Business context and reporting period
Old National Bancorp is a Midwest-based bank holding company. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020; balance-sheet comparisons are to December 31, 2019. Results reflect the COVID-19 environment and adoption of CECL on January 1, 2020.
Key financial metrics
- Third-quarter earnings: Net income was $77.9 million, or $0.47 per diluted share, versus $69.8 million, or $0.41, in Q3 2019. Nine-month net income fell to $152.3 million from $189.0 million; diluted EPS was $0.92 versus $1.09.
- Revenue and margin: Q3 net interest income was $145.6 million, down 4.9% year over year; noninterest income was $64.8 million, up 20.0%. Nine-month net interest income declined 4.5% to $435.0 million while noninterest income rose 19.2% to $180.7 million. Tax-equivalent net interest margin was 3.03% in Q3 versus 3.57% a year earlier, and 3.15% for the first nine months versus 3.58%.
- Credit costs: Q3 loan-loss provision was zero, compared with $1.4 million in Q3 2019; nine-month provision was $39.5 million versus $3.5 million. The September 30 allowance for loan losses was $131.4 million, or 0.95% of loans. CECL adoption increased the loan allowance by $41.3 million and the unfunded-commitment allowance by $4.5 million, with a $31.2 million reduction to opening retained earnings.
- Balance sheet and liquidity: Assets were $22.46 billion, loans $13.89 billion, and deposits $16.51 billion. Since year-end 2019, assets increased $2.05 billion, loans $1.77 billion, and deposits $1.95 billion. Cash and cash equivalents were $330.8 million. Subsidiaries reported $3.97 billion of available funds, including cash, unencumbered securities, and borrowing capacity.
- Debt and capital: Wholesale borrowings totaled $2.73 billion; FHLB advances were $2.09 billion. Shareholders’ equity was $2.92 billion. Consolidated Tier 1 leverage was 8.15%, common equity Tier 1 was 11.84%, and total risk-based capital was 12.81%; the bank subsidiary remained well-capitalized.
- Cash flow: For nine months, operating cash flow was $85.1 million, investing cash outflow was $1.83 billion, and financing cash inflow was $1.80 billion; cash increased $54.4 million to $330.8 million.
Material changes versus comparable periods
- Lower asset yields and reduced acquired-loan accretion weighed on net interest income and margin; reduced funding costs and higher average earning assets partly offset the decline. Acquired-loan accretion was $5.4 million in Q3 2020 versus $13.4 million in Q3 2019.
- Mortgage banking revenue rose to $18.1 million in Q3 and $46.5 million for nine months, reflecting increased originations and sales. Debt-securities gains were $4.9 million in Q3 and $10.6 million year to date, also supporting noninterest income. Lower deposit service charges partly offset these gains.
- Nine-month noninterest expense rose 6.8% to $399.1 million, principally reflecting $39.0 million of ONB Way strategic-plan charges. Branch-consolidation lease termination and long-lived-asset impairment charges accounted for $25.8 million of the year-to-date increase in other expense.
- Q3 provision expense was zero after the economic forecast improved from the prior quarter and the company recorded $3.0 million of net recoveries. The nine-month increase in provision largely reflects CECL adoption and COVID-related economic assumptions.
- PPP lending was a major balance-sheet driver: loans included $1.479 billion of PPP balances at September 30. Noninterest-bearing deposits increased $1.42 billion from year-end, partly reflecting PPP funds on deposit.
Outlook, commentary, risks and unusual items
- Management provided no specific earnings or financial guidance. It said most ONB Way expense initiatives had been executed and savings realized; revenue initiatives, delayed by COVID-19, would proceed, including targeted hiring and technology investment.
- Management cited strong Q3 commercial loan production of $978 million and a $2.9 billion commercial loan pipeline at September 30. It intends to continue loan growth, noninterest-income generation, prudent capital deployment, and expense management.
- COVID-19’s future effects remain uncertain. Management noted government stimulus had mitigated adverse effects in Q3, but a renewed rise in cases, withdrawal of relief programs, borrower stress, and economic deterioration could affect credit quality, asset values, earnings, and liquidity. COVID-related loan deferrals declined from $1.30 billion at June 30 to $137.6 million at September 30, across 485 loans.
- Asset quality merits monitoring: criticized and classified assets were $603.9 million, up from $534.4 million at year-end 2019. Nonperforming loans were 1.15% of loans. Management warned that CECL provisions may be volatile as forecasts, credit quality, and loan composition change.
- Interest rates were near historic lows. Management’s two-year sensitivity model estimated net interest income 2.81% below base in an immediate 50-basis-point decline and 3.58% above base with a 100-basis-point increase; model results are not guarantees. The company reported $1.106 billion of interest-rate hedge notional and modified $300 million of FHLB advances in Q3, lowering their weighted-average effective rate from 1.78% to 0.90%.
- The board-approved share repurchase plan was suspended in the near term amid economic uncertainty. The company paid $0.14 per share in Q3 dividends. No material litigation was reported; ordinary-course legal matters could still affect a particular future period.
Important facts for investors to verify
- How PPP loan forgiveness, repayment, and the associated deposit balances affect loan growth, funding, and future interest income.
- Whether the CECL allowance adequately reflects changing economic forecasts and borrower performance, particularly as deferrals and government relief programs roll off.
- Whether Q3 mortgage banking revenue and securities gains are sustainable, and how lower interest rates affect margins and earnings.
- The nature, remaining timing, and expected benefits of ONB Way charges, including branch-consolidation costs and revenue initiatives.
- Future trends in criticized/classified loans, nonperforming loans, capital ratios, and available liquidity.