Old National Bancorp — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Comparisons are with the corresponding 2019 periods unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are generally reported in thousands.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $145.7 million | $155.2 million | $289.4 million | $302.3 million |
| Provision for loan losses | $22.5 million | $1.0 million | $39.5 million | $2.0 million |
| Noninterest income | $58.5 million | $51.2 million | $116.0 million | $97.6 million |
| Noninterest expense | $120.1 million | $128.1 million | $278.9 million | $251.2 million |
| Net income | $51.7 million | $63.0 million | $74.3 million | $119.2 million |
| Diluted earnings per share | $0.32 | $0.36 | $0.45 | $0.68 |
| Tax-equivalent net interest margin | 3.14% | 3.66% | 3.22% | 3.59% |
Q2 net income was $51.7 million, or $0.32 per diluted share. Six-month net income fell 38% year over year, reflecting higher credit-loss provisioning and increased strategic initiative and tax-credit investment expenses. Q2 noninterest income benefited particularly from mortgage banking and capital markets revenue; pandemic-related reductions in deposit service charges and debit-card fees partly offset those gains. The six-month effective tax rate was 14.6%, versus 18.7%, primarily reflecting increased federal tax credits.
Financial condition, liquidity and capital
- Balance sheet: Total assets were $22.10 billion at June 30, up from $20.41 billion at December 31, 2019. Total loans were $13.62 billion; deposits were $16.32 billion; shareholders’ equity was $2.86 billion.
- Loan growth: Commercial and commercial real estate loans increased substantially, including $1.463 billion of PPP loans outstanding. Total loans rose $1.231 billion from March 31. Residential real estate and consumer loan balances declined from year-end.
- Credit allowance and asset quality: The loan allowance was $128.4 million, or 0.94% of loans, compared with $54.6 million under the prior methodology at year-end. Nonperforming loans were 1.04% of loans; underperforming assets were $144.7 million. Net charge-offs were $0.5 million in Q2 and $7.1 million for the six months.
- Funding and borrowings: Deposits increased $1.77 billion from year-end, with noninterest-bearing deposits up $1.18 billion, largely reflecting PPP-related funds. Wholesale borrowings totaled $2.64 billion, down $103 million from year-end; FHLB advances were $2.04 billion.
- Cash flows: For the first six months, operating cash flow was negative $36.6 million, investing cash flow was negative $1.46 billion, and financing cash flow was positive $1.53 billion. Cash and cash equivalents ended the period at $310.5 million.
- Capital: Common equity Tier 1 was 11.70%, total risk-based capital was 12.68%, and the leverage ratio was 8.12%. Management reported that the bank remained well-capitalized. Subsidiaries had $4.22 billion of available liquid funds and borrowing capacity; the parent had $50.7 million of available liquid funds.
Material changes and management commentary
- Year-over-year Q2 net interest income declined 6.2%; management cited lower earning-asset yields and lower acquired-loan accretion, partly offset by lower funding costs and higher average earning assets. The Q2 margin was down 52 basis points from 2019.
- CECL adoption on January 1, 2020 increased the loan allowance by $41.3 million and the unfunded-commitment allowance by $4.5 million; the after-tax cumulative adjustment reduced retained earnings by $31.2 million. CECL estimates are sensitive to credit quality and economic forecasts.
- COVID-19 drove the higher credit provision through a forecast incorporating elevated unemployment and a sharp GDP decline. Management said government stimulus and relief programs had mitigated near-term credit effects, but subsequent borrower performance and losses remain uncertain.
- By June 30, the company had booked 4,162 COVID-related loan deferrals totaling $1.304 billion, or 11% of the portfolio. It had processed more than 9,200 PPP applications representing $1.538 billion in approved funding. Management noted risks if borrowers fail to qualify for forgiveness or the SBA challenges program compliance.
- Six-month noninterest expense increased 11.0%, including $36.1 million of charges related to “The ONB Way” strategic initiative and higher tax-credit investment amortization. Branch consolidation-related lease termination charges and long-lived asset impairments totaled $24.6 million for the six months. The company completed 31 branch closures in April and cited its multi-year Infosys partnership as part of its strategy.
- The board-approved share repurchase program was suspended in the near term because of economic uncertainty. The company paid $0.28 per share in dividends during the first half.
- No specific earnings guidance was provided. Management described ongoing uncertainty around the pandemic, interest rates, borrower credit quality and the duration of government support. A COVID-related goodwill impairment trigger was identified, but the interim qualitative assessment found no impairment as of June 30.
Key investor verification points
- Track PPP forgiveness, SBA guarantee exposure and any compliance, regulatory or litigation developments.
- Monitor deferral extensions, borrower delinquencies, criticized/classified loans, charge-offs and whether the $128.4 million allowance remains adequate as economic forecasts change.
- Assess whether mortgage banking and capital markets gains can offset margin pressure, weaker fee income and the low-rate environment.
- Review the nature and recurrence of ONB Way charges, branch consolidation savings, and the status of the suspended repurchase program.
- Verify liquidity, deposit trends and regulatory capital levels as stimulus-related balances and customer behavior evolve.