Old National Bancorp — Q1 2023 Form 10-Q
Business context and reporting period. Old National Bancorp is a Midwest financial holding company providing commercial and consumer banking, wealth management and related financial services. This unaudited filing covers the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. The February 2022 First Midwest merger affects year-over-year comparability.
Key financial results
| Metric | Q1 2023 | Prior comparable period |
|---|---|---|
| Net interest income | $381.5 million | $222.8 million in Q1 2022 |
| Net interest margin | 3.69% taxable-equivalent; 3.64% GAAP | 2.88% taxable-equivalent; 2.83% GAAP in Q1 2022 |
| Provision for credit losses | $13.4 million | $108.7 million in Q1 2022 |
| Noninterest income | $70.7 million | $65.2 million in Q1 2022 |
| Noninterest expense | $250.7 million | $215.6 million in Q1 2022 |
| Net income applicable to common shareholders | $142.6 million; $0.49 diluted EPS | Net loss of $29.6 million; $(0.13) diluted EPS in Q1 2022 |
| Operating cash flow | $53.7 million | $161.1 million in Q1 2022 |
Interest income rose substantially with higher rates and loan growth, while deposit and borrowing costs also increased. Management reported a 3.69% taxable-equivalent net interest margin, down from 3.85% in Q4 2022; higher funding costs, fewer days in the quarter and lower acquired-loan accretion contributed to the sequential decline. Net income was also affected by $14.6 million of merger-related expenses, $1.3 million of property optimization costs and $5.2 million of net debt-securities losses.
Financial condition and material changes
- Scale and lending: Total assets were $47.8 billion, up $1.1 billion from year-end. Loans were $31.8 billion, up $698.7 million, primarily from commercial lending growth.
- Deposits and funding: Deposits totaled $34.9 billion, down $83 million overall. Noninterest-bearing deposits declined $935.7 million; time deposits increased $1.1 billion. Wholesale borrowings rose $1.15 billion to $6.74 billion, including a $1.15 billion increase in FHLB advances. Cash and cash equivalents were $1.11 billion.
- Credit: The loan allowance was $298.7 million, or 0.94% of loans, versus $303.7 million and 0.98% at year-end. Net charge-offs were $16.4 million, including $12.4 million in purchased-credit-deteriorated loans. Nonaccrual loans were $234.3 million; total criticized and classified assets were $1.43 billion, up $19.3 million from year-end.
- Capital: Shareholders’ equity was $5.28 billion. Consolidated CET1 was 9.98%, Tier 1 capital 10.64%, total capital 11.96% and leverage 8.53%. The company reported that it and its bank subsidiary exceeded regulatory minimums and that the bank met the “well-capitalized” definition.
- Securities and accumulated losses: Available-for-sale securities had $814.5 million of net unrealized losses and held-to-maturity securities had $407.8 million of net unrealized losses. Management said it did not intend, and did not expect to be required, to sell securities in unrealized-loss positions before anticipated recovery.
- Cash flows: Investing activities used $640.1 million and financing activities provided $971.9 million; cash and cash equivalents increased $385.5 million during the quarter.
Outlook, risks and unusual items
The filing provides no specific earnings or financial guidance. Management described deposits as stable overall, liquidity as ample, credit quality as strong and expense management as disciplined. It cautioned that further loan growth, lower recoveries, increased charge-offs or changes in CECL assumptions and economic forecasts could raise provision expense. Other stated risks include deposit and liquidity pressures, inflation and interest rates, credit and market conditions, merger integration, cybersecurity and operational disruptions, and regulatory or legal developments.
Management reported $9.45 billion of available funds and borrowing capacity at subsidiaries, including access to Federal Reserve and FHLB facilities. On April 21, 2023, Moody’s affirmed ratings but changed outlooks on Old National and Old National Bank ratings to negative from stable. The bank’s commercial real estate loans were 234% of risk-based capital, below the cited 300% regulatory guideline. Litigation outcomes were described as uncertain; the company did not expect pending matters to materially adversely affect consolidated financial condition, though results or cash flows in a particular future period could be affected.
Investor verification priorities
- Track deposit mix and pricing, especially noninterest-bearing deposit trends, time-deposit growth and reliance on wholesale funding.
- Assess liquidity capacity and collateral availability alongside the increase in FHLB advances and the negative Moody’s outlook.
- Review unrealized securities losses, interest-rate sensitivity and whether securities could need to be sold before recovery.
- Monitor commercial real estate and criticized/classified exposures, charge-offs, nonaccrual loans and allowance adequacy.
- Separate recurring earnings from merger costs, securities losses and other unusual items; account for the First Midwest merger when comparing periods.