Old National Bancorp's Dividend Strategy: Navigating Rising Rates with Prudence and Resilience

In a financial landscape marked by persistent inflation and aggressive Federal Reserve rate hikes, investors are increasingly scrutinizing the sustainability of dividend-paying stocks. For regional banks like Old National Bancorp (ONB), the interplay between interest rate dynamics, capital management, and earnings resilience becomes critical. This article evaluates ONB's dividend strategy through the lens of its financial health, capital structure, and strategic positioning in a rising rate environment.

Dividend Payout Ratio: A Conservative and Sustainable Approach

Old National Bancorp's current dividend payout ratio of 32% (as of Q2 2025) underscores its disciplined approach to capital allocation. This metric, calculated by dividing cash dividends by net income per share, indicates that the bank retains two-thirds of its earnings for reinvestment, debt reduction, or operational flexibility. Analysts project this ratio will decline to 21% over the next three years, driven by a forecasted 90.1% increase in earnings per share (EPS). Such a trajectory suggests growing financial flexibility, enabling the bank to either raise dividends or deploy capital toward strategic initiatives like the integration of Bremer Bank.

The bank's consistent dividend of $0.14 per share over the past five years, coupled with a 2.4% annualized growth rate since 2015, reflects a long-term commitment to shareholder returns. However, slower organic EPS growth (4.2% annually over five years) and recent share issuance (16% of shares outstanding in the last 12 months) pose challenges to sustaining this trajectory. The latter, in particular, could dilute earnings per share and complicate future dividend increases.

Capital Adequacy: A Strong Foundation Amid Merger-Driven Pressures

ONB's capital ratios, while slightly pressured by the Bremer acquisition and loan growth, remain robust. As of June 30, 2025, its Tier 1 common equity ratio stood at 10.74%, down from 11.62% in Q1 2025, but still well above regulatory thresholds. The bank's leverage ratio (9.26%) and tangible common equity (7.26% of tangible assets) further reinforce its ability to absorb shocks and maintain dividend payments.

The decline in capital ratios is partially offset by strong retained earnings and a loan-to-deposit ratio of 88%, which ensures ample liquidity. This liquidity buffer is critical in a rising rate environment, where deposit costs are climbing. ONB's ability to manage funding costs—despite a 2-basis-point increase in the cost of total deposits to 1.93%—demonstrates its agility in navigating rate hikes.

Net Interest Margin and Interest Rate Risk Management

ONB's net interest margin (NIM) expanded to 3.53% in Q2 2025, up 26 basis points from the prior quarter. This growth was fueled by higher asset yields, balance sheet expansion, and the Bremer acquisition. While rising deposit costs (up 6 bps to 2.52%) partially offset gains, the bank's NIM remains resilient, supported by its low-cost deposit base and strategic repositioning of the Bremer securities portfolio.

The bank's proactive interest rate risk management further bolsters its earnings stability. Through its Interest Rate Risk Management Group, ONB offers clients tools like interest rate swaps and derivatives to hedge against rate volatility. These strategies not only stabilize cash flows for customers but also reflect the bank's own preparedness for a prolonged high-rate environment. Additionally, ONB's conservative approach to loan growth—avoiding aggressive pricing in competitive commercial real estate (CRE) markets—mitigates credit risk and preserves margin integrity.

Earnings Resilience and Strategic Positioning

ONB's adjusted EPS of $0.53 in Q2 2025 (up 18% from the prior quarter) highlights its earnings resilience. This growth was driven by organic loan production ($2.3 billion in Q2), Bremer integration, and disciplined expense management. The bank's pre-provision net revenue (PPNR) of $521.9 million on a fully taxable equivalent basis further underscores its operational efficiency.

However, risks persist. A prolonged inverted yield curve could pressure margins, and the integration of Bremer's $11.2 billion in period-end loans requires careful execution to realize $80–$100 million in annual cost synergies by 2027. Additionally, rising credit losses in CRE—exacerbated by economic uncertainty—could strain the bank's allowance for credit losses (ACL), which now stands at 1.24%.

Investment Implications

For income-focused investors, ONB's dividend strategy appears sustainable in the near term, supported by a conservative payout ratio, strong capital position, and resilient earnings. The projected decline in the payout ratio to 21% by 2028 suggests room for dividend growth, provided the bank continues to outperform its EPS growth projections. However, the recent share issuance and exposure to CRE loans warrant caution.

The $200 million share repurchase program, announced in February 2025, adds another layer of shareholder value creation. By reducing the share count, the program could enhance EPS and complement the dividend as a dual-pronged return strategy. Investors should monitor the bank's credit quality metrics and capital deployment decisions, particularly as the Bremer integration progresses.

Conclusion

Old National Bancorp's dividend strategy is a testament to its balance between prudence and growth. While rising interest rates pose challenges, the bank's strong capital base, disciplined payout ratio, and proactive risk management position it to sustain and potentially grow its dividend. For investors willing to tolerate moderate risks, ONB offers an attractive combination of income stability and long-term capital appreciation in a volatile market.