Old National Bancorp — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Comparisons below are year over year unless otherwise noted. Dollar amounts are in U.S. dollars.
Business context and reporting period
Old National is a Midwest-focused bank holding company operating through Old National Bank. Its reported business is one community-banking segment. The company entered into an all-stock merger agreement with First Midwest Bancorp on May 30, 2021; the transaction was pending at quarter-end.
Key financial metrics
| Metric | Q2 2021 | Comparable period / change |
|---|---|---|
| Net interest income | $149.9 million | $145.7 million; up 2.9% |
| Noninterest income | $51.5 million | $58.5 million; down 11.9% |
| Net income | $62.8 million; diluted EPS $0.38 | $51.7 million; diluted EPS $0.32 |
| Net interest margin, taxable-equivalent basis | 2.91% | 3.14% |
| Efficiency ratio | 62.05% | 56.29% |
For the six months, net income was $149.6 million versus $74.3 million, and net interest income was $298.0 million versus $289.4 million. Noninterest income fell 6.7% to $108.2 million. Noninterest expense was $247.4 million, down 11.3%, primarily because the first half of 2020 included $36.1 million of ONB Way restructuring-related charges.
Q2 provision for credit losses was a $4.9 million recovery, compared with $22.5 million of provision expense in Q2 2020. The six-month provision was a $22.3 million recovery versus $39.5 million of expense. Management attributed the reversals chiefly to an improved economic forecast.
Cash flow: For the six months, operating activities provided $165.2 million, investing activities used $926.4 million, and financing activities provided $662.6 million. Cash and cash equivalents decreased $98.6 million to $491.1 million.
Balance sheet and liquidity: At June 30, assets were $23.68 billion, loans $13.78 billion, deposits $17.87 billion, and shareholders’ equity $2.99 billion. Compared with December 31, 2020, deposits increased $831.5 million and total borrowings decreased $117.4 million to $2.56 billion. Available subsidiary funds and borrowing capacity totaled $5.31 billion, including cash, unencumbered securities, and secured borrowing availability.
Credit and capital: The allowance for credit losses was $109.4 million, or 0.79% of loans, versus $131.4 million and 0.94% at year-end. Nonperforming loans were 1.03% of loans; underperforming assets totaled $143.0 million. Old National Bancorp’s Tier 1 leverage ratio was 8.38% and total risk-based capital ratio was 12.73%; the bank subsidiary met the regulatory definition of well-capitalized.
Material changes versus comparable periods
- Q2 net income improved year over year, supported by higher net interest income and a credit-loss recovery, but was partly offset by lower noninterest income and higher expenses.
- Net interest margin declined year over year as lower asset yields and a change in asset and funding mix more than offset lower funding costs. Average earning assets increased 11% in Q2.
- Mortgage banking revenue fell 54.8% in Q2, reflecting fewer refinance transactions and more normalized gain-on-sale margins. Wealth management, investment product, and debit-card fees increased.
- Loans were down $140.6 million from March 31, mainly due to a $403.0 million decline in PPP balances, partly offset by growth in other commercial and commercial real estate lending. Commercial loan production was $1.1 billion in Q2; the reported pipeline was $2.6 billion at June 30.
- Available-for-sale securities increased to $6.78 billion from $5.97 billion at year-end. Net unrealized gains declined to $74.3 million from $186.3 million, primarily reflecting higher long-term interest rates; the change reduced equity through other comprehensive income.
Outlook, commentary, risks and unusual items
Management cited the commercial pipeline, excess liquidity from deposit growth, and ONB Way revenue initiatives as supportive of future quarters, but cautioned that renewed COVID-19 cases could stall the recovery. The filing provides no quantified earnings or margin guidance.
The First Midwest merger is an all-stock merger of equals: First Midwest shareholders are to receive 1.1336 Old National shares per share, with former First Midwest shareholders expected to own approximately 44% of the combined company. Based on Old National’s June 30 closing price, the stated transaction value was approximately $2.307 billion. Closing was expected in late 2021 or early 2022, subject to regulatory and shareholder approvals and other conditions. Old National had expensed $6.5 million of merger costs through June 30, including $6.2 million of Q2 professional fees; further transaction and integration costs were expected.
Key risks include the merger not closing or anticipated benefits not being realized; COVID-19 and economic uncertainty affecting borrowers and credit quality; interest-rate and liquidity risk; possible volatility in CECL credit-loss estimates; and operational, technology, cybersecurity, regulatory, and legal risks. Management noted that COVID-19 effects remained uncertain, including risks from slower reopening and resistant virus strains. The filing states that Old National was not involved in material litigation at quarter-end, while noting ordinary-course legal matters and the difficulty of estimating outcomes.
Important facts for investors to verify
- Progress, approvals, conditions, timing, costs, and expected benefits of the First Midwest merger.
- Whether the strong loan pipeline converts to funded balances as PPP loans continue to run off.
- Net interest margin trends under low rates and changing deposit pricing, asset mix, and interest rates.
- Credit quality, loan deferrals, nonperforming assets, and the assumptions supporting the allowance and credit-loss recoveries.
- Available-for-sale securities valuation and the effect of interest-rate movements on accumulated other comprehensive income and capital.
- Execution of expense and technology initiatives, alongside the quarter’s higher merger-related fees and data-processing costs.