Old National Bancorp: Improvements Are Underway, But It Is Still Too Expensive

Old National Bancorp (ONB) reported Q2 2025 results exceeding EPS and revenue estimates, though the market reacted with a slight retracement. The recent Bremer Financial acquisition propelled ONB's assets past $70 billion, contributing to significant loan growth and a sharp increase in net interest margin to 3.53%. While the acquisition slightly elevated deposit costs due to brokered deposits, ONB reduced its AOCI unrealized losses by 8%, mitigating prior equity concerns. Despite these operational improvements, the bank's valuation remains at its three-year average, indicating limited undervaluation potential, and its dividend has stagnated for years.

Analysis

Old National Bancorp (ONB) reported a strong Q2 2025, beating both EPS and revenue estimates, largely driven by its recent acquisition of Bremer Financial. This strategic move has transformed ONB into a top-25 U.S. bank with over $70 billion in assets. The acquisition fueled a significant expansion of the net interest margin, which rose 26 basis points quarter-over-quarter to 3.53%, as improved yields on the loan and securities portfolios more than offset higher funding costs. A key area of prior concern, the accumulated other comprehensive income (AOCI), has shown marked improvement, with unrealized losses on AFS securities declining 8% to -$599 million. Consequently, total unrealized losses now represent a more manageable 11.50% of equity. While the Bremer deal weakened the deposit mix by increasing the share of expensive brokered deposits and resulted in minimal organic deposit growth of 0.80% annualized, the overall impact on profitability was positive. The bank's Commercial & Industrial loan pipeline grew 40% to $4.8 billion, indicating future lending momentum. However, with a Commercial Real Estate (CRE) concentration of 265%, near the 300% regulatory threshold, new CRE growth is constrained, though ONB has an opportunity to reprice $800 million in maturing low-yield CRE loans at a +300 bps spread if interest rates remain elevated. Despite these operational strengths, the bank's Price to Tangible Book Value is aligned with its three-year average, suggesting it is fairly valued at current levels.

Key Decisions for Investors

• Given that strong operational performance is balanced by a valuation in line with its historical average, investors might consider holding existing positions while monitoring for a more attractive entry point, such as a Price-to-Tangible-Book-Value ratio below 1.50x.
• Investors should closely track Federal Reserve interest rate policy, as sustained high rates are critical for ONB to realize the significant spread improvement from its $800 million in maturing CRE loans, a key driver for near-term profitability.
• The lack of dividend growth, despite a sustainable 33% payout ratio, remains a significant drawback; any announcement of a dividend increase post-integration would serve as a major positive catalyst.
• Monitor the ongoing integration of Bremer Financial, focusing specifically on management's ability to control the acquired higher-cost deposit base and sustain the newly expanded net interest margin.