Old National Bancorp — Q3 2023 Form 10-Q
Business and period: Old National Bancorp is a Midwest-based commercial bank with consumer, commercial, wealth-management and related financial services. This unaudited report covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are with December 31, 2022 unless stated otherwise. Amounts below are in U.S. dollars.
Financial performance and condition
- Q3 earnings: Net income was $147.9 million versus $140.2 million in Q3 2022. Net income applicable to common shareholders was $143.8 million, or $0.49 diluted EPS, compared with $136.1 million, or $0.47. Sequentially, common net income declined from $151.0 million and $0.52 diluted EPS in Q2 2023.
- Year-to-date earnings: Nine-month net income applicable to common shareholders was $437.4 million versus $217.5 million in 2022; diluted EPS was $1.50 versus $0.80. The prior-year comparison includes materially higher First Midwest merger-related credit provisions and costs.
- Revenue and margin: Q3 net interest income was $375.1 million, down 0.4% year over year and $7.1 million sequentially. Taxable-equivalent net interest margin was 3.49%, versus 3.71% a year earlier and 3.60% in Q2. Management attributed margin pressure to higher funding costs, partly offset by loan growth and higher asset yields. Nine-month net interest income rose 21.6% to $1.139 billion. Q3 noninterest income was $80.9 million, up 0.7% year over year; nine-month noninterest income was $233.2 million, down 0.6%.
- Expenses and efficiency: Q3 noninterest expense was $244.8 million, down 6.7% year over year, including $6.3 million of merger-related expense. The efficiency ratio was 51.66% (a non-GAAP measure), compared with 55.26% in Q3 2022. Nine-month expense fell 1.8% to $742.1 million, while FDIC assessment expense rose substantially.
- Credit: Q3 provision for credit losses was $19.1 million, up from $15.5 million a year earlier. Net loan charge-offs were $19.7 million in Q3 and $46.2 million for nine months, versus $7.6 million and $12.1 million, respectively, in 2022. The 2023 nine-month provision was $47.3 million, compared with $133.4 million in 2022, which included $96.3 million to establish allowance for acquired First Midwest loans. A $12.2 million charge-off tied to one commercial credit was described by management as not representative of broader credit concerns.
- Loans and asset quality: Loans totaled $32.58 billion, up 4.7% from year-end, primarily reflecting commercial real estate growth; commercial loans declined. Nonaccrual loans were $261.3 million, or 0.80% of loans, versus $238.2 million and 0.77% at year-end. Criticized and classified assets increased to $1.65 billion from $1.41 billion, mainly from higher criticized commercial loans. The allowance for loan losses was $304.0 million, or 0.93% of loans.
- Deposits, liquidity and borrowings: Deposits increased 6.4% to $37.25 billion. The mix shifted: noninterest-bearing deposits declined 15%, while money-market deposits increased 63% and time deposits 85% from year-end. Cash and cash equivalents were $1.66 billion. Wholesale borrowings totaled $5.56 billion, broadly flat versus year-end; FHLB advances increased 15% to $4.41 billion. The company reported $9.47 billion of available subsidiary liquidity and borrowing capacity, based on pledged collateral.
- Capital and securities: Shareholders’ equity was $5.24 billion. Consolidated CET1, Tier 1 and total capital ratios were 10.41%, 11.06% and 12.32%; the bank’s corresponding ratios were 11.26%, 11.26% and 12.00%. Management said the bank exceeded regulatory “well-capitalized” thresholds. Available-for-sale securities had $1.14 billion of gross unrealized losses and held-to-maturity securities had $634.3 million of unrecognized losses, largely attributed to higher interest rates. AOCI was negative $968.8 million. Management said it did not intend, and did not expect to be required, to sell securities in unrealized-loss positions before recovery.
- Cash flows: For the first nine months, operating activities provided $443.5 million, investing activities used $1.56 billion, and financing activities provided $2.05 billion. Cash and cash equivalents increased $935.0 million to $1.66 billion.
Changes, outlook and notable items
- Compared with Q3 2022, higher loan and investment yields were offset by sharply higher deposit and borrowing costs; the taxable-equivalent margin contracted. Compared with year-end, loan growth and deposits increased, but deposits shifted toward interest-bearing products.
- Management characterized Q3 credit quality as stable, while reported nonaccrual loans and criticized/classified assets were higher than at year-end. It cautioned that loan growth, reduced recoveries, higher charge-offs and changes in economic assumptions could raise future provision expense.
- On October 26, 2023, after quarter-end, Old National announced an all-stock agreement to acquire CapStar Financial Holdings. The stated transaction value was approximately $344.4 million at announcement; closing was anticipated in Q2 2024, subject to regulatory and CapStar shareholder approvals. CapStar reported approximately $3.3 billion of assets, $2.3 billion of loans and $2.8 billion of deposits at September 30.
- The FDIC had proposed a special assessment related to the 2023 bank failures. Old National estimated that, if the proposal were recorded as expense in a single quarter, the expense could be about $17 million; the proposal and accounting timing remained subject to change.
- No specific earnings or margin guidance was provided. Management cited interest rates, deposit pricing and mix, economic conditions, loan demand and credit quality as important uncertainties. Other disclosed risks include liquidity and funding access, interest-rate exposure, integration of business combinations, cybersecurity and operational risks. Management did not expect pending ordinary-course litigation to have a material adverse effect.
- For the nine months, merger-related costs were $23.2 million, versus $100.6 million in 2022. The company also reported $3.4 million of Louisville-related expenses and $1.6 million of property-optimization expense during the 2023 nine-month period. It disclosed that the proposed FDIC assessment could affect a future quarter.
Most important facts for investors to verify
- Whether deposit mix and funding costs continue to pressure net interest margin, and whether deposit growth is sustainable.
- Trends in commercial and commercial real estate credit quality, criticized/classified assets, nonaccrual loans and charge-offs, including the effect of the single $12.2 million commercial charge-off.
- How unrealized securities losses and negative AOCI affect capital, liquidity flexibility and results if securities must be sold.
- The final FDIC special assessment, its accounting treatment and timing, and its impact on expenses.
- Regulatory and shareholder approvals, final economics, integration costs and closing progress for the proposed CapStar acquisition.
- Capital and liquidity measures, including the assumptions and collateral supporting reported available borrowing capacity.