Old National Bancorp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet figures are as of March 31, 2022. Old National completed its all-stock merger of equals with First Midwest Bancorp on February 15, 2022. Consequently, Q1 2022 includes First Midwest only after closing, while Q1 2021 reflects Old National alone; year-over-year comparisons are not fully comparable.
Financial performance and condition
- Earnings: Net loss was $27.6 million, or $0.13 per diluted common share, versus net income of $86.8 million, or $0.52 per diluted share, in Q1 2021. Net loss applicable to common shareholders was $29.6 million after $2.0 million of preferred dividends.
- Revenue and margin: Net interest income was $222.8 million, up 50.4% year over year; noninterest income was $65.2 million, up 15.0%. Tax-equivalent net interest margin was 2.88%, down from 2.94%. Management attributed higher net interest income primarily to the merger, loan growth, acquired-loan accretion, and lower funding costs.
- Credit costs and expenses: Provision for credit losses was $97.6 million, compared with a $17.4 million provision recovery in Q1 2021. The 2022 provision included $96.3 million for acquired non-PCD loans. Noninterest expense rose 92.6% to $226.8 million, including $52.3 million of merger-related charges, of which $11.0 million related to unfunded commitments. The efficiency ratio was 76.15%, versus 55.57%.
- Cash flow: Operating cash flow was $161.1 million, compared with $83.2 million in Q1 2021. Cash and cash equivalents ended the quarter at $2.0 billion. Investing cash flow included $1.913 billion of net cash received in the merger; financing cash flow was negative $114.1 million.
- Balance sheet and funding: Total assets were $45.8 billion, loans $28.3 billion, and deposits $35.6 billion. Total borrowed funds were $4.35 billion. These balances increased substantially from year-end largely because of the First Midwest acquisition. Wholesale funding was 11% of total funding.
- Liquidity and capital: The company reported $566.6 million of parent-company liquid funds and $7.72 billion of subsidiary available funds and borrowing capacity. Old National Bank was described as well-capitalized. Consolidated common equity Tier 1, Tier 1, total capital, and leverage ratios were 10.04%, 10.79%, 12.19%, and 10.58%, respectively.
- Other notable metrics: Allowance for credit losses was $280.5 million, or 0.99% of loans. Nonaccrual loans were $227.9 million; criticized and classified assets totaled $1.28 billion, with substantial portions attributable to acquired First Midwest loans. The common dividend was $0.14 per share.
Material changes and unusual items
- The merger added approximately $21.9 billion of acquired assets and $17.2 billion of deposits at preliminary fair values. Old National issued approximately 129.4 million common shares and preferred stock; it recorded $960.2 million of merger-related goodwill, which is not tax deductible.
- Merger-related transaction costs of $41.3 million were expensed in Q1, and management said further transaction and integration costs would be recognized as incurred. The $52.3 million of merger-related charges disclosed in the executive summary also includes the $11.0 million unfunded-commitment provision.
- Available-for-sale securities had net unrealized losses of $413.6 million at quarter-end, principally reflecting higher interest rates. Accumulated other comprehensive loss increased to $338.2 million, contributing to lower reported equity. The company transferred $2.039 billion of securities from available-for-sale to held-to-maturity.
- Mortgage banking revenue fell 56.2% year over year to $7.2 million, which management linked to the rate environment, normalizing gain-on-sale margins, and a higher share of portfolio production. Accretion income on acquired loans and borrowings was $15.9 million, versus $4.7 million a year earlier.
- Old National repurchased approximately 3.54 million shares under its board-approved $200 million repurchase program during the quarter; $136.1 million remained authorized at March 31.
Outlook, commentary and risks
- Management cited a $5.4 billion commercial loan pipeline and $1.5 billion of commercial loan production in Q1. It expects Federal Reserve rate increases to continue through 2022 and into 2023; higher rates could improve the spread, while lower rates could reduce it. These statements are not specific earnings guidance.
- The company’s two-year cumulative interest-rate sensitivity model estimated net interest income 7.38% above base under an immediate 100-basis-point increase and 5.10% below base under a 50-basis-point decrease. Management cautioned that model outputs depend on assumptions and are not guarantees of actual results.
- Key risks include integration and systems conversion, realizing merger synergies, credit quality and allowance-estimation uncertainty, interest-rate and securities-value changes, deposit and wholesale-funding conditions, LIBOR transition, cybersecurity and operational disruptions, inflation and supply-chain pressures, and pandemic-related effects. Management said the pandemic appeared less disruptive by quarter-end.
- Loan commitments were $7.991 billion and standby letters of credit were $221.1 million. Management stated that pending litigation was not expected to have a material adverse effect on consolidated financial condition, though a matter could affect results or cash flows in a particular period. The filing reports no material litigation currently involving the company.
Important facts for investors to verify
- How much of reported earnings, expenses, loan growth, and credit costs reflects the merger versus ongoing operations, and how merger-related costs and expected synergies develop.
- Whether acquired criticized, classified, and nonaccrual loans perform as expected, and whether the allowance remains adequate as loan growth and economic conditions evolve.
- How higher rates affect net interest margin, deposit pricing and retention, mortgage banking, and the substantial unrealized losses in the securities portfolio.
- Whether capital ratios, liquidity resources, and share repurchases remain appropriate after acquisition integration and any further credit or market deterioration.
- Whether the preliminary acquisition-date fair values, goodwill, integration assumptions, and management’s forward-looking statements change in subsequent filings.