Old National Bancorp (NASDAQ:ONB) is a bank we issued a buy on in early 2023, but have since moved to neutral. The stock mostly moved sideways in 2024, and we dubbed it a market perform. Well, the stock has had a big run-up, but it followed the sector and market higher recently. We remain on the sidelines, especially as the bank’s Q2 earnings which were just reported were mixed.
Headline Earnings Impress
At first glance, this appears to have been a strong quarter, and it was in terms of the headline print. On the top line, Old National Bancorp saw revenue of $482 million, rising 2.6% from last year, and beating estimates by $9 million. This is strong. Now there is some loan growth here, but organically we are not seeing recent growth, the year-over-year loan growth was due to the CapStar transaction adding $2.1 billion. Backing this out, loans were up 5.9% annualized, but have been choppy the last few quarters. Deposits are also up to $40 billion, up $2.3 billion from a year ago, but $2.1 billion was from CapStar as well. We are still seeing issues with the commercial side of the business. Total commercial loan production was $1.5 billion, down sizably from $3.1 billion in Q2 a year ago.
Now net interest margin and net interest income went up from last year, entirely driven by the CapStar acquisition. For the sector, have called the bottom for margins, but not all banks are created equal. Some stronger banks have seen stabilization if not expansion in this critical metric, for what it is worth. For Old National, net interest income was $394.8 million, and the margin was 3.33%, but without the acquisition, both figures would have contracted.
Asset Quality
Now, while performance was mixed thus far, and really driven by an acquisition versus organic growth, we need to have a sense of Old National Bancorp asset quality, especially with the new loan book on hand. There was a sizable loan loss provision expense of $36.2 million in the quarter, while net charge-offs were up to $14 million or 0.16% of all loans, compared to 0.14% a year ago. A bit of a yellow flag there. 30-day delinquencies held firm at 0.16%.
On a positive note, nonaccrual loans as a percentage of total loans improved 4 basis points to 0.94% from 0.98%. But, the allowance for credit losses, including the allowance for credit losses on unfunded commitments, rose to $392.1 million, or 1.08% of total loans, compared to $346.0 million, or 1.03% of total loans. While the absolute amount went up because of the new loan book, that 5 basis point increase is another yellow flag. Still, as a whole, while mixed, the bank’s asset quality is healthy.
It is also worth mentioning that compared to the sequential Q1, the return metrics weakened here. The return on average equity fell to 8.2% from 8.7% last quarter. Further, the return on tangible equity fell to 14.1% from 14.9% in Q1 and is down from over 30% a year ago. This comes despite an improved efficiency ratio registering at 57.2%, improving 110 basis points from Q1.
Final Thoughts
While Old National Bancorp stock has surged, we remain on the sidelines for the simple fact that we continue to see Old National Bancorp as a market perform. The key metrics are mixed, despite strong headline earnings. While the bank is operationally fine, there are simply better choices for regionals out there with better yields and improvements in key metrics. The Asset quality metrics, for the most part, are respectable, but are mixed. Return metrics have been battered as well. Overall, Old National Bancorp is neutral rated from our perspective.
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