Old National Bancorp — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022; filed February 22, 2023. Old National is a Midwest regional bank offering commercial and consumer banking, deposits, and wealth-management services. Results include First Midwest from its February 15, 2022 merger date, so year-over-year comparisons are substantially affected by the transaction.
Financial and operating performance
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Net interest income | $1.328 billion | $596.4 million |
| Net interest margin, taxable-equivalent | 3.47% | 2.89% |
| Provision for credit losses | $144.8 million | $29.6 million recapture |
| Noninterest income | $399.8 million | $214.2 million |
| Noninterest expense | $1.038 billion | $501.4 million |
| Net income applicable to common shareholders | $414.2 million | $277.5 million |
| Diluted earnings per common share | $1.50 | $1.67 |
| Net charge-offs to average loans | 0.06% | (0.03%) |
| Cash dividends per common share | $0.56 | $0.56 |
Higher net interest income reflected the merger, loan growth, higher rates, and acquired-loan accretion; acquired-loan and borrowing accretion was $86.4 million. The margin expansion accompanied a 71-basis-point increase in average earning-asset yield and a 19-basis-point rise in the cost of interest-bearing liabilities. Diluted EPS declined despite higher common net income, with the merger materially increasing the weighted-average share count and preferred dividends also reducing common earnings.
Fourth-quarter 2022 net income available to common shareholders was $196.7 million, or $0.67 diluted EPS. Quarterly net interest income was $391.1 million, provision for credit losses $11.4 million, noninterest income $165.0 million, and noninterest expense $282.7 million. The quarter’s noninterest income included the health-savings-account sale gain.
Balance sheet, cash flow, and capital
- At year-end, assets were $46.8 billion, loans $31.1 billion, deposits $35.0 billion, total borrowings $5.6 billion, and shareholders’ equity $5.1 billion. The loan-to-deposit ratio was 89%.
- Operating cash flow was $814.4 million; investing activities used $1.686 billion and financing activities provided $777.5 million. Cash and cash equivalents ended the year at $728.4 million.
- Regulatory capital remained above well-capitalized thresholds: Old National Bancorp’s CET1 ratio was 10.03%, total risk-based capital 12.02%, and leverage ratio 8.52%. Old National Bank’s CET1 ratio was 10.66%.
- Available-for-sale securities had $847.5 million of gross unrealized losses; held-to-maturity securities had $445.7 million of unrecognized losses. The company reported no intent or expected need to sell securities in unrealized-loss positions before recovery. AOCI declined by $784.0 million, net of tax, during 2022.
- Reported liquidity availability for subsidiaries was $4.85 billion, including cash, unencumbered securities, and borrowing capacity. Wholesale borrowings were 14% of total funding, versus 12% a year earlier.
Material changes, unusual items, and outlook
- Old National completed its all-stock merger with First Midwest on February 15, 2022, acquiring $21.9 billion of assets, including $14.3 billion of loans, and assuming $17.2 billion of deposits. Systems conversions were completed in the third quarter. Merger-related expenses were $120.9 million, with additional integration costs possible.
- The November 2022 sale of its health savings account custody and administration business generated a $90.7 million pretax gain; approximately $382 million of related deposit accounts transferred.
- Fourth-quarter property optimization, including branch closures and real-estate repositioning, resulted in $26.8 million of pretax charges. Management also eliminated the non-sufficient-funds fee for returned items, among other deposit-account changes.
- Provision for credit losses was elevated partly by merger accounting: $96.3 million was recorded for acquired non-PCD loans, and $89.1 million of allowance was established for acquired PCD loans. The year-end loan allowance was $303.7 million, or 0.98% of loans; nonperforming loans were 0.81% of loans.
- Management described credit quality as strong and the commercial loan pipeline as robust, while emphasizing disciplined underwriting. Priorities for 2023 include organic loan growth, realizing merger cost savings, growing revenue-generating businesses, expense management, and positive operating leverage. Management said it was managing the balance sheet for a possible decline in rates. No specific numerical earnings or margin guidance is provided in the filing.
Key risks include interest-rate and deposit-pricing changes, liquidity and funding costs, Midwest economic concentration, commercial real-estate exposure, potential credit deterioration, merger integration and synergy execution, and cybersecurity, vendor, and regulatory risks. Commercial real-estate loans were $12.5 billion, about 40% of total loans. Criticized and classified assets totaled $1.4 billion, with a material portion associated with First Midwest. The company reported no material litigation, though pending matters could affect results or cash flows in a particular period. Management and the auditor concluded internal control over financial reporting was effective; the auditor identified credit-loss estimation and acquired-loan fair valuation as critical audit matters.
Investor facts to verify
- Progress in realizing First Midwest merger synergies, integration costs, and retained client and deposit relationships.
- Deposit retention and repricing, funding costs, and sensitivity of net interest income to changing rates.
- Collectability and market implications of the substantial unrealized securities losses, including effects on AOCI and capital.
- Credit trends in commercial real estate and acquired loans, and whether classified assets, nonaccrual loans, and provisions continue to rise.
- Underlying earnings excluding the $90.7 million HSA-sale gain and merger, credit, and property-optimization costs.