakota. We compounded tangible book value per share despite closing that deal and advanced our peer-leading return on tangible common equity and efficiency. And we funded our loan growth with deposit growth while improving our already resilient credit metrics.

In 2026, we remain focused on organic growth and returning capital shareholders, investing in ourselves to drive excellence in talent, operations, sales execution, and client-facing capabilities. This will ensure that we will remain strong, scalable, and positioned for long-term success.

With those comments, I'd like to open the call for your questions.

(Operator Instructions) Scott Siefers, Piper Sandler.

Thank you for taking the questions. Let's see, I guess, John, maybe first question for you is hoping you could maybe help with how you see the margin trajecting through the year. Just noticed on the sort of the NII walk on slide 17. You've got a much bigger step up in NII in the second half versus what we should see here in the next couple of quarters. Is that a function of sort of timing of asset repricing, or your expectations for rate cuts? Just curious as to the nuance in there.

Yeah, I think the bigger factor there, Scott, is actually day count, right? So just remember the first two quarters of next year, we got a couple less days in each of those quarters. I think -- and then when we think about the trajectory of margin in 2026, it's really four big factors on that. I think its growth is number one, so we're sort of guiding 4% to 6% on that side. The second would be steepness of the curve and how that plays out. So knock on wood, the forwards actually come true.

Number 3 would be belly of curve on fixed asset repricing. And then number 4 would be our continued ability to manage beta on the downside, which so far has gone really, really well. And so I think those are the big swings on the margin. Okay.

Okay. Perfect. And then great to see the strong kind of end to the year just in terms of proactiveness of capital management. Maybe just sort of thoughts on pace of share repurchase throughout the year vis-a-vis the 1.1 million that you did in kind of late in the fourth quarter.

Yeah, Scott, I would say this year we plan to be more active than we were last year. We obviously want to make sure we have enough capital to support growth. And then I think our next priority is making sure that we return it back to our shareholders. So we're going to see how the year plays out a little bit, but it would be a definitely more active year in 2026 versus last.

Got it. Perfect. All right. Thank you guys very much. Appreciate it.

Thanks for the call, Scott.

Brendan Nosal, Hovde Group.

Maybe just to circle back to the margin. John, totally get your comments on day count. I mean, if we strip out day count factors from margin because I think you guys use a simple -- multiply by 4 to get to your margin presentation. Is it fair to say that like a day count adjusted margin is stable, if not a big grinding higher as we move through the year?

Very fair. I think you captured it.

Okay. Then maybe moving to the credit side of things. I think if I interpolate the kind of the various pieces on the guide for a loan growth charge-offs and provision, I think it implies a bit of a reduction in your reserve coverage ratio versus loans. So I guess just what are you seeing either in your own portfolio or the macro inputs that would let you slightly underprovide for both growth plus loss content.

Yeah. It's really the migration in the criticized and classified book and improvement on those measures two or three now quarters of really, really solid improvement there, close to $70 million bucks lower on NPLs in this quarter. And when you've got that kind of fundamental improvement, it's just -- the model just spits out what it spits out. It kind of math maths, right? And so, clearly, I think we're through the peak in that -- in those, categories of classification.

Okay. Perfect. Thank you for taking the question.

Jared Shaw, Barclays.

Just circling back on the capital and hearing what you're saying about the buyback, how should we think about sort of a good core target CET1 for you as we move through '26 with sort of all those assumptions behind it?

Yeah. Jared, very comfortable with where we are on CET1 today. And Jim said it well, first priority is I'm sure got powder for organic growth, right? But left unchecked, this is going to grow quickly, arguably too quickly, and we're not going to let it go unchecked.

But not a -- we shouldn't assume that you're trying to target back down to like a 10.5% from where we are right now.

No, I don't think so, not at this time. And again, I think we said we don't view it as mutually exclusive to grow a little bit of capital and return capital in 2026.

Okay. And then I guess shifting to deposits, you had really good growth in DDA on average and end of period, but then you call out sort of a relatively stable balance for '26. How should we think about sort of seasonality? And is that stable as a percentage of deposits? Or is that stable as sort of dollars of deposits from here?

Yeah, I'm thinking that it's stable as a percentage. We've got some seasonality obviously in the public funds book, but other than that, nothing to really talk about on the deposit side in terms of seasonality.

Great. Thank you.

Ben Gerlinger, Citi.

I'm wondering if you could talk to the growth a little bit. I know that some of your larger competitors in the area of acquisition is pending. And maybe they're taking your eye off the ball, or different markets, or is it just hiring, or potentially just kind of deepening relationships with kind of the new Bremer customers. I was just kind of curious where's the growth coming from like existing or new areas. Just kind of unpack that a little bit would be helpful.

Sure. Good morning, Ben. This is Tim. We're seeing broad-based growth from the C&I middle markets standpoint. We're also seeing enhancements from CRE demand drivers. And we're going to continue to be opportunistic and aggressive from a talent perspective. So we think as the year unfolds and we continue to add talent that will also help drive. Consumer sentiment is showing that demand is growing.

Got you. That's helpful. And then if you could think about kind of the pricing of that. Is there any areas where it becomes a little bit more overly competitive, or any geographies where it's just like they're not getting the ROTCE adjusted to rather not play? Or you think -- I mean, it's always competitive. So I'm just kind of layering that in. Any thoughts on just pricing within the loan categories or geographies?

We continue to be very disciplined in our pricing model. Obviously, where you see disruption, I think there is opportunity as banks are playing defense with the disruption. But we're being opportunistic in certain high growth markets. But across the board, a very disciplined approach to pricing as we look to grow loans.

Ben, I just -- I reiterate the point that Tim made earlier. And we try to highlight that in our remarks. Our plan is to invest heavily in talent. Tim's been around about six months now, got his feet wet, thinking about how do we best organize for success and really get after it. And I think this -- I think we'll be like some of our past years where we're going to highlight some real growth and talent. And so we're excited about what that might bring for us.

Terry McEvoy, Stephens.

Maybe start with just a question on fees. If I annualize the fourth quarter, it's kind of at the high end of your 2026 outlook. And I'm wondering, is there a bit of conservative -- conservatism built into your outlook or maybe mortgage returns to more normal levels? I was hoping to get your thoughts there.

Yeah, I think, Terry, there's a little bit of seasonality obviously in first quarter on the mortgage line. Mortgage was good last year. I wouldn't say great but good. We've got a constructive, or more constructive, anyway, rate backdrop on that line of business.

So I'd say we're cautiously optimistic on mortgage for '26. But what you see in the guide is, if I were going to pick on two places where maybe we've got some upside, it would be mortgage and cap markets. Both of which have been really good in the back half of 2025.

Yeah, agreed. And then as a follow-up, new production yields were 6% last quarter I think in the presentation. Could you just run through what's the incremental kind of repricing benefit that you're seeing? And John, could you run through the securities repricing as well? I couldn't get all those, couldn't write everything down as you were going through your prepared remarks.

Yeah, no problem. In total, there's, on the loan side, 70 basis points. In terms of spread to new yields against the portfolio, about $5 billion of that over the next 12 months. And then on the investment portfolio, $2.9 billion of cash flow over the next 12 months. And those new money yields are 94 basis points above the back book yield.

Perfect. Thanks for taking my questions.

Janet Lee, TD Cowen.

For your securities portfolio, the new money yields of 5%, it seems pretty solid. What's the underlying drivers behind the securities yields that you're earning? And is it fair to assume the securities investment portfolio stays around this level or running down as your expectation for deposit growth appears to be in line with your loan growth for 2026?

Yeah, I think securities as a percentage of earning assets or the way that we kind of look at it is cash and securities as a percentage of total assets. And I think that that's going to be pretty stable over 2026, so we don't really intend to grow it nor shrink it. I think we'll just continue to invest cash flow.

And in terms of where we're going, it's really plain vanilla stuff. I mean, we're targeting kind of a [four] duration, and Mike and his team do a good job managing that for us. So I don't think there's going to be big changes in our securities book.

Got it. Thank you. And just to follow-up on deposit costs and your expectation for your NIM of stable to moving higher throughout 2026. So the spot rate of 1.68%, that seems -- I mean, given the strength of your deposit franchise, it seems lower than here's it. And it looks low. We're on an absolute basis.

Is there an expectation that the total deposit cost could creep down more from the current levels, given the amount of exception pricing deposits that you have on your balance sheet? Or is more of the benefit coming from the fixed rate asset repricing?

I think it's both. Look, where we managed all of our beta in the deposit book was via that exception price book. That book today is 36% of total deposits. It's about 45% of our transactional accounts. And that price, we think we still have room to pull down. And we're continuing to work that book really hard. We've realized almost a 90% beta on that one kind of point to point. And we're ready to move proactively with rights.

Chris McGratty, KBW.

Thanks for the question. Jim or John, one of your peers has made a comment recently that said deposit pricing particularly Chicago was actually pretty reasonable, which is something I haven't really heard in my career. Any comments on deposit repricing by your markets which expand the Midwest?

Yeah. Look, I would suggest that it's still competitive. But I think almost everywhere it is -- it has been very, very rational. There are a handful of markets out there that are a little bit spicier, but I think for the vast majority of our footprint. And certainly, any place where we've got meaningful deposits and meaningful share, things have been very rational.

Okay. And then just quickly on the on the expenses. Technology spends gotten a lot of attention this quarter. I'm not sure if I've seen a number from you of what piece of the expenses are going into tech investments. But any color there either percent of revenues, rate of growth? Any kind of color to kind of give us some context there?

Maybe just let me give you a quick view. I think we're spending as much (technical difficulty) at this point in time. We're not underfunding new investments. We're thinking about innovation in the payment space, innovation in the client facing capabilities. And we're really good at self-funding a lot of that. Even though we keep grinding on the efficiency ratio, we're really good about self-funding those new investments.

If there's anything that I think we're going to continue to put pressure on, it's probably that salaries line item. As I said earlier, I want to make John uncomfortable with the amount of people that we plan to hire to really grow the front line. So I'm very comfortable with our technology spend. And I'm even more comfortable that we couldn't spend any more really and handle the organizational change that comes out of that. So I think we're at the right level, and we're certainly not underfunding any opportunities that are in front of us.

All right, great. Thank you.

David Chiaverini, Jefferies.

Hi, thanks for taking the question. So I wanted to circle back to loan growth, the 4% to 6% guide. Can you talk about, what could lead to the high end versus the low end and also talk about borrower sentiment on the commercial side.

Sure thing. Good morning, David. This is Tim. I'll start with the sentiment side. We think customers are feeling more optimistic about 2026 than the prior few years. Part of the contributing factors would be lower rates, more experience dealing with tariffs, clarity on the tax bill, and certainly M&A heating up. So we think from a demand perspective, things are -- sentiment is driving that higher.

As far as some of the factors that could drive the higher end of that, we're seeing middle market C&I picking up. We think our message of being a community bank, very client centric is one that plays very well in that space. To continue to build on Jim's comment, talent is a big factor here. I think continuing to add bankers strategically in high growth markets will help drive that. And I think our expansion markets continue to show really good loan growth and opportunity as we continue to build out those teams.

Great. Thanks for that. And then on the outlook for M&A, so the Bremer integration has gone well. Can you give us your latest thoughts on your appetite for M&A going forward?

Yeah, I think it's like we said last quarter, we're really focused in on investing in ourselves, being a better version of ourselves. I think that that's the best return we can provide for our shareholders today is continue to work on ourselves and grow organically. And it's just not -- it's not a focus. It's not something we're spending a lot of time on today. And nothing would make me happier if we finish the year just by being a better version of ourselves.

Very helpful. Thank you.

Jon Arfstrom, RBC.

John, the strategic portfolio management that you referenced earlier, how much is left to do there?

I think it's kind of constant and ongoing, Jon. It's just like, look, the inflow into the classified and buckets that we saw starting kind of 18 months ago, we really feel like we've got our arms around that. Obviously, the lost content there has been de minimis. And I think we're through the worst of it but ongoing active portfolio management like we always do.

Okay. But maybe Jim, can you talk a little bit more about the wealth strategy and outlook and what kind of expectations you have for that business?

Yeah, I think we're doing really well. But again, I also -- I would reiterate my comments around the talent. That's really a talent play, Tim's spending a lot of time with our wealth teams. In fact, he's meeting with the sales team here next week, really trying to ramp up expectations around ongoing hiring in that space.

We've been successful and probably more successful than many of our peers, have been in that space, but I think we can do even better. I really see great opportunities for us there. So I think we've built the product capabilities to be successful. We've got the right business model.

I think we're organized for success. But really what we can do is I think we're under penetrated in some of our biggest markets with talent. And I think if we can pull that part off, which I believe we can, I think we can even see higher growth coming out of that business line.

And one thing I would add. This is Tim. I think our partnership and collaboration with the commercial bank, there's continues to be opportunities to more fully deliver the entire bank into our wealth clients and into our commercial clients. And we're seeing partnerships and those referral activities really drive good results there.

Yeah, okay, fair enough. And Jim, congratulations to the Hoosiers. I know you're pushing Moran on expenses, but hopefully, there's room for some Hoosier game day lager in the budget.

I like it. I like it. We're very excited, and we're so proud of them. What a great story and can't wait for the movie Hoosiers 2 to come out soon.

Great story. Thank you.

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

Thank you all for your support and participation. The team will be available for calls all day today. Thanks so much. Hoosiers

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. This replay will be available through February 4. If anyone has any additional questions, please contact Lynell Durchholz at (812) 464-1366. Thank you for your participation in today's conference call.