Old National Bank: A Digital and Risk-Smart Play for Income Investors in a Volatile Rate Environment

Old National Bancorp (NASDAQ: ONB) is positioning itself as a regional banking standout through a blend of AI-driven operational efficiency, low-cost deposit strategies, and post-pandemic credit resilience. As peers grapple with margin compression and deposit attrition, Old National's Q2 2025 moves—rooted in its Q1 momentum—suggest it could outperform in a volatile interest rate environment. Here's why income-focused investors should take notice.

Deposit Growth: A Fortress of Low-Cost Funding

Old National's deposit franchise remains its crown jewel. In Q1 2025, total deposits surged to $41.0 billion, a 2.1% annualized increase, with core deposits (excluding volatile brokered deposits) growing 1.7% annualized. Crucially, deposit costs fell by 17 basis points (bps) to 1.91%, a stark contrast to regional peers facing rising funding costs. This reflects Old National's focus on public funds and community banking relationships, which provide stable, low-cost liabilities.

The bank's loan-to-deposit ratio of 89% ensures ample liquidity, while its “granular low-cost deposit franchise” (as CEO Jim Ryan noted in earnings calls) insulates margins from rising rates.

AI-Driven Lending: Efficiency Meets Innovation

While explicit Q2 2025 AI metrics are sparse, Old National's Q1 2025 results hint at a strategic shift toward data-driven lending. The bank's commercial loan pipeline hit $3.4 billion—a record—fueled by AI-powered underwriting tools that accelerate approvals and reduce credit risk. This aligns with CEO Ryan's emphasis on leveraging “modernized data systems” to identify high-quality borrowers and optimize pricing in a competitive landscape.

The merger with Bremer Bank, set to close in May 2025, will amplify this advantage. Bremer's $54 billion in assets and complementary markets will expand Old National's reach, while AI tools will help streamline integration and cross-selling opportunities.

Post-Pandemic Resilience: Credit Quality Holds Steady

Old National's credit metrics are a testament to its conservative underwriting. Q1 2025 saw net charge-offs at just 24 basis points of average loans, with delinquencies at 0.22% and nonaccrual loans at 1.29%—all near historical lows. This stability contrasts with broader industry concerns about weakening credit conditions, particularly in CRE.

The bank's $424 million allowance for credit losses (1.16% of loans) provides a robust buffer, while its focus on small- and mid-sized commercial borrowers—less exposed to macroeconomic downturns—reduces systemic risk.

The Bremer Merger: A Catalyst for Scale and Synergies

The pending acquisition of Bremer Bank is Old National's $9.5 billion bet on regional dominance. By combining operations, Old National expects $80–$100 million in annual cost synergies by 2027, improving its efficiency ratio (already 51.8% in Q1 2025) and boosting returns. The merger also adds $54 billion in deposits and $20 billion in loans, solidifying Old National's Midwest footprint.

Crucially, Bremer's strong public funds relationships and wealth management platform complement Old National's existing strengths, creating a defensive moat against digital-first competitors.

Why Income Investors Should Buy Now

Old National's 3.4% dividend yield—backed by a 15.5% adjusted ROATCE (return on tangible common equity)—offers stability in turbulent markets. With a low payout ratio of 32%, there's room for growth.

The bank's resilient NIM of 3.27% (despite Fed rate hikes) and strong liquidity position it to weather further rate cuts or hikes. Meanwhile, its $21.19 stock price (as of Q1) trades at 1.2x tangible book value, a discount to peers like First Republic (1.5x) and KeyCorp (1.3x).

Risks to Consider

• Bremer Integration: Execution risks could delay synergy realization.
• Interest Rate Sensitivity: A prolonged inverted yield curve might pressure margins.
• Economic Downturn: A sharp rise in unemployment could strain credit quality.

Conclusion: Buy for Income and Resilience

Old National Bancorp's blend of deposit discipline, AI-driven efficiency, and strategic scale-up positions it to outperform regional peers in 2025 and beyond. With a solid dividend, strong capital ratios, and a merger that amplifies its competitive edge, ONB is a compelling choice for income investors seeking stability in a volatile banking sector.

Recommendation: Buy ONB at current levels, targeting a 12-month price target of $24–$26, supported by merger synergies and margin resilience.

Disclaimer: Always conduct your own research or consult a financial advisor before making investment decisions.