Old National Bancorp — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Figures are unaudited. Old National completed its all-stock merger with First Midwest on February 15, 2022; year-over-year comparisons therefore reflect a substantially larger combined company and are not like-for-like.
Financial performance and position
| Metric | Q3 2022 | Comparable period / balance |
|---|---|---|
| Net interest income | $376.6 million | $151.6 million in Q3 2021 |
| Net interest margin, tax-equivalent | 3.71% | 3.33% in Q2 2022; 2.92% in Q3 2021 |
| Noninterest income | $80.4 million | $54.5 million in Q3 2021 |
| Noninterest expense | $266.6 million | $121.3 million in Q3 2021; includes $22.7 million merger-related expenses |
| Provision for credit losses | $11.3 million | $4.6 million reversal in Q3 2021 |
| Net income / diluted EPS | $140.2 million / $0.47 | $71.7 million / $0.43 in Q3 2021 |
| Net income applicable to common shareholders | $136.1 million | $111.0 million in Q2 2022 |
For the first nine months, net income was $227.6 million and diluted EPS was $0.80, compared with $221.4 million and $1.33 in 2021. The 2022 nine-month results included $111.6 million in merger-related expenses, including a provision on unfunded commitments, and a $96.3 million provision to establish an allowance for acquired non-PCD loans. Merger-related costs were expensed as incurred.
Q3 net interest income rose $39.1 million from Q2, mainly from higher rates and loan growth, partly offset by lower acquired-loan accretion. Management reported strong loan production and margin expansion. Q3 noninterest income declined $8.7 million from Q2, reflecting market-sensitive wealth fees, weaker mortgage activity and unusually high prior-quarter other income. The efficiency ratio was 56.17% in Q3 versus 62.70% in Q2.
- Balance sheet at September 30: Assets $46.2 billion; loans $30.5 billion; deposits $36.1 billion; total shareholders’ equity $4.9 billion. Loans grew $1.0 billion, or 13% annualized, from June 30.
- Funding and liquidity: Borrowed funds totaled $4.3 billion. Cash and cash equivalents were $801.6 million. The company reported $5.1 billion of available subsidiary liquidity, including cash, unencumbered securities and borrowing capacity at the Federal Reserve and FHLB. Management stated it believed liquidity was adequate short and long term.
- Capital: Consolidated Tier 1 leverage ratio was 8.26%, common equity Tier 1 ratio 9.88%, and total risk-based capital ratio 11.84%. Old National Bank exceeded regulatory minimums and met the “well-capitalized” definition.
- Credit: Allowance for credit losses was $302.3 million, or 0.99% of loans. Nonaccrual loans were $233.7 million; nonperforming loans were 0.81% of loans. Underperforming assets were $260.1 million. These balances rose in large part because of First Midwest-acquired loans; management cited $157.8 million of acquired nonaccrual loans and $727.7 million of acquired criticized and classified assets.
- Cash flow: Nine-month operating cash flow was $687.3 million, investing cash outflow $878.5 million and financing cash inflow $170.8 million. Cash and equivalents declined $20.4 million from year-end to $801.6 million. These consolidated cash flows include merger and bank balance-sheet activity.
Material changes and unusual items
- The First Midwest merger added approximately $21.9 billion of assets, including $14.3 billion of loans, and $17.2 billion of deposits at closing. Systems conversions and branding were completed in Q3. The merger contributed $965.6 million of goodwill; total goodwill was $2.0 billion. No goodwill impairment was identified in the annual test.
- Available-for-sale securities had $860.3 million of net unrealized losses at September 30, versus $6.0 million at December 31, 2021, primarily reflecting higher interest rates. AOCI was negative $808.5 million, versus negative $2.4 million at year-end. The company said it did not intend, and did not expect to be required, to sell securities in unrealized loss positions before recovery.
- During the nine months, $3.0 billion of available-for-sale securities were transferred to held-to-maturity. Held-to-maturity securities had a $496.1 million unrecognized loss at quarter-end; the transferred securities’ unrealized loss remains reflected in equity and is amortized over their remaining terms.
- On June 27, Old National agreed to sell its health savings account custody and administration business to UMB. Regulatory approval was received; closing was expected in mid-November 2022, subject to customary conditions. UMB’s premium was estimated at approximately $95 million based on September 30 deposit balances.
Outlook, commentary and risks
The filing does not provide specific earnings or financial guidance. Management noted that the Federal Reserve was expected to continue raising rates through 2022 and into 2023; higher rates could support spread income, while lower rates could reduce it. The company reported its modeled interest-rate sensitivity was within policy limits, but stated model results are not guarantees.
Key risks include merger integration and realizing expected synergies; uncertain credit conditions and potentially volatile credit-loss provisions; interest-rate, deposit-pricing and liquidity changes; the substantial unrealized securities losses; and operational, cybersecurity, regulatory and legal risks. Management cited inflation-control measures, the war in Ukraine and supply-chain issues among factors that could worsen economic assumptions. The company disclosed no material litigation and no material change in previously reported risk factors.
Important facts for investors to verify
- Whether integration delivers expected merger synergies and how remaining integration costs affect results.
- Trends in criticized, classified, nonaccrual and acquired loans, charge-offs, and the adequacy of the allowance as the economy changes.
- Deposit retention, deposit pricing and reliance on wholesale funding as interest rates rise.
- The duration and potential capital or liquidity implications of securities unrealized losses, including securities transferred to held-to-maturity.
- Completion and proceeds of the UMB transaction, and the effect on deposits and earnings.
- Capital ratios and tangible common equity measures, noting that certain tangible measures are non-GAAP.