Old National Bancorp — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance sheet compared with December 31, 2019. Old National is a Midwest community bank operating principally in Indiana, Kentucky, Michigan, Wisconsin, and Minnesota. Results were shaped by the onset of COVID-19, adoption of CECL, and a strategic restructuring program.
Financial performance and position
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Net interest income | $143.8 million | $147.0 million in Q1 2019, down 2.2% |
| Net interest margin | 3.31% taxable-equivalent; 3.24% GAAP | 3.51% taxable-equivalent; 3.43% GAAP in Q1 2019 |
| Noninterest income | $57.5 million | $46.4 million in Q1 2019, up 23.9% |
| Noninterest expense | $158.7 million | $123.0 million in Q1 2019, up 29.0% |
| Provision for loan losses | $17.0 million | $1.0 million in Q1 2019 |
| Net income / diluted EPS | $22.6 million / $0.13 | $56.3 million / $0.32 in Q1 2019 |
| Net cash from operating activities | $(21.1) million | $33.0 million in Q1 2019 |
- Net interest income declined mainly because loan yields and acquired-loan accretion income fell; reduced funding costs provided a partial offset. Acquired-loan accretion was $6.7 million versus $8.9 million a year earlier.
- Noninterest income benefited from mortgage banking revenue of $11.1 million, versus $5.0 million, and net securities gains of $5.2 million, versus a $0.1 million loss. Mortgage activity and securities gains are important contributors to the year-over-year increase.
- Expense included $31.2 million of charges associated with “The ONB Way” initiative. The filing cites $22.8 million of branch optimization charges, $7.0 million of severance, and $1.4 million of other related costs; the reported expense categories also reflect tax-credit investment amortization and other items.
- Effective tax rate was 11.5%, compared with 18.9%, primarily reflecting higher federal tax credits.
- Total assets were $20.74 billion. Loans were $12.38 billion, up $267.1 million from year-end, primarily from commercial and commercial real estate growth. Deposits were $14.31 billion, down $248.0 million.
- Allowance for credit losses on loans was $106.4 million, or 0.86% of loans, at quarter-end. The allowance for unfunded commitments was $9.0 million. Net charge-offs were $6.5 million, or 0.21% annualized of average loans.
- Total borrowed funds were $3.25 billion, up about $500.5 million from year-end; FHLB advances were $2.13 billion. Cash and cash equivalents were $343.2 million. The company reported subsidiary available funds of $3.98 billion, including cash, unencumbered securities, and borrowing availability.
- Shareholders’ equity was $2.82 billion. The company reported consolidated CET1 and total risk-based capital ratios of 11.40% and 12.28%, respectively; its bank subsidiary met the well-capitalized definition. The company paid $0.14 per share in dividends and repurchased about 4.9 million shares under its buyback plan, which it then suspended near term.
Material changes and notable items
- CECL adoption: Effective January 1, 2020, adoption increased the loan allowance by $41.3 million and the unfunded-commitment allowance by $4.5 million. A $31.2 million after-tax cumulative adjustment reduced opening retained earnings; the day-one adjustment did not run through Q1 earnings. Prior-period allowance measures use the former incurred-loss method and are not directly comparable.
- COVID-19 credit response: The Q1 allowance included a forecast of a sharp second-quarter GDP decline and elevated unemployment through 2023, alongside consideration of fiscal support. Through April 16, after quarter-end, the company reported 2,675 approved loan deferrals totaling $1.23 billion, or 10% of its portfolio. Modifications completed during Q1 were described as immaterial.
- PPP activity: After quarter-end, Old National reported facilitating more than $1.3 billion of Paycheck Protection Program loans to over 5,100 clients through April 16. This is subsequent-period activity, not Q1 revenue or loan growth.
- Branch optimization: The company consolidated 31 banking centers on or before April 24. It expected approximately $6 million of additional charges for later closures of non-branch facilities.
- Funding and liquidity: Deposits declined while wholesale funding rose, increasing wholesale funding to 18% of total funding from 16% at year-end. Operating cash flow was negative, while financing activities provided $140.1 million; cash and equivalents nevertheless increased $66.8 million during the quarter.
- Market rates: The Federal Reserve cut its target rate to near zero. Management warned that lower rates could pressure asset yields and net interest income, while noting balance-sheet, derivative, and deposit-pricing actions intended to mitigate exposure.
Outlook, risks, and contingencies
Management said the pandemic’s duration, economic effects, and impact on borrowers were highly uncertain; it did not provide quantified earnings guidance. It warned that sustained disruption could impair borrower repayment, collateral values, loan quality, securities, servicing rights, deferred tax assets, goodwill or other intangibles, and counterparty exposures. Future provision expense may be volatile under CECL as forecasts, portfolio mix, and credit conditions change.
The filing identifies interest-rate, credit, liquidity, operational/cybersecurity, regulatory, and legal risks. Loan commitments were $2.90 billion and standby letters of credit were $82.4 million at March 31; these are off-balance-sheet exposures. Management said it was not involved in material litigation and did not expect pending matters to materially affect consolidated financial condition, while acknowledging possible effects on results or cash flows in a particular period. Disclosure controls were assessed as effective at a reasonable-assurance level.
Most important facts for investors to verify
- How COVID-19-related deferrals, PPP lending, and subsequent borrower performance affect credit quality, charge-offs, and the CECL allowance.
- Whether the economic assumptions underlying the $106.4 million loan allowance remain supportable, and how much further provision expense may be required.
- Whether deposit trends, higher wholesale funding, and available liquidity remain adequate as loan demand and customer cash needs evolve.
- How persistently near-zero interest rates affect net interest margin, loan yields, deposit costs, and hedge positions.
- The final cost, timing, and expected savings of “The ONB Way,” including the approximately $6 million of anticipated later facility-closure charges.
- The sustainability of earnings excluding securities gains, elevated mortgage banking revenue, tax-credit benefits, and restructuring charges; also verify the dividend and share-repurchase posture.