Business context and reporting period
Old National Bancorp’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2022. Old National completed its all-stock merger with First Midwest Bancorp on February 15, 2022; the acquisition materially increased the company’s scale, so year-over-year comparisons include a substantial change in the business.
Financial and operating highlights
- Second-quarter results: Net income was $115.0 million, or $0.38 per diluted common share; income applicable to common shareholders was $111.0 million after $4.0 million of preferred dividends. In Q2 2021, net income and common income were $62.8 million, or $0.38 per diluted share.
- Revenue and margins: Q2 net interest income was $337.5 million and noninterest income was $89.1 million. Net interest margin was 3.33% on a tax-equivalent basis, versus 2.91% a year earlier. The quarter’s $426.6 million of net interest income plus noninterest income reflects the larger post-merger company.
- Expenses and credit costs: Q2 noninterest expense was $277.4 million, including $36.6 million of merger-related expenses. Provision for credit losses was $9.2 million. The efficiency ratio was 62.70%.
- Six-month results: Net income was $87.4 million and common income was $81.3 million, or $0.31 per diluted share, compared with $149.6 million and $0.90 per diluted share in the first half of 2021. The 2022 period included $106.8 million of credit-loss provision, including $96.3 million to establish an allowance on acquired non-PCD loans, and $77.9 million of merger transaction costs.
- Balance sheet at June 30: Assets were $45.7 billion, loans $29.6 billion, deposits $35.5 billion, and shareholders’ equity $5.1 billion. Versus December 31, 2021, loans increased from $13.6 billion and deposits from $18.6 billion, primarily due to the merger.
- Funding and capital: Borrowed funds totaled $4.4 billion. Consolidated CET1, Tier 1, and total risk-based capital ratios were 9.90%, 10.63%, and 12.03%, respectively; Old National Bank met the regulatory definition of well-capitalized. The common dividend was $0.14 per share for Q2.
- Cash flow and liquidity: For the first six months, operating cash flow was $438.8 million, investing cash flow was negative $278.6 million, and financing cash flow was negative $184.3 million. Cash and cash equivalents ended the period at $798.0 million. The company reported $5.6 billion of available funds at subsidiaries, including borrowing capacity based on pledged collateral, plus $271.8 million of parent-company cash.
- Credit quality and securities: Allowance for loan losses was $288.0 million, or 0.97% of loans. Nonperforming loans were 0.78% of loans; nonaccrual loans were $214.9 million, with $122.4 million related to First Midwest. Available-for-sale securities had $574.7 million of net unrealized losses, largely reflecting higher interest rates; accumulated other comprehensive loss was $569.1 million.
Material changes versus comparable periods
- Q2 net interest income rose 125% and noninterest income rose 73% year over year, largely reflecting First Midwest’s contribution, loan growth, higher rates, and acquired-loan accretion. Q2 noninterest expense rose 114%, principally from merger-related operating costs and expenses.
- Six-month common earnings fell 45.6% year over year, despite higher net interest income, as merger-related costs and acquired-loan credit provisioning affected reported results. Share count also increased substantially following merger stock issuance.
- The company transferred $3.0 billion of available-for-sale securities to held-to-maturity during the first half. The transfer did not remove the related unrealized losses from equity; those losses are being amortized over the securities’ remaining terms.
- Nonperforming and criticized/classified assets increased versus year-end, partly due to acquired First Midwest loans. Management reported $1.2 billion of criticized and classified assets, including $659.8 million associated with the merger.
Outlook, commentary, risks and unusual items
- Management said rising rates could support net interest income, while noting that the effect depends on deposit pricing, asset repricing, and other assumptions. Its modeled two-year net interest income sensitivity showed a 3.42% increase under an immediate 100-basis-point rise and a 4.67% decrease under a 50-basis-point decline; management cautioned that model outputs are not forecasts or guarantees.
- No specific full-year earnings or revenue guidance is provided in the filing. Management cited loan growth, rate changes, deposit costs, acquired-loan accretion, integration execution, and credit conditions as important drivers.
- Old National expects to complete its First Midwest branding and core systems integration work; branding and most core system conversions were completed in early July. The company expects merger synergies and cost savings, but additional integration costs will be expensed as incurred.
- On June 27, Old National agreed to sell its health savings account custodial business to UMB. The expected premium was approximately $95 million based on June 30 balances; closing was anticipated in Q4 2022, subject to customary conditions and regulatory approval.
- Key risks include merger integration and realizing synergies; credit deterioration and allowance-estimate uncertainty; interest-rate, deposit, and liquidity changes; securities valuation losses; economic and inflation pressures; cybersecurity and operational risks; and the LIBOR transition. The filing says pending litigation is not expected to materially affect consolidated financial condition, although a particular period’s results or cash flows could be affected.
Important facts for investors to verify
- Track merger integration costs, delivery of expected cost savings, and the impact of acquired-loan accretion on earnings.
- Assess credit trends in acquired portfolios, including nonaccrual, criticized/classified, past-due loans, and future allowance or provision changes.
- Monitor deposit balances and pricing, wholesale funding reliance, and sensitivity of net interest income as rates change.
- Review the scale and duration of securities-related unrealized losses, AOCI, and any effect on capital or liquidity.
- Confirm whether the UMB transaction closes on expected terms and timing, and how proceeds and transferred deposits affect results and funding.
- Compare reported GAAP results with non-GAAP measures and account for merger-related expenses, acquisition accounting, and the substantially larger post-merger share base.