Old National's Margin Pressure Eases as Loan Growth Reaccelerates
Old National Bancorp (ONB) held net interest margin nearly flat at 3.54% in the second quarter while period-end loans grew 8.3% annualized to $50.8 billion.
Old National Bancorp (ONB), the Evansville, Indiana-based regional lender, showed signs that months of margin pressure were leveling off in the second quarter. Net interest margin on a fully taxable-equivalent basis compressed just 1 basis point quarter over quarter to 3.54%, a marked slowdown from the 10 basis point drop to 3.55% in the first quarter. Net interest income on the same basis rose to $586.5 million from $580.4 million in the first quarter, though it remained below the $588.8 million posted in the fourth quarter of 2024.
The stabilizing margin came alongside a warning sign on funding costs. Total deposit costs fell only 1 basis point quarter over quarter to 171 basis points, a sharp deceleration from the 8 basis point decline in the first quarter and the 17 basis point decline in the fourth quarter. The deposit-repricing tailwind that had cushioned margins through late 2024 appeared largely spent, leaving asset yields to carry more of the margin story going forward.
Loan growth, meanwhile, reaccelerated. Period-end loans grew 8.3% annualized to $50.8 billion, up from 8.0% annualized growth in the first quarter and 6.4% annualized growth in the fourth quarter, with commercial and industrial balances adding $495.0 million and commercial real estate adding $342.3 million. Commercial loan production rose 7% quarter over quarter to $3.5 billion, reversing a 5% production decline in the prior quarter, and the bank's pipeline climbed 2% to a record $5.6 billion, pointing to continued origination strength into the third quarter.
Capital returned to shareholders outpaced retained-earnings build in the quarter. The preliminary Tier 1 common equity ratio slipped 2 basis points to 11.09%, reversing the prior quarter's 3 basis point gain, as Old National repurchased $107 million of stock, or 4.4 million shares, up from 3.9 million shares bought back in the first quarter.
Credit quality showed a split picture. Nonaccrual loans improved to 0.91% of total loans from 1.03% in the first quarter and 1.07% in the fourth, extending a multi-quarter improving trend. But net charge-offs excluding purchased-credit-deteriorated loans rose to 22 basis points of average loans from 19 basis points in the first quarter and 16 basis points in the fourth, even as headline net charge-offs held flat at 26 basis points. Provision for credit losses climbed to $36.2 million from $34.9 million in the first quarter and $32.7 million in the fourth, a steady build across the panel.
Fee income provided the clearest upside surprise. Noninterest income excluding notable items rose 14.8% in the quarter, driven by broad-based gains across wealth and investment services fees, service charges, mortgage banking and capital markets, an acceleration from the more modest fee trajectory implied by the prior two quarters.
Expense discipline pushed efficiency to new lows. The adjusted efficiency ratio improved to a record 45.2% from 45.7% in the first quarter and 46.0% in the fourth, while the GAAP efficiency ratio hit a record 47.0%, down from 48.3% and 51.6% respectively. Return on average tangible common equity rose to 19.8% from 18.4% in the first quarter and 17.8% in the fourth, a steadily climbing return profile.
Taken together, the quarter suggested Old National's operating leverage was doing more of the work as the deposit-cost tailwind faded. With commercial pipelines at a record and margin compression nearly arrested, the bank's near-term results will hinge on whether loan growth and fee momentum can offset the slower pace of funding-cost relief and the gradual uptick in underlying charge-offs.