Old National Bancorp — Q3 2021 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2021; balance-sheet comparisons are with December 31, 2020. Old National is a Midwest community bank operating through one reportable segment. The filing was signed October 27, 2021.
Key financial metrics
| Metric | Q3 2021 / September 30, 2021 | Comparison |
|---|---|---|
| Net interest income | $151.6 million | Up 4.1% from Q3 2020 |
| Provision for credit losses | $4.6 million recapture | Zero in Q3 2020 |
| Noninterest income | $54.5 million | Down 15.8% year over year |
| Noninterest expense | $121.3 million | Up 0.9% year over year |
| Net income / diluted EPS | $71.7 million / $0.43 | $77.9 million / $0.47 in Q3 2020 |
| Net interest margin | 2.92% taxable-equivalent basis | 3.03% in Q3 2020; reported margin was 2.86% |
| Assets / loans / deposits | $24.019 billion / $13.585 billion / $18.196 billion | Assets up $1.058 billion and deposits up $1.159 billion from year-end 2020; loans down $201.7 million |
| Allowance for credit losses | $107.9 million; 0.79% of loans | $131.4 million and 0.95% at year-end 2020 |
| Shareholders’ equity | $3.036 billion | $2.973 billion at year-end 2020 |
For the first nine months, net income was $221.4 million ($1.33 diluted EPS), versus $152.3 million ($0.92) in 2020. Net interest income was $449.6 million, up 3.4%; noninterest income was $162.7 million, down 10.0%; and noninterest expense was $368.6 million, down 7.6%. The effective tax rate rose to 18.2% from 14.0%.
Cash flow and liquidity. Nine-month operating cash flow was $264.7 million, investing cash flow was negative $1.000 billion, and financing cash flow was $943.2 million. Cash and cash equivalents increased $207.7 million to $797.5 million. Total borrowed funds were $2.536 billion, down from $2.677 billion at year-end 2020; deposits funded 88% of total funding. Management reported $5.791 billion in available funds at subsidiaries, including cash, unencumbered securities, and borrowing capacity. Capital ratios included 12.08% common equity Tier 1 and an 8.54% leverage ratio; Old National Bank met the regulatory definition of well-capitalized.
Changes versus comparable periods
- Q3 net income and diluted EPS declined from 2020 despite higher net interest income, principally as noninterest income fell, especially mortgage banking revenue and securities gains.
- Q3 taxable-equivalent net interest margin declined 11 basis points year over year, reflecting lower asset yields and changes in asset and funding mix, partly offset by lower funding costs.
- Nine-month net income improved substantially, aided by a $26.9 million credit-loss provision recapture versus $39.5 million of provision expense in 2020 and lower expenses. The prior-year period included $39.0 million of ONB Way charges.
- Loan balances fell during Q3, primarily from a $366.1 million decline in PPP loans, partly offset by commercial and commercial real estate growth. Q3 commercial production was $1.0 billion; the reported pipeline was $2.7 billion.
- Nonperforming loans were 0.94% of loans, down from 1.20% at year-end 2020. Underperforming assets were $130.1 million, versus $166.6 million at year-end.
- Available-for-sale securities were $7.028 billion, up from $5.970 billion at year-end; net unrealized gains fell to $69.5 million from $186.3 million, principally with higher long-term interest rates. Accumulated other comprehensive income declined to $56.8 million from $147.8 million.
Outlook, commentary, risks and unusual items
- First Midwest merger: The all-stock merger of equals was valued at approximately $2.210 billion based on Old National’s September 30 share price. Shareholders and the OCC had approved it; Federal Reserve approval remained pending. Management said it stood ready to close after approval. Merger costs of $7.9 million had been expensed through September 30, with further transaction and integration costs expected. The filing also identifies execution, integration, employee-retention, regulatory approval, and termination risks; a possible $97 million termination fee applies in specified circumstances.
- Management outlook: Management cited strong commercial loan production and pipeline, controlled expenses, and improved credit metrics as supportive of future quarters, but provided no numerical earnings or balance-sheet guidance. It cautioned that incomplete economic recovery, COVID-19, inflation, labor constraints, and supply-chain disruptions could weaken conditions.
- Credit and pandemic: The $4.6 million quarterly credit-loss recapture reflected a more favorable economic forecast. Management warned that weaker-than-expected recovery or changes in forecasts, loan growth, recoveries, or charge-offs could increase future provision expense. Remaining PPP loans were $354.9 million and carry an SBA guarantee. COVID-related loan deferrals totaled $20.2 million across 187 deferrals.
- Interest-rate exposure: The company’s two-year model estimated net interest income 2.86% lower under an immediate 50-basis-point decrease and 5.92% higher under a 100-basis-point increase versus its base case. Management cautioned that model results are not guarantees. The portfolio’s effective duration increased to 4.50 from 4.08 at year-end.
- Legal matter: Management disclosed an October 2021 Fair Housing Center of Central Indiana lawsuit concerning Indianapolis lending practices and said it strongly denied the claims. It stated it was not then involved in other material litigation; it could not predict outcomes of ordinary-course legal actions.
- Other notable items: Goodwill of $1.037 billion passed the August 2021 annual impairment test. Disclosure controls were deemed effective at a reasonable-assurance level, with no material changes to internal control over financial reporting reported.
Most important facts for investors to verify
- Whether and when Federal Reserve approval is received for the First Midwest merger, and the resulting costs, conditions, integration performance, and expected benefits.
- Whether loan growth replaces runoff in PPP balances, and whether the $2.7 billion commercial pipeline converts into funded loans without weakening underwriting.
- How credit quality and the allowance develop as pandemic support wanes and economic forecasts, recoveries, and charge-offs change.
- Whether net interest margin and fee income stabilize, particularly mortgage banking revenue, and how rate changes affect earnings and securities values.
- The development and potential impact of the Fair Housing lawsuit, merger-related shareholder claims, and other contingencies.
- Liquidity, capital, and asset quality trends; reported available funding and regulatory ratios are point-in-time measures and may change.