OLD NATIONAL BANCORP annual report, FY2023

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Old National Bancorp — 2023 Form 10-K

Business context and period. This annual report covers the year ended December 31, 2023, with balance-sheet comparisons to December 31, 2022. Old National is a Midwest-focused commercial bank with $49.1 billion in assets and 258 banking centers. Its businesses include commercial and consumer lending, deposits, wealth management, and related financial services.

Financial performance and condition

  • Earnings and revenue: Net income was $582.0 million, or $565.9 million applicable to common shareholders; diluted EPS was $1.94, versus $1.50 in 2022. Net interest income rose 13% to $1.503 billion. Noninterest income fell 17% to $333.3 million, and total noninterest expense declined 1% to $1.026 billion. The effective tax rate increased to 22.5% from 21.4%.
  • Margins and efficiency: Net interest margin was 3.54% for the year, versus 3.47% in 2022; it declined through 2023 to 3.39% in the fourth quarter. The reported non-GAAP efficiency ratio improved to 53.70% from 57.97%.
  • Cash flow: Operating cash flow was $516.3 million; investing cash flow was negative $1.819 billion and financing cash flow was positive $1.749 billion. Cash and cash equivalents ended the year at $1.175 billion, up from $728.4 million.
  • Loans and deposits: Total loans grew 6% to $33.0 billion; deposits grew 6% to $37.2 billion. The loan-to-deposit ratio was 89%. Noninterest-bearing demand deposits fell 19% to $9.7 billion, while money-market and time deposits increased 77% and 85%, respectively, reflecting a shift toward interest-bearing funding.
  • Credit quality: Net charge-offs were 0.17% of average loans, up from 0.06%. Nonaccrual loans were 0.83% of loans versus 0.77%; criticized and classified assets increased to $1.8 billion from $1.4 billion. The allowance for loan losses was $307.6 million, or 0.93% of loans. Commercial real estate loans were $14.1 billion, 43% of total loans.
  • Capital, debt, and liquidity: Shareholders’ equity was $5.56 billion. Old National Bancorp’s CET1 and total risk-based capital ratios were 10.70% and 12.64%, respectively; its leverage ratio was 8.83%. Total borrowed funds were $5.33 billion. The company reported $10.9 billion of available funds at subsidiaries, including cash, unencumbered securities, and borrowing availability. Estimated uninsured deposits for regulatory purposes were $17.1 billion.
  • Securities: Available-for-sale securities had $869.5 million of net unrealized losses; held-to-maturity securities had $412.3 million of net unrealized losses. Management said it did not intend to sell securities in unrealized-loss positions and did not expect to be required to sell them before recovery.

Material changes versus 2022

  • Net income applicable to common shareholders increased to $565.9 million from $414.2 million. Net interest income rose $175.2 million, reflecting higher asset yields and loan growth; this was partly offset by higher funding costs and lower acquired-loan accretion income.
  • Provision for credit losses declined to $58.9 million from $144.8 million, largely because 2022 included provisions for loans and commitments acquired in the First Midwest merger. Net charge-offs nevertheless increased.
  • Noninterest income decreased primarily because 2022 included a $90.7 million gain on the sale of the health-savings-account business. A $21.6 million Visa Class B share-sale gain partly offset that comparison in 2023.
  • Reported expenses decreased, but 2023 included $28.7 million of merger-related costs, a $19.1 million FDIC special assessment, $4.4 million of contract termination charges, $3.4 million related to the Louisville tragedy, and $1.6 million of property optimization costs. Excluding specified items, management reported expenses increased $78.8 million, including the full-year impact of the First Midwest merger and higher FDIC costs.
  • Available-for-sale securities unrealized losses increased to $869.5 million from $844.4 million; held-to-maturity losses narrowed to $412.3 million from $445.5 million. AOCI remained negative at $738.8 million, improving from negative $786.4 million.

Outlook, risks, and unusual items

  • Management described its 2024 outlook as cautiously optimistic, citing progress toward a more neutral interest-rate-risk position. Priorities include deposit and organic loan growth, expanding revenue-generating businesses, prudent capital deployment, and expense management. The filing provides no specific numerical earnings or margin guidance.
  • The proposed all-stock acquisition of CapStar, valued at approximately $344.4 million when announced, was expected to close in the second quarter of 2024, subject to CapStar shareholder approval. The transaction’s value may change with Old National’s share price.
  • Key risks include deposit competition and outflows, higher funding costs, sensitivity to interest rates, regional economic conditions, commercial real estate exposure, credit-loss estimation, securities liquidity and unrealized losses, acquisition integration, cybersecurity and third-party operational risks, and regulatory change.
  • The FDIC special assessment was recorded as a $19.1 million expense in 2023; collection under the rule is scheduled across 2024 and 2025, subject to potential adjustment. A proposed CFPB overdraft rule could reduce fee revenue and increase compliance costs; Old National reported $22.3 million of overdraft transaction fees in 2023.
  • Pending legal proceedings arose in the ordinary course of business; management did not expect them to have a material adverse effect based on information available. Deloitte issued unqualified opinions on the 2023 financial statements and internal control over financial reporting. The allowance for credit losses, particularly qualitative adjustments to its estimate, was identified as a critical audit matter.

Most important facts for investors to verify

  • Whether deposit balances and mix remain stable, and how deposit pricing affects funding costs and net interest margin.
  • Trends in commercial real estate criticized, classified, and nonaccrual loans, charge-offs, and allowance adequacy.
  • How securities unrealized losses, collateral availability, and the scheduled end of the Federal Reserve Bank Term Funding Program in March 2024 affect liquidity planning.
  • CapStar shareholder approval, closing timing, share issuance, integration costs, and expected benefits.
  • The ultimate cost and timing of FDIC assessments and the effect of potential overdraft and other regulatory changes on fee income and expenses.