Old National Bancorp — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020 unless otherwise stated. Old National is a Midwest-focused community bank operating primarily in Indiana, Kentucky, Michigan, Minnesota, and Wisconsin.
Financial performance and condition
Dollars in millions, except per-share data and ratios.
| Metric | Q1 2021 | Comparable / change |
|---|---|---|
| Net interest income | $148.1 | $143.8 in Q1 2020; up 3.0% |
| Net interest margin, taxable-equivalent | 2.94% | 3.31% in Q1 2020 |
| Noninterest income | $56.7 | $57.5 in Q1 2020; down 1.4% |
| Noninterest expense | $117.7 | $158.7 in Q1 2020; down 25.8% |
| Provision for credit losses | $(17.4), a recapture | $17.0 expense in Q1 2020 |
| Net income / diluted EPS | $86.8 / $0.52 | $22.6 / $0.13 in Q1 2020 |
| Operating cash flow | $83.2 | $(21.1) in Q1 2020 |
Net income rose substantially, reflecting the credit-loss provision recapture and lower expenses, as well as higher net interest income. Expense comparisons benefited from $31.2 million of ONB Way strategic initiative charges in Q1 2020. Results also included $12.6 million of PPP interest and net fees. The effective tax rate was 16.9%, versus 11.5% a year earlier.
- Balance sheet: Assets were $23.74 billion, up $783.8 million from year-end. Loans were $13.93 billion, up $138.8 million; deposits were $17.85 billion, up $812.3 million. Available-for-sale securities totaled $6.72 billion.
- Credit: Allowance for credit losses was $114.0 million, or 0.82% of loans, down from $131.4 million, or 0.95%, at year-end. Net recoveries were approximately $5,000. Nonperforming loans were 1.13% of loans; total underperforming assets were $158.2 million.
- Liquidity and funding: Cash and cash equivalents were $457.8 million. The company reported $5.24 billion of available funds at its subsidiaries, including cash, unencumbered securities, and borrowing capacity, plus $73.5 million of parent-company cash. Wholesale borrowings were $2.575 billion, down $101.6 million from year-end.
- Debt and capital: FHLB advances were $1.913 billion; other borrowings were $266.3 million. Total shareholders’ equity was $2.979 billion. Consolidated Tier 1 capital ratio was 12.01%, total capital ratio 12.84%, and leverage ratio 8.33%. The bank subsidiary remained well-capitalized.
- Cash flows and distributions: Investing activities used $901.6 million, largely reflecting securities purchases; financing activities provided $686.5 million, including deposit growth. Cash and cash equivalents declined $131.9 million during the quarter. The quarterly dividend was $0.14 per share.
Material changes versus prior periods
- Net interest income improved year over year, but the taxable-equivalent margin fell 37 basis points as lower asset yields and changes in balance-sheet mix more than offset lower funding costs. Average earning assets increased 16% year over year.
- Noninterest income declined modestly; higher mortgage banking revenue was offset by lower securities gains and deposit service charges. Mortgage banking revenue rose 48.6% year over year.
- Noninterest expense fell $41.0 million, principally because Q1 2020 included ONB Way costs and higher tax-credit investment amortization. Data-processing costs increased 30.5%, reflecting technology infrastructure modernization.
- The securities portfolio’s net unrealized gains declined to $110.8 million from $186.3 million at year-end, primarily with higher long-term interest rates. Other comprehensive loss was $55.9 million, reducing equity from $2.973 billion to $2.979 billion despite net income and dividends.
- Remaining PPP loans were $1.124 billion at quarter-end. Old National originated more than 4,800 second-round PPP loans totaling $517.3 million during the quarter.
Outlook, management commentary, and risks
- No specific earnings or financial guidance was provided. Management cited a $2.6 billion commercial loan pipeline, strong first-quarter commercial production, deposit-driven excess liquidity, and momentum from revenue initiatives as supportive of future quarters.
- Management cautioned that renewed COVID-19 cases could disrupt the recovery. The pandemic, vaccination pace, resistant virus strains, stimulus effects, and borrowers’ ability to resume payments remain uncertain.
- The $17.4 million provision recapture reflected an improved economic forecast for unemployment, GDP, and house prices. Management noted that forecast changes, loan growth, declining recoveries, or higher charge-offs could increase future provision expense; CECL assumptions can make the provision volatile.
- Interest-rate risk remains material: management’s model estimated a 2.98% decline in two-year cumulative net interest income under an immediate 50-basis-point rate decrease and increases of 4.56%, 8.44%, and 11.83% under +100, +200, and +300 basis-point scenarios, respectively. Model outcomes are not guarantees.
- Commercial real estate lending and construction loans are exposed to property values, occupancy, economic conditions, and refinancing availability. CRE loans equaled 226% of the bank’s risk-based capital, below the cited 300% regulatory guideline.
- COVID-related loan deferrals totaled $39.3 million across 305 loans at March 31, down from $63.9 million at year-end. Loan commitments were $3.851 billion, with standby letters of credit of $75.1 million.
- The filing reports no material litigation currently and no material change to previously disclosed risk factors. It identifies cyber, technology, operational, liquidity, credit, regulatory, and LIBOR-transition risks. Securities unrealized losses were attributed primarily to interest-rate movements; management said it did not intend, and did not expect to be required, to sell those securities before recovery.
Most important facts for investors to verify
- Whether the improved economic assumptions supporting the credit-loss recapture remain appropriate, and how criticized, classified, nonaccrual, and charge-off trends develop.
- How quickly PPP loans are forgiven and related fees recognized, and the effects of PPP runoff on loan growth, net interest income, and margin.
- Whether deposit growth and excess liquidity can be deployed at attractive yields without further margin pressure; monitor the reported rate sensitivity and securities duration.
- Whether the large securities-related decline in accumulated other comprehensive income stabilizes or continues as interest rates change.
- How recurring operating expenses compare after excluding prior-year ONB Way charges and other timing-sensitive items, including tax-credit amortization.
- The extent of share repurchases: the board authorized up to $100 million through January 31, 2022, but no shares were purchased under that plan in Q1; reported purchases were associated with employee incentive programs.