Old National Bancorp — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Financial statements are unaudited. The company is a Midwest-based bank holding company with approximately $48.5 billion in assets.
Financial performance
| Metric | Q2 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $382.2 million | Up 13.2% from Q2 2022; up $0.7 million sequentially |
| Net interest margin, taxable-equivalent | 3.60% | 3.33% in Q2 2022; 3.69% in Q1 2023 |
| Net income applicable to common shareholders | $151.0 million | Up 36.1% from $111.0 million in Q2 2022 |
| Diluted EPS | $0.52 | Compared with $0.38 in Q2 2022 |
| Provision for credit losses | $14.8 million | Up from $9.2 million in Q2 2022 |
| Noninterest income / expense | $81.6 million / $246.6 million | Income down 8.4%; expense down 11.1% year over year |
For the six months, net income applicable to common shareholders was $293.6 million ($1.01 diluted EPS), versus $81.3 million ($0.31) in 2022. The prior-year period included substantial First Midwest merger-related credit provisions and integration costs, so the year-over-year earnings comparison reflects those items as well as current-period performance.
Financial position, funding and cash flow
- At June 30, total assets were $48.5 billion, loans were $32.4 billion, and deposits were $36.2 billion. Since December 31, 2022, loans increased $1.3 billion (4%) and deposits increased $1.2 billion (4%).
- Total borrowed funds were $6.0 billion, up $0.4 billion from year-end. FHLB advances were $4.8 billion, up $0.9 billion. Noninterest-bearing deposits declined $1.4 billion, while money-market and time deposits rose $1.8 billion and $2.3 billion, respectively.
- Cash and cash equivalents were $1.2 billion, up from $728 million at year-end. In the first half, operating cash flow was $214.7 million, investing cash outflow was $1.29 billion, and financing cash inflow was $1.55 billion.
- Regulatory capital ratios remained above stated minimums: consolidated CET1 was 10.14%, Tier 1 capital 10.79%, and total capital 12.14%. The bank subsidiary met the regulatory definition of well-capitalized.
- Available liquidity included $10.6 billion of subsidiary liquid funds and borrowing availability, in addition to $882 million of parent-company cash. Management stated it believes liquidity is adequate for short- and long-term needs.
Material changes and credit quality
- Loan growth was led by commercial real estate, up $993 million (8%) since year-end. Consumer loans declined $98 million (4%).
- Nonaccrual loans increased to $295.5 million from $238.2 million at year-end; nonperforming loans were 0.91% of loans versus 0.81%. Underperforming assets rose to $305.6 million from $267.0 million. Management attributed the increase in nonaccrual loans primarily to purchased-credit-deteriorated loan migration in commercial real estate.
- First-half net charge-offs were $26.5 million, compared with $4.5 million in the prior-year period. The allowance for loan losses was $300.6 million, or 0.93% of loans, versus $303.7 million, or 0.98%, at year-end. The allowance for unfunded commitments was $37.0 million.
- Available-for-sale securities had $934.7 million of net unrealized losses; held-to-maturity securities had $451.9 million of net unrealized losses. Management attributed the losses primarily to higher interest rates, stated it did not intend to sell loss-position securities, and did not expect to be required to sell them before recovery. Accumulated other comprehensive loss was $808.6 million.
Outlook, commentary and notable items
- Management cited loan and deposit growth, increased revenue, stable credit quality, and disciplined expense management in Q2. Higher asset yields and loan growth supported net interest income, partly offset by higher deposit and wholesale funding costs and lower acquired-loan accretion income.
- The filing provides no specific earnings or margin guidance. Management cautioned that future credit-loss provisions may rise with loan growth, lower recoveries, higher charge-offs, or changes in economic conditions and CECL assumptions. Interest-rate and deposit repricing behavior also create uncertainty in modeled results.
- The FDIC proposed a special assessment to recover losses associated with the Silicon Valley Bank and Signature Bank resolutions. Based on the proposal and the bank’s reported uninsured deposits, Old National estimated a potential expense of approximately $17 million if recognized in one quarter; the proposal and accounting timing remained subject to change.
- Q2 included $3.4 million of expenses related to the April 10 event at the company’s downtown Louisville location, $2.4 million of merger-related expenses, and $0.2 million of property-optimization costs. The filing does not provide further detail on the Louisville event in the supplied text.
- Management reported pending litigation in the ordinary course but did not expect it to have a material adverse effect. Moody’s affirmed ratings in April; outlooks for specified issuer and deposit ratings were negative. The filing identifies economic, credit, liquidity, interest-rate, operational, cybersecurity, regulatory, and integration risks.
Key facts for investors to verify
- Whether deposit mix shifts toward higher-cost money-market and time deposits continue, and how funding costs affect net interest margin.
- Whether nonaccrual loans, criticized/classified assets, commercial real estate exposures, and charge-offs continue to rise.
- The eventual size, timing, and accounting treatment of any FDIC special assessment.
- How unrealized securities losses and available liquidity evolve, particularly if funding needs or market rates change.
- Progress on merger integration and expense control, and any further disclosed costs related to the Louisville event.