Executive Summary / Key Takeaways

• Old National Bancorp is executing a disciplined, relationship-focused banking strategy, leveraging strategic M&A to expand its footprint and enhance scale, most notably with the recent CapStar integration and the pending Bremer acquisition set to close May 1, 2025.
• The company delivered strong Q1 2025 results, driven by solid loan and deposit growth, stable net interest income and margin performance (meeting expectations), and disciplined expense management, contributing to positive operating leverage.
• Credit quality remains resilient, with management proactively building reserves based on conservative macroeconomic scenarios and qualitative factors, maintaining delinquency and charge-off ratios below peer averages despite a modest increase in nonperforming loans.
• Capital levels are strong and expected to accrete rapidly, with the Bremer acquisition anticipated to provide higher-than-modeled day-one capital, offering significant balance sheet optionality and supporting future organic growth and potential optimization.
• While lacking specific, quantifiable technological differentiators compared to larger peers, Old National is strategically investing in fee income businesses like wealth and treasury management and focusing on leveraging its community banking model and M&A execution as key competitive advantages.

The Foundation: A Relationship-Focused Bank Building Scale

Old National Bancorp, founded in 1834, stands as the sixth largest commercial bank headquartered in the Midwest and ranks among the top 30 banking companies in the United States, boasting consolidated assets of $53.9 billion as of March 31, 2025. The company operates primarily across the Midwest and Southeast regions, built on a foundational strategy centered on basic banking fundamentals: cultivating low-cost core deposits, exercising disciplined lending, and fostering deep client relationships.

This enduring approach has served Old National well, particularly in recent years. Since 2022, the company has demonstrated robust organic growth, achieving an impressive compounded annual growth rate of 8% in both total deposits and loans, a pace that has exceeded overall industry growth (as measured by H.8 data). This growth is not merely a function of market tailwinds but a direct outcome of strategic investments in new markets and talent, coupled with a relentless focus on client acquisition and retention.

In the competitive landscape, Old National operates alongside larger regional and national players such as Fifth Third Bancorp (FITB), Huntington Bancshares (HBAN), Regions Financial (RF), and PNC Financial Services Group (PNC), as well as facing indirect competition from fintech firms. While peers like FITB and PNC often possess advantages in scale and digital innovation – offering faster processing speeds or more advanced mobile platforms – Old National distinguishes itself through its community banking model. This localized presence and relationship-driven approach foster higher customer loyalty, particularly in its core Midwest markets, providing a competitive moat that supports stable deposit bases and granular loan portfolios. The company's use of brokered deposits, for instance, consistently remains less than half peer levels, highlighting the strength of its core deposit franchise.

However, the competitive arena is intensifying. Management notes increased competitive pressures in both lending and deposit gathering over the past quarter. While Old National believes its relationship model grants it the "right to win," the digital gap remains a vulnerability. The company's noninterest expense includes technology costs ($22.020 million in Q1 2025, up from $20.023 million in Q1 2024), indicating ongoing investment. Management acknowledges the risk of "disruptive technologies" but the company does not appear to detail specific, proprietary technological differentiators or R&D initiatives with quantifiable targets that would provide a distinct technological edge over rivals. Instead, the strategic response to competitive pressures involves leveraging its cost efficiency (evidenced by lower interest-bearing deposit costs compared to peers) and focusing on relationship-based growth and strategic M&A to build necessary scale.

The company's recent history is marked by significant strategic partnerships aimed at achieving this scale. The acquisition of CapStar Financial Holdings (CSTL), completed on April 1, 2024, successfully integrated into the Old National network by mid-October 2024, solidifying the company's foothold in the high-growth Nashville and broader Southeastern markets. Building on this, the pending acquisition of Bremer Financial Corporation, announced in November 2024 and anticipated to close on May 1, 2025, is poised to significantly enhance Old National's presence and density across Minnesota, North Dakota, and Wisconsin. These transactions are not merely about increasing asset size but are strategically designed to boost the balance sheet, enhance earnings growth, and provide greater operational scale in an uncertain economic environment.

Performance Reflecting Strategy and Market Dynamics

Old National's first quarter 2025 results underscore the effectiveness of its strategy in navigating a challenging environment. Net income applicable to common shareholders for the quarter was $140.6 million, or $0.44 per diluted common share. Excluding merger-related charges and net securities losses, adjusted earnings per share were $0.45. These results were driven by continued growth in both loans and deposits, disciplined expense management leading to positive linked-quarter operating leverage, and resilient credit quality.

Total loans, excluding loans held-for-sale, increased by $128.1 million, or 1.4% annualized, reaching $36.4 billion at March 31, 2025. Excluding the sale of $71 million in commercial real estate (CRE) loans during the quarter, the annualized growth rate was a more robust 2.3%. Loan production remained strong, particularly in the commercial book, with quarterly new loan production rates in the high 6% range. Management notes that new production is currently margin accretive, with new loan yields significantly above marginal funding costs.

The deposit franchise continues to be a source of strength. Period-end total deposits grew by $211 million, or 2.1% annualized, to $41.0 billion at March 31, 2025. Core deposits (excluding brokered deposits) saw nearly 1.7% annualized growth. Notably, noninterest-bearing deposits remained relatively stable at 23% of core deposits. The company's cost of total deposits decreased by 17 basis points linked quarter in Q1 2025, settling at a spot rate of 190 basis points at quarter-end. Management highlights a favorable cumulative total deposit beta of 37% and a significant 103% down beta on exception-priced deposits since early Q2 2024, demonstrating effective deposit pricing strategy.

Net interest income (NII) for Q1 2025 was $387.6 million, a decrease of $6.5 million compared to Q4 2024. This decrease was primarily attributed to lower accretion income, fewer days in the quarter, and earning asset mix, partially offset by lower funding costs. On a fully taxable equivalent basis, the net interest margin was 3.27%. Management points out that, excluding the impact of accretion and fewer days, the net interest margin would have increased by 6 basis points, driven by lower deposit costs offsetting asset dynamics.

Noninterest income decreased slightly to $93.8 million in Q1 2025, reflecting lower company-owned life insurance income and seasonally lower bank fees compared to Q4 2024. However, compared to Q1 2024, noninterest income increased by $16.3 million, benefiting from the CapStar acquisition, higher mortgage banking revenue (up $2.4 million due to higher originations and sales), increased capital markets income (up $1.6 million from CRE client interest rate swap fees), and higher other income (up $5.8 million, including $4.2 million in net gains on commercial loan sales).

Noninterest expense decreased by $8.4 million linked quarter to $268.5 million in Q1 2025. Excluding merger-related expenses ($5.9 million in Q1 2025 vs. $8.1 million in Q4 2024), adjusted noninterest expense decreased by $6.1 million, driven by lower FDIC assessment expense, other expense, and tax credit amortization. This reflects disciplined expense management and contributed to positive operating leverage.

Resilient Credit and Robust Capital

Credit quality remains a core strength and a key differentiator for Old National. While the nonperforming loan (NPL) ratio increased modestly linked quarter to 1.29% of total loans at March 31, 2025, the delinquency ratio improved. Management attributes the NPL increase partly to credit migration driven by macroeconomic factors and the impact of higher interest rates, as well as specific credits that were already on their radar. Notably, approximately 40% of the NPLs are from acquired books with appropriate reserves and marks. The company's proactive approach to credit monitoring, which includes a more conservative risk rating framework focusing primarily on debt service coverage, has historically resulted in above-peer NPL levels but below-peer delinquency and charge-off ratios over time. Net charge-offs were 24 basis points in Q1 2025 (21 basis points excluding purchased credit deteriorated loans), which management views as normalized levels and within their expected range.

The allowance for credit losses on loans stood at $401.9 million at March 31, 2025, or 1.10% of ending loans. Including the reserve for unfunded commitments, the allowance was 116 basis points, up 2 basis points from the prior quarter. Management increased the allowance in Q1 2025 to incorporate global trade and economic uncertainty, maintaining a 100% weighting on the Moody's (MCO) S-2 scenario in their qualitative reserves, supplemented by additional factors. The allowance for credit losses plus the discount remaining on acquired loans represents nearly 150 basis points of total loans, providing ample reserve coverage. While provision expense increased in Q1 2025 compared to the prior year due to credit migration, higher net charge-offs, and macroeconomic factors, management feels "really good about what the lost content looks like" and expects the provision to cover losses plus growth. They acknowledge that provision expense can be volatile due to changes in CECL model assumptions and economic conditions.

The CRE portfolio, a focus area for investors, is highlighted as well-diversified and granular. Management emphasizes that their pending maturity schedule is manageable, with most loans underwritten to withstand significant rate increases. They specifically note that only about $400 million of non-owner-occupied CRE loans maturing within 18 months are at rates below their 4% threshold, representing just 1% of total loans. The office portfolio is characterized by a low average loan size ($2.9 million) and concentration in lower-risk segments, with strong average credit metrics. The multifamily portfolio, while impacted by prolonged higher rates on some recent projects, remains stable overall and trends towards middle-income tenants.

Capital remains a significant strength. All regulatory capital ratios increased in Q1 2025, driven by strong retained earnings. The CET1 ratio reached 11.62% at March 31, 2025, up 86 basis points year-over-year. Management views achieving double-digit CET1 as important and believes the company is in a "really good place" regarding key capital metrics. The pending Bremer acquisition is expected to result in higher legal day-one capital levels than originally modeled, creating "significant balance sheet optionality." This additional capital is seen as a "tremendous lever" in an uncertain year, potentially allowing the company to support a larger pro forma balance sheet and reduce the need for contemplated loan sales ($2.4 billion included in guidance). Management expects to generate capital rapidly and will evaluate capital optimization strategies in the latter half of 2025 and into 2026, prioritizing growth and balance sheet strength over immediate share buybacks.

Outlook and Strategic Trajectory

Old National's outlook for 2025 reflects confidence in its strategic execution and the benefits of the Bremer partnership. The guidance incorporates the anticipated May 1, 2025, closing of Bremer, two months earlier than previously assumed, pulling forward the expected benefits. While the guidance still includes the original M&A marks and $2.4 billion of loan sales, management signals that the higher expected day-one capital from Bremer may lead to a reduction in the actual loan sales needed, supporting a larger balance sheet. An updated guidance will be provided with Q2 2025 earnings once accounting marks are finalized.

Net interest income and net interest margin are expected to grow in 2025, driven by the addition of Bremer, the continued repricing of fixed assets at higher yields, and organic growth. NII is anticipated to be relatively stable in the first half of the year (excluding Q1's fewer days) before increasing in the back half due to these factors. Key assumptions underpinning the outlook include three 25-basis point Fed rate cuts, a 5-year Treasury rate stabilizing at 4%, a total down-rate deposit beta increasing to approximately 40% by Q2 2025, and a relatively stable noninterest-bearing deposit mix. Management emphasizes that the guidance is unchanged for one or no Fed cuts, highlighting the balance sheet's neutral positioning to short-term rates.

Full-year loan growth, excluding Bremer, is projected to be 4% to 6%, expected to ramp up over the year, supported by strong pipelines despite macroeconomic uncertainty. Deposit growth is anticipated to meet or exceed industry growth in 2025, leveraging the company's deposit strategy and competitive positioning.

Strategically, Old National remains focused on integrating CapStar and Bremer, realizing cost synergies (CapStar saves expected to be fully realized in Q4 2024), and leveraging the expanded footprint for organic growth. Investments will be prioritized in high-growth areas like Nashville and in fee income businesses such as wealth management and treasury management, where the company sees significant long-term opportunities and the "right to win." While strategic M&A is not a near-term focus and faces a high hurdle, the company is committed to continually optimizing its balance sheet and pursuing opportunities that align with its goal of compounding tangible book value per share at a double-digit clip.

Conclusion

Old National Bancorp is executing a clear and consistent strategy centered on relationship banking, organic growth, and value-enhancing M&A. The successful integration of CapStar and the imminent closing of Bremer are set to transform the company, providing increased scale, density, and balance sheet flexibility. Despite a challenging macroeconomic backdrop and competitive pressures, particularly in the digital realm where the company lacks a stated technological moat, Old National's focus on low-cost deposits, disciplined lending, and proactive credit management is yielding resilient financial performance and strong capital accretion.

The investment thesis for Old National rests on its ability to successfully integrate its recent and pending acquisitions, leverage the expanded footprint for continued organic growth, maintain its peer-leading deposit franchise and credit quality, and capitalize on the expected tailwinds from asset repricing and scale benefits in 2025. While macroeconomic uncertainty and the pace of digital innovation across the industry present ongoing risks, the company's strong capital position and management's disciplined approach position it to navigate these dynamics and continue compounding tangible book value for shareholders. The flexibility afforded by the higher-than-expected day-one capital from Bremer adds a compelling layer of optionality to the investment story, potentially enabling further balance sheet optimization and enhanced future growth.