Detailed Narrative
Strong Organic Growth and Pipeline Momentum
Old National delivered robust total loan growth of 8% annualized in Q1 FY26, significantly driven by a 16.9% annualized increase in Commercial & Industrial (C&I) loans. This growth is supported by record commercial pipelines totaling $5.5 billion, representing a 14% increase from year-end levels. The company attributes this success to refined go-to-market strategies, sales excellence, and strategic investments in talent, with a focus on winning new clients and deepening existing relationships.
Expense Management and Efficiency Gains
The company achieved a record low adjusted efficiency ratio of 46% in Q1, demonstrating strong expense control and positive operating leverage both quarter-over-quarter and year-over-year. Old National has fully realized the $111 million in annual run-rate cost savings anticipated from the Bremer merger. Investments in technology and AI are accelerating efficiency and scalability, with examples including using AI to streamline programming tasks, contributing to operational excellence.
Capital Strength and Shareholder Returns
Old National maintains healthy liquidity and capital levels, with a CET1 ratio comfortably over 11%. The company returned $151 million to shareholders in Q1, including repurchasing 3.9 million shares, resulting in a combined payout ratio of 64% of adjusted net income. Tangible book value per share grew 6% annualized linked quarter and 11% year-over-year, despite absorbing merger-related charges and increased capital return, underscoring strong capital generation.
Deposit Strategy and Funding Discipline
Total deposits increased 4.2% annualized in Q1, primarily driven by commercial and retail growth, partially offset by seasonally lower public funds balances. Noninterest-bearing deposits saw a slight decline to 23% of total deposits. Despite a competitive deposit environment, the company successfully decreased total deposit costs by 8 basis points and interest-bearing deposit costs by 14 basis points linked quarter, achieving an approximate 93% beta in its exception-priced book.
Credit Quality and Macro Assumptions
Credit performance remained stable in Q1, with net charge-offs at 26 basis points (19 basis points excluding PCD loans). While criticized and classified loans increased by $113 million due to the transition of Bremer loans, nonaccrual loans to total loans decreased modestly for the fourth consecutive quarter. The allowance for credit losses to total loans was 122 basis points, incorporating a 100% weighting on the Moody's S2 scenario, reflecting a cautious but stable credit outlook.
Regulatory Capital Optionality and Basel III Endgame
Management highlighted potential capital benefits under proposed capital rule changes, particularly from reductions in Risk-Weighted Asset (RWA) treatment within its mortgage book and changes to unfunded commitments over one year. If finalized, these changes could provide up to 100 basis points of CET1 benefit, offering meaningful capital optionality for future organic growth and capital returns, though the industry is still assessing optimal long-term capital levels.