Old National at RBC Conference: Strategic Growth and Optimism

Old National reported record earnings in 2025 and issued 2026 targets of ~15% earnings growth, high‑teens ROTACE, a sub‑50% efficiency ratio and ~1.4% ROA, with loan growth guidance of 4–6% and wealth growth in the mid‑to‑upper single digits. The bank doubled its capital return authorization to $400M (from $200M) and says Bremer integration is in the 'late innings'; Tim Burke is new President/COO and talent hiring is a priority. Key risks: sustained, rational but intense deposit competition and a flat yield curve limiting margin expansion; strategic opportunities include treasury/capital markets buildout, participation in the Cari tokenized deposit network, and AI investments to drive efficiency.

Analysis

Old National’s recent moves should be viewed as a play on scale + optionality rather than just near-term earnings beats. Scale lowers marginal distribution costs for treasury and capital markets work, which in turn makes mid-cap client economics viable inside a regional branch footprint; that combination is a structural advantage versus both smaller community banks (who can’t fund product investments) and the largest banks (who are slower and more bureaucratic to reallocate sales resources).

The two biggest fragilities are funding cost persistence and execution risk on people-heavy growth. If deposit promo rates remain sticky because the curve refuses to steepen, margin upside will compress even as revenue diversifies — that compresses the payoff window for new hires. Separately, hiring-driven growth projects have high sequencing risk: pre-hire recruiting costs are immediate while client book payback is backloaded, so any slowdown in business formation or an abrupt regulatory expense increase will turn attractive IRRs into mid-single-digit ROEs.

Strategically, tokenized-deposit participation and accelerated AI adoption create asymmetric optionality: low incremental capex with high upside if adoption crosses a threshold among corporate clients. For investors, this argues for a barbell approach — capture near-term capital return optionality via yield-aware instruments while keeping a smaller, time-flexible flyer to benefit from tech-driven re-rating if product wins accelerate over 12–24 months.

Key Decisions for Investors

• Long ONB preferred (ONBPP): buy on weakness, target 9–12 month holding. Rationale: preferred captures capital-return optionality and is less sensitive to NIM swings than common equity. Position size 2–4% of risk assets; downside: dividend cut or funding shock (~‑8–12% price hit); upside: 15–25% total return if buybacks/dividends accelerate or market re-rates.
• Pair trade — long ONB common / short RY (equal-dollar): 6–12 month horizon. Rationale: express regional execution and digital/payments optionality vs a larger, slower competitor; hedges macro rate direction. Target asymmetric payoff: 20–30% upside on spread if adoption and hiring convert to revenue; stop 12% adverse move on either leg.
• Small options flyer on FHN (buy 12–18 month call spread): limited-cost asymmetric play on tokenized deposits adoption. Rationale: network wins would re-rate participants; limit premium at risk to <1% portfolio. Reward scenario: 2–4x option payoff if adoption accelerates; risk: full premium loss if slow uptake or market repricing.