Old National Bancorp — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparative results are for 2020 unless otherwise noted. Old National is a Midwestern commercial bank headquartered in Evansville, Indiana, operating 162 banking centers primarily across Indiana, Kentucky, Michigan, Minnesota, and Wisconsin. Figures below are in U.S. dollars.
Financial performance and condition
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Net income | $277.5 million | $226.4 million | Up 22.6% |
| Diluted earnings per share | $1.67 | $1.36 | Up from prior year |
| Net interest income | $596.4 million | $596.1 million | Nearly unchanged |
| Net interest margin, taxable-equivalent basis | 2.89% | 3.18% | Down 29 basis points |
| Noninterest income | $214.2 million | $239.3 million | Down 10.5% |
| Noninterest expense | $500.6 million | $541.4 million | Down 7.5% |
| Provision for credit losses | $(28.8) million | $38.4 million | 2021 benefit/recapture reflected improved economic forecasts |
| Operating cash flow | $330.4 million | $219.8 million | Cash provided by operating activities |
Net interest income remained stable as higher average earning assets and lower funding costs offset lower asset yields. Taxable-equivalent net interest income was $610.3 million. The margin decline reflected yields on average earning assets falling 44 basis points, partly offset by a 19-basis-point reduction in the cost of interest-bearing liabilities. Net income also benefited from the credit-loss provision recapture and lower expenses; therefore, the year-over-year earnings increase should not be viewed as solely recurring operating growth.
Mortgage banking revenue fell to $42.6 million from $62.8 million, and net debt securities gains declined to $4.3 million from $10.8 million. Wealth management fees rose to $40.4 million from $36.8 million. The efficiency ratio improved to 59.65% from 62.91%; return on average assets was 1.17%, versus 1.04%.
At year-end, total assets were $24.45 billion, up 7%; loans were $13.60 billion, down from $13.79 billion; deposits were $18.57 billion, up from $17.04 billion; and shareholders’ equity was $3.01 billion. The loan-to-deposit ratio was 73%. Total borrowed funds were $2.58 billion, including $1.89 billion of FHLB advances. Cash and cash equivalents totaled $822.0 million. The company reported $6.24 billion of available subsidiary liquid funds and borrowing capacity, plus $107.9 million at the parent company.
Capital remained above regulatory minimums: the company’s CET1 ratio was 12.04%, total risk-based capital ratio 12.77%, and leverage ratio 8.59%. Old National Bank met the regulatory definition of “well-capitalized.” The quarterly common dividend was $0.14 per share ($0.56 for the year).
Material changes and unusual items
- Asset quality improved: nonperforming loans were 0.92% of loans versus 1.20%; nonaccrual loans were $106.7 million versus $147.3 million. Net recoveries were $4.8 million, compared with net charge-offs of $3.0 million in 2020.
- The allowance for credit losses on loans declined to $107.3 million from $131.4 million, primarily reflecting a better economic forecast. The allowance was 0.79% of year-end loans, versus 0.95%.
- Noninterest expenses included $14.6 million of diligence and merger charges in 2021. In 2020, expenses included $42.6 million of ONB Way strategic initiative charges and significant lease termination and asset impairment costs.
- Unrealized losses on available-for-sale securities changed accumulated other comprehensive income materially: the portfolio moved from $186.3 million of net unrealized gains at year-end 2020 to $6.0 million of net unrealized losses at year-end 2021, largely as longer-term interest rates rose. This reduced equity through other comprehensive income.
- Remaining PPP loans were $169.0 million at year-end, compared with $943.0 million a year earlier. PPP interest and net fees contributed $44.4 million of 2021 interest income.
Merger, outlook, and principal risks
Old National agreed in May 2021 to an all-stock merger of equals with First Midwest Bancorp. First Midwest shareholders are to receive 1.1336 Old National shares per share, and were expected to own approximately 44% of the combined company. Based on Old National’s December 31 share price, the transaction value was approximately $2.4 billion; the combined organization was expected to have about $45 billion in assets. Shareholder and required regulatory approvals had been obtained by January 27, 2022. The merger was expected to close after market hours on February 15, 2022, subject to customary conditions; the OCC extended the deadline for completing the bank merger to April 20, 2022. The filing reports $11.0 million of merger transaction costs expensed through year-end and anticipates additional transaction and integration costs.
Management described a strong but uneven economic recovery, with Delta and Omicron, supply-chain disruption, labor constraints, inflation, and geopolitical tensions creating uncertainty. It cited record commercial loan production of $3.9 billion and record-high commercial loan pipeline levels entering 2022, while emphasizing disciplined underwriting. The filing provides no specific company earnings or financial guidance. Management’s strategy emphasizes organic loan growth, noninterest income, expense discipline, and integration with First Midwest. The filing cites general economic forecasts of U.S. growth of 3.5% in 2022 and 2.9% in 2023; these are not company guidance.
- Merger execution: Integration could cost more or take longer than expected, fail to deliver anticipated savings, disrupt clients or employees, or distract management. Under specified circumstances, termination could require a $97 million fee. The filing also describes merger-related lawsuits and demand letters challenging disclosures; Old National considered the claims without merit.
- Credit and pandemic exposure: A weaker economy, commercial real estate stress, higher unemployment, or renewed pandemic effects could increase defaults and credit-loss provisions. Allowance estimates depend on forecasts and management assumptions and may be volatile under CECL.
- Interest-rate and securities risk: Rate changes affect net interest income and securities values. The company’s model projected net interest income sensitivity of negative 3.18% under an immediate 50-basis-point decline and positive 5.74% under a 100-basis-point increase, over a two-year cumulative horizon; management cautioned that model outputs are not guarantees.
- Funding, operations, and regulation: Risks include reliance on deposits and wholesale funding, cyberattacks and vendor disruption, LIBOR transition, regulatory change, and the possibility of increased compliance costs or legal liabilities.
- Commitments and contingencies: At year-end, the bank had $4.49 billion of loan commitments and $75.7 million of standby letters of credit, which are not recorded as funded loans. The filing states it was not involved in material litigation, while noting ordinary-course legal matters and merger-related claims.
Most important facts for investors to verify
- Whether the First Midwest merger closed as expected and whether integration costs, realized savings, and post-merger performance matched management’s expectations.
- Whether underlying earnings growth persists after separating the credit-loss recapture, PPP income, securities gains, and merger or strategic initiative costs.
- Whether loan quality and the allowance remain adequate as pandemic support fades and economic, commercial real estate, and borrower conditions evolve.
- How deposit pricing and asset yields affect net interest margin as interest rates change, and whether securities valuation changes create further pressure on equity.
- Whether liquidity, capital ratios, and dividend capacity remain strong, particularly given loan growth, merger needs, and the bank’s regulatory dividend restrictions.