Old National Bancorp(ONB) - 2023 Q3 - Quarterly Report

Glossary of Abbreviations and Acronyms The report defines key abbreviations and acronyms for clarity and consistency - Key abbreviations and acronyms used in the report include AOCI (accumulated other comprehensive income (loss)), CECL (current expected credit loss), FHLB (Federal Home Loan Bank), GAAP (U.S. generally accepted accounting principles), LIBOR (London Interbank Offered Rate), and SEC (U.S. Securities and Exchange Commission)[11] Part I. Financial Information This part presents the company's unaudited financial statements and management's analysis Item 1. Financial Statements This section presents the unaudited consolidated financial statements and accompanying notes Consolidated Balance Sheets The balance sheet shows a 4.9% increase in total assets to $49.1 billion Consolidated Balance Sheet Highlights | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total assets | $49,059,448 | $46,763,372 | $2,296,076 | 4.9% | | Total loans (gross) | $32,577,834 | $31,123,641 | $1,454,193 | 4.7% | | Total deposits | $37,252,676 | $35,000,830 | $2,251,846 | 6.4% | | Total liabilities | $43,819,911 | $41,634,777 | $2,185,134 | 5.3% | | Total shareholders' equity | $5,239,537 | $5,128,595 | $110,942 | 2.2% | Consolidated Statements of Income The income statement reveals a 97.5% year-over-year increase in nine-month net income Consolidated Statements of Income Highlights | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | % Change (YoY) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | % Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total interest income | $576,519 | $406,518 | 41.8% | $1,617,070 | $996,381 | 62.3% | | Total interest expense | $201,433 | $29,929 | 573.1% | $478,325 | $59,535 | 703.4% | | Net interest income | $375,086 | $376,589 | (0.4)% | $1,138,745 | $936,846 | 21.6% | | Provision for credit losses | $19,068 | $15,490 | 23.1% | $47,292 | $133,391 | (64.5)% | | Total noninterest income | $80,938 | $80,385 | 0.7% | $233,248 | $234,742 | (0.6)% | | Total noninterest expense | $244,776 | $262,444 | (6.7)% | $742,071 | $755,508 | (1.8)% | | Net income | $147,876 | $140,153 | 5.5% | $449,512 | $227,552 | 97.5% | | Net income applicable to common shareholders | $143,842 | $136,119 | 5.7% | $437,411 | $217,468 | 101.1% | | Diluted EPS | $0.49 | $0.47 | 4.3% | $1.50 | $0.80 | 87.5% | Consolidated Statements of Comprehensive Income (Loss) Comprehensive income for the nine months ended Sep 30, 2023 was $267.1 million Consolidated Statements of Comprehensive Income (Loss) Highlights | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net income | $147,876 | $140,153 | $449,512 | $227,552 | | Other comprehensive income (loss), net of tax | $(160,182) | $(239,317) | $(182,393) | $(806,075) | | Comprehensive income (loss) | $(12,306) | $(99,164) | $267,119 | $(578,523) | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased by $110.9 million since year-end 2022 Changes in Shareholders' Equity (9 Months Ended Sep 30, 2023 vs. Dec 31, 2022) | Component | Balance Dec 31, 2022 (in thousands) | Net Income (in thousands) | Other Comprehensive Income (Loss) (in thousands) | Cash Dividends (in thousands) | Stock Activity (in thousands) | Balance Sep 30, 2023 (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Preferred Stock | $230,500 | — | — | — | — | $230,500 | | Common Stock | $292,903 | — | — | — | $(1,900) | $292,586 | | Capital Surplus | $4,174,265 | — | — | — | $(20,288) | $4,153,977 | | Retained Earnings | $1,217,349 | $449,512 | — | $(135,054) | $(162) | $1,531,289 | | Accumulated Other Comprehensive Income (Loss) | $(786,422) | — | $(182,393) | — | — | $(968,815) | | Total Shareholders' Equity | $5,128,595 | $449,512 | $(182,393) | $(135,054) | $(22,350) | $5,239,537 | Consolidated Statements of Cash Flows Cash flows show a net increase in cash of $935.0 million for the nine months ended Sep 30, 2023 Consolidated Statements of Cash Flows Highlights (9 Months Ended Sep 30) | Cash Flow Activity | 2023 (in thousands) | 2022 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Net cash flows provided by (used in) operating activities | $443,515 | $687,311 | (35.5)% | | Net cash flows provided by (used in) investing activities | $(1,561,607) | $(878,523) | 77.8% | | Net cash flows provided by (used in) financing activities | $2,053,110 | $170,804 | 1102.0% | | Net increase (decrease) in cash and cash equivalents | $935,018 | $(20,408) | N/M | | Cash and cash equivalents at end of period | $1,663,430 | $801,611 | 107.5% | Notes to Consolidated Financial Statements These notes provide detailed disclosures supporting the consolidated financial statements Note 1. Basis of Presentation This note clarifies that the unaudited consolidated financial statements are prepared in accordance with GAAP, involve management estimates, and include all necessary adjustments for fair presentation - The financial statements are unaudited and prepared in conformity with GAAP, requiring management estimates and assumptions[22] - Adoption of ASU 2022-02 on January 1, 2023, eliminated the recognition and measurement of Troubled Debt Restructurings (TDRs) and enhanced disclosures for financial difficulty modifications[24] Note 2. Recent Accounting Pronouncements This note outlines accounting guidance recently adopted in 2023 and pending guidance - Adopted ASU 2021-08 (Business Combinations), ASU 2022-01 (Derivatives and Hedging), and ASU 2022-02 (Financial Instruments—Credit Losses) on January 1, 2023, with no material impact on financial statements, except for ASU 2022-02 which eliminated TDR recognition[26][28][29] - Pending adoption of ASU 2022-03 (Fair Value Measurement), ASU 2023-01 (Leases—Common Control Arrangements), and ASU 2023-02 (Investments—Equity Method and Joint Ventures), with impact currently being evaluated[33][34][35] Note 3. Acquisition and Divestiture Activity This note details the completed merger with First Midwest Bancorp, Inc, a divestiture, and a pending acquisition - Completed merger with First Midwest Bancorp, Inc on February 15, 2022, to expand Midwestern presence and commercial banking capabilities; transaction costs for the nine months ended September 30, 2023, totaled $23.2 million, down from $100.6 million in the prior year[36][37] - Divested health savings accounts business to UMB on November 18, 2022, resulting in a $90.7 million pre-tax gain[38] - Announced pending all-stock acquisition of CapStar Financial Holdings, Inc on October 26, 2023, valued at approximately $344.4 million, expected to close in Q2 2024; CapStar had $3.3 billion total assets as of September 30, 2023[39] Note 4. Net Income Per Common Share This note presents the calculation of basic and diluted net income per common share Net Income Per Common Share | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income applicable to common shares (in thousands) | $143,842 | $136,119 | $437,411 | $217,468 | | Weighted average common shares outstanding - basic (in thousands) | 290,648 | 290,961 | 290,763 | 269,843 | | Weighted average common shares outstanding - diluted (in thousands) | 291,717 | 292,483 | 291,809 | 271,123 | | Basic Net Income Per Common Share | $0.49 | $0.47 | $1.50 | $0.81 | | Diluted Net Income Per Common Share | $0.49 | $0.47 | $1.50 | $0.80 | Note 5. Investment Securities This note provides a comprehensive overview of the company's investment securities portfolio Investment Securities Portfolio Summary (in thousands) | Category | Sep 30, 2023 Amortized Cost | Sep 30, 2023 Fair Value | Dec 31, 2022 Amortized Cost | Dec 31, 2022 Fair Value | | :--- | :--- | :--- | :--- | :--- | | Available-for-Sale | | | | | | Total AFS securities | $7,719,944 | $6,414,761 | $7,772,603 | $6,773,712 | | Gross unrealized gains | $234 | $234 | $3,028 | $3,028 | | Gross unrealized losses | $(1,143,301) | $(1,143,301) | $(847,474) | $(847,474) | | Held-to-Maturity | | | | | | Total HTM securities | $3,027,914 | $2,393,621 | $3,089,147 | $2,643,682 | | Gross unrecognized losses | $(634,293) | $(634,293) | $(445,686) | $(445,686) | - At September 30, 2023, the investment securities available-for-sale portfolio had net unrealized losses of $1.1 billion, and the held-to-maturity portfolio had net unrealized losses of $634.3 million, both increasing from December 31, 2022, primarily due to higher market interest rates[44][243] - The company had no intent to sell any securities in an unrealized loss position at September 30, 2023, nor was it expected to be required to sell them prior to anticipated recovery[52] - Equity securities with readily determinable fair values totaled $69.9 million at September 30, 2023, up from $52.5 million at December 31, 2022; alternative investments without readily determinable fair values totaled $418.3 million[54][56] Note 6. Loans and Allowance for Credit Losses This note details the composition of the loan portfolio and analysis of the allowance for credit losses Loan Portfolio Composition by Segment (in thousands) | Portfolio Segment | Sep 30, 2023 | Dec 31, 2022 | % Change | | :--- | :--- | :--- | :--- | | Commercial | $9,107,095 | $9,298,624 | (2.1)% | | Commercial real estate | $13,750,628 | $12,298,748 | 11.8% | | BBCC | $391,946 | $368,602 | 6.3% | | Residential real estate | $6,696,288 | $6,460,441 | 3.7% | | Indirect | $1,047,224 | $1,034,257 | 1.3% | | Direct | $542,689 | $629,186 | (13.8)% | | Home equity | $1,041,964 | $1,033,783 | 0.8% | | Total loans | $32,577,834 | $31,123,641 | 4.7% | Allowance for Credit Losses on Loans Activity (in thousands) | Activity | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Balance at beginning of period | $300,555 | $288,003 | $303,671 | $107,341 | | Provision for loan losses | $23,115 | $11,288 | $46,520 | $117,951 | | Charge-offs | $(22,750) | $(11,440) | $(55,261) | $(20,200) | | Recoveries | $3,062 | $3,845 | $9,052 | $8,073 | | Balance at end of period | $303,982 | $302,254 | $303,982 | $302,254 | - Total nonaccrual loans increased to $261.3 million at September 30, 2023, from $238.2 million at December 31, 2022, primarily due to PCD loan migration in the commercial real estate portfolio[267][269] - Financial difficulty modifications totaled $97.3 million for the three months ended September 30, 2023, and $137.4 million for the nine months ended September 30, 2023, primarily for commercial and commercial real estate loans through term extensions[89] Note 7. Leases This note outlines the company's operating and finance lease arrangements Lease Expense Components (in thousands) | Lease Expense Component | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Operating lease cost | $7,462 | $7,657 | $23,569 | $21,323 | | Finance lease cost (amortization) | $742 | $680 | $2,170 | $2,003 | | Finance lease cost (interest) | $183 | $105 | $536 | $315 | | Sub-lease income | $(119) | $(87) | $(281) | $(389) | | Total Lease Expense | $8,268 | $8,355 | $25,994 | $23,252 | Lease Balance Sheet Information (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Operating lease right-of-use assets | $179,284 | $189,714 | | Operating lease liabilities | $199,937 | $211,964 | | Finance lease assets (Premises and equipment, net) | $20,571 | $10,799 | | Finance lease liabilities (Other borrowings) | $21,595 | $13,469 | - The weighted-average remaining lease term for operating leases was 8.5 years and for finance leases was 10.6 years[92] Note 8. Goodwill and Other Intangible Assets This note details the carrying amounts and changes in goodwill and other intangible assets Goodwill and Other Intangible Assets (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Goodwill | $1,998,716 | $1,998,716 | | Other intangible assets (net) | $108,119 | $126,405 | | Total Goodwill and Other Intangible Assets | $2,106,835 | $2,125,121 | - Goodwill remained stable at $1,998.7 million, with no impairment recorded as of August 31, 2023; other intangible assets decreased to $108.1 million from $126.4 million due to amortization[94][95] - Amortization expense for intangibles was $6.0 million for Q3 2023 and $18.3 million for YTD 2023[97] Note 9. Qualified Affordable Housing Projects and Other Tax Credit Investments This note summarizes investments in tax-advantaged limited partnerships Tax Credit Investments (in thousands) | Investment Type | Sep 30, 2023 Investment | Sep 30, 2023 Unfunded Commitment | Dec 31, 2022 Investment | Dec 31, 2022 Unfunded Commitment | | :--- | :--- | :--- | :--- | :--- | | LIHTC | $93,214 | $54,440 | $84,428 | $55,754 | | FHTC | $36,715 | $27,214 | $19,316 | $9,588 | | NMTC | $45,637 | — | $51,912 | — | | Renewable Energy | $385 | — | $1,099 | — | | Total | $175,951 | $81,654 | $156,755 | $65,342 | Amortization Expense and Tax Benefit from Tax Credit Investments (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Amortization Expense | $5,852 | $3,902 | $14,302 | $9,437 | | Total Tax Benefit Recognized | $(6,592) | $(4,700) | $(16,654) | $(11,264) | Note 10. Securities Sold Under Agreements to Repurchase This note details the company's secured borrowings through repurchase agreements Securities Sold Under Agreements to Repurchase (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Outstanding at period end | $279,061 | $432,804 | | Weighted-average interest rate at period end | 1.35% | 1.31% | - The company pledges securities valued at 107% of the gross outstanding balance of repurchase agreements to manage risk[104] Note 11. Federal Home Loan Bank Advances This note summarizes Federal Home Loan Bank (FHLB) advances FHLB Advances (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total FHLB advances | $4,412,576 | $3,829,018 | | Weighted-average interest rate | 3.36% | 3.15% | - Certain FHLB advances are collateralized with loans and investment securities up to 190%[105] Contractual Maturities of FHLB Advances at Sep 30, 2023 (in thousands) | Maturity | Amount | | :--- | :--- | | Due in 2023 | $100,000 | | Due in 2024 | $25,243 | | Due in 2025 | $550,285 | | Due in 2026 | $100,000 | | Thereafter | $3,675,000 | Note 12. Other Borrowings This note provides a breakdown of other borrowings, including senior notes and debentures Other Borrowings (in thousands) | Borrowing Type | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Senior unsecured notes | $175,000 | $175,000 | | Subordinated debentures | $162,000 | $162,000 | | Junior subordinated debentures | $136,643 | $136,643 | | Finance lease liabilities | $21,595 | $13,469 | | Leveraged loans for NMTC | $143,745 | $143,187 | | Other | $205,106 | $89,588 | | Total Other Borrowings | $863,455 | $743,003 | - Junior subordinated debentures, totaling $136.6 million, qualify as Tier 2 capital and have variable rates tied to 3-month SOFR plus a spread, maturing between 2031 and 2037[110][113] Note 13. Accumulated Other Comprehensive Income (Loss) This note summarizes the changes within each classification of Accumulated Other Comprehensive Income (Loss) Changes in AOCI (Net of Tax, in thousands) | Component | Balance Dec 31, 2022 | Other Comprehensive Income (Loss) before Reclassifications (9M 2023) | Reclassified from AOCI to Income (9M 2023) | Balance Sep 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Unrealized Gains/Losses on AFS Debt Securities | $(642,346) | $(219,562) | $4,033 | $(857,875) | | Unrealized Gains/Losses on HTM Securities | $(112,664) | $1,325 | $12,388 | $(98,951) | | Gains/Losses on Hedges | $(31,549) | $34,279 | $(14,719) | $(11,989) | | Defined Benefit Pension Plans | $137 | — | $(137) | $0 | | Total AOCI | $(786,422) | $(183,958) | $1,565 | $(968,815) | - During the next 12 months, an estimated $5.8 million will be reclassified to interest income and $26.3 million to interest expense from AOCI related to cash flow hedges[139] Note 14. Income Taxes This note provides a summary of income tax expense and deferred tax assets Income Tax Expense and Effective Tax Rate | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Income tax expense (in thousands) | $44,304 | $38,887 | $133,118 | $55,137 | | Effective tax rate | 23.1% | 21.7% | 22.9% | 19.5% | - The higher effective tax rate in 2023 compared to 2022 reflects increased pre-tax book income, smaller increases in tax-exempt income and tax credits, and higher non-deductible officer compensation and FDIC premiums[122] - Net deferred tax assets totaled $480.7 million at September 30, 2023, up from $435.8 million at December 31, 2022, with no valuation allowance required[123] - Federal net operating loss carryforwards were $68.4 million and state NOL carryforwards were $115.6 million[125] Note 15. Derivative Financial Instruments This note describes the use of derivative instruments for interest rate risk management - Derivatives are used for interest rate risk management, including interest rate swaps, collars, caps, and floors, recognized at fair value on the balance sheet[127] Derivatives Designated as Hedges (Notional Amounts in thousands) | Hedge Type | Sep 30, 2023 Notional | Dec 31, 2022 Notional | | :--- | :--- | :--- | | Cash flow hedges (loan pools) | $1,500,000 | $1,900,000 | | Cash flow hedges (borrowings) | $150,000 | $150,000 | | Fair value hedges (investment securities) | $998,107 | $909,957 | | Fair value hedges (borrowings) | $700,000 | $300,000 | Derivatives Not Designated as Hedges (Notional Amounts in thousands) | Derivative Type | Sep 30, 2023 Notional | Dec 31, 2022 Notional | | :--- | :--- | :--- | | Customer interest rate swaps | $5,775,638 | $5,220,363 | | Counterparty interest rate swaps | $5,775,634 | $5,220,363 | | Interest rate lock commitments | $42,492 | $21,401 | | Forward mortgage loan contracts | $54,730 | $30,330 | Note 16. Commitments, Contingencies, and Financial Guarantees This note addresses legal proceedings, credit-related financial instruments, and other commitments - Management does not expect any potential liabilities from pending legal matters to have a material adverse effect on the company's financial position[147] Unfunded Loan Commitments and Standby Letters of Credit (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Unfunded loan commitments | $9,142,538 | $8,979,334 | | Standby letters of credit (notional) | $184,027 | $174,070 | | Allowance for unfunded loan commitments | $33,000 | $32,200 | - Old National holds 65,466 Visa Class B restricted shares, carried at a zero cost basis due to transfer restrictions and litigation uncertainty[151] Note 17. Fair Value This note details the company's fair value measurements and the three-level hierarchy - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)[152] Recurring Fair Value Measurements (Assets, in thousands) | Asset Type | Sep 30, 2023 Fair Value | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Equity securities | $69,880 | $69,880 | — | — | | Investment securities available-for-sale | $6,414,761 | $548,126 | $5,866,635 | — | | Loans held-for-sale | $122,033 | — | $122,033 | — | | Derivative assets | $227,833 | — | $227,833 | — | Non-Recurring Fair Value Measurements (Assets, in thousands) | Asset Type | Sep 30, 2023 Fair Value | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Collateral Dependent Loans (Commercial) | $10,783 | — | — | $10,783 | | Collateral Dependent Loans (Commercial real estate) | $75,720 | — | — | $75,720 | | Foreclosed Assets (Commercial) | $1,879 | — | — | $1,879 | - The fair value option was elected for loans held-for-sale to mitigate accounting mismatches and simplify operations, with interest income of $0.4 million for Q3 2023 and $0.9 million for YTD 2023[165][166] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed narrative and analysis of financial condition and results of operations Forward-Looking Statements This section outlines potential risks and uncertainties affecting future performance - Forward-looking statements are subject to risks and uncertainties, including competition, government regulations, liquidity, economic conditions, inflation, interest rate risks, and cybersecurity threats[173] - The company undertakes no obligation to publicly update any forward-looking statements after the report date[174] Financial Highlights This section summarizes key performance metrics for the third quarter and year-to-date Financial Highlights (3 Months Ended Sep 30, 2023 vs. Sep 30, 2022) | Metric | Sep 30, 2023 | Sep 30, 2022 | % Change | | :--- | :--- | :--- | :--- | | Net interest income (in thousands) | $375,086 | $376,589 | (0.4)% | | Net income (diluted) per share | $0.49 | $0.47 | 4.3% | | Return on average assets | 1.22% | 1.22% | 0.0% | | Return on average common equity | 11.39% | 11.13% | 2.3% | | Net interest margin (taxable equivalent) | 3.49% | 3.71% | (5.9)% | | Efficiency ratio (non-GAAP) | 51.66% | 55.26% | (6.5)% | | Total loans (in thousands) | $32,577,834 | $30,528,933 | 6.7% | | Total deposits (in thousands) | $37,252,676 | $36,053,663 | 3.3% | | Tier 1 common equity ratio | 10.41% | 9.88% | 5.4% | Financial Highlights (9 Months Ended Sep 30, 2023 vs. Sep 30, 2022) | Metric | Sep 30, 2023 | Sep 30, 2022 | % Change | | :--- | :--- | :--- | :--- | | Net interest income (in thousands) | $1,138,745 | $936,846 | 21.6% | | Net income (diluted) per share | $1.50 | $0.80 | 87.5% | | Return on average assets | 1.25% | 0.72% | 73.6% | | Return on average common equity | 11.66% | 6.26% | 86.3% | | Net interest margin (taxable equivalent) | 3.59% | 3.34% | 7.5% | | Efficiency ratio (non-GAAP) | 51.89% | 62.17% | (16.6)% | | Total loans (in thousands) | $32,577,834 | $30,528,933 | 6.7% | | Total deposits (in thousands) | $37,252,676 | $36,053,663 | 3.3% | | Tier 1 common equity ratio | 10.41% | 9.88% | 5.4% | Non-GAAP Financial Measures This section reconciles non-GAAP measures to their most comparable GAAP counterparts - Non-GAAP measures like taxable equivalent net interest income/margin and tangible common equity are provided to assist investors in assessing operating performance and capital adequacy[185][186][187] - Taxable equivalent adjustments use a 21% federal income tax rate to compare taxable and tax-exempt assets[186] Tangible Common Book Value Reconciliation (in thousands, except per share data) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Shareholders' common equity | $4,995,818 | $4,884,876 | | Deduct: Goodwill and intangible assets | $2,106,835 | $2,125,121 | | Tangible shareholders' common equity | $2,888,983 | $2,759,755 | | Period end common shares (in thousands) | 292,586 | 292,903 | | Tangible common book value | $9.87 | $9.42 | Executive Summary Old National reported Q3 2023 net income of $143.8 million, with strong deposit and loan growth - Old National is the sixth largest commercial bank headquartered in the Midwest by asset size, with consolidated assets of approximately $49 billion at September 30, 2023[194] Q3 2023 Key Financial Highlights (vs. Q2 2023) | Metric | Q3 2023 (in thousands) | Q2 2023 (in thousands) | % Change (QoQ) | | :--- | :--- | :--- | :--- | | Net income applicable to common shareholders | $143,842 | $151,003 | (4.7)% | | Diluted EPS | $0.49 | $0.52 | (5.8)% | | Total deposits | $37,252,676 | $36,231,315 | 2.8% | | Total loans (excluding HFS) | $32,577,834 | $32,432,473 | 0.4% | | Net interest income | $375,086 | $382,171 | (1.9)% | | Provision for credit losses | $19,068 | $14,787 | 28.9% | | Noninterest income | $80,938 | $81,629 | (0.8)% | | Noninterest expense | $244,776 | $246,584 | (0.7)% | - Q3 2023 results were impacted by $6.3 million of merger-related charges[196] Results of Operations This section provides a detailed analysis of the company's income statement Net Interest Income (Tax Equivalent Basis, in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net interest income - taxable equivalent basis | $380,923 | $381,539 | $1,156,073 | $949,882 | | Net interest margin - taxable equivalent basis | 3.49% | 3.71% | 3.59% | 3.34% | - Net interest income decreased for Q3 2023 YoY primarily due to higher funding costs, while YTD 2023 YoY increased due to higher rates on loans and loan growth[217] Provision for Credit Losses (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Provision for credit losses on loans | $23,115 | $11,288 | $46,520 | $117,951 | | Provision (release) for credit losses on unfunded loan commitments | $(4,047) | $4,203 | $772 | $15,290 | | Total provision for credit losses | $19,068 | $15,490 | $47,292 | $133,391 | - Net charge-offs on loans totaled $19.7 million for Q3 2023 (annualized 0.24% of average loans) and $46.2 million for YTD 2023 (annualized 0.19% of average loans)[225][271] Noninterest Income (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Wealth and investment services fees | $26,687 | $25,359 | $80,128 | $75,183 | | Service charges on deposit accounts | $18,524 | $20,042 | $53,278 | $54,392 | | Mortgage banking revenue | $5,063 | $5,360 | $12,628 | $19,127 | | Capital markets income | $5,891 | $8,906 | $19,003 | $20,609 | | Other income | $10,456 | $6,921 | $30,574 | $24,461 | | Total noninterest income | $80,938 | $80,385 | $233,248 | $234,742 | - Noninterest income was relatively flat YoY for both Q3 and YTD 2023, with shifts among categories including lower mortgage banking revenue and higher wealth management fees[226] Noninterest Expense (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Salaries and employee benefits | $131,541 | $147,203 | $404,715 | $433,167 | | FDIC assessment | $9,000 | $6,249 | $29,028 | $13,523 | | Amortization of intangibles | $6,040 | $7,089 | $18,286 | $19,070 | | Amortization of tax credit investments | $2,644 | $2,662 | $8,167 | $5,703 | | Total noninterest expense | $244,776 | $262,444 | $742,071 | $755,508 | - Noninterest expense decreased for Q3 and YTD 2023 YoY, primarily due to significantly lower merger-related expenses[232][233] - FDIC assessment expense increased by $2.8 million for Q3 2023 YoY and $15.5 million for YTD 2023 YoY due to higher assessment rates and deposit balances[234] - The FDIC proposed a special assessment to recover losses from recent bank failures, which could result in an estimated $17 million expense for Old National[236][237] Financial Condition Total assets increased to $49.1 billion, driven by loan and deposit growth Total Assets and Earning Assets (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | % Change | | :--- | :--- | :--- | :--- | | Total assets | $49,059,448 | $46,763,372 | 4.9% | | Earning assets | $43,900,000 (approx) | $41,600,000 (approx) | 5.5% | - The investment securities portfolio was $9.9 billion at September 30, 2023; net unrealized losses on available-for-sale securities increased to $1.1 billion and on held-to-maturity securities to $634.3 million due to higher market interest rates[242][243] - The total investment securities portfolio's effective duration decreased to 5.48 at September 30, 2023, from 6.45 at December 31, 2022[245] Loan Portfolio Composition (in thousands) | Loan Type | Sep 30, 2023 | Dec 31, 2022 | % Change | | :--- | :--- | :--- | :--- | | Commercial | $9,333,448 | $9,508,904 | (1.8)% | | Commercial real estate | $13,916,221 | $12,457,070 | 11.7% | | Residential real estate | $6,696,288 | $6,460,441 | 3.7% | | Consumer | $2,631,877 | $2,697,226 | (2.4)% | | Total loans | $32,577,834 | $31,123,641 | 4.7% | - Total deposits increased by $2.3 billion (6%) to $37.3 billion, with a significant shift from noninterest-bearing demand deposits (down 15%) to money market (up 63%) and time deposits (up 85%)[257] - Shareholders' equity increased to $5.2 billion from $5.1 billion, driven by retained earnings and changes in unrealized gains (losses) on derivatives[258] Capital Ratios | Capital Ratio | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Tier 1 capital to total average assets (leverage ratio) | 8.70% | 8.52% | | Common equity Tier 1 capital to risk-weighted total assets | 10.41% | 10.03% | | Tier 1 capital to risk-weighted total assets | 11.06% | 10.71% | | Total capital to risk-weighted total assets | 12.32% | 12.02% | Risk Management The company manages strategic, market, liquidity, credit, and operational risks - The company's Risk Appetite Statement addresses major risks including strategic, market, liquidity, credit, operational, talent management, compliance and regulatory, legal, and reputational[264] Asset Quality Summary (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total nonaccrual loans | $261,346 | $238,178 | | Loans 90 days or more past due and still accruing | $1,192 | $2,650 | | Foreclosed assets | $9,761 | $10,845 | | Total under-performing assets | $272,299 | $266,986 | | Classified loans | $825,965 | $745,485 | | Criticized loans | $775,526 | $636,069 | | Total criticized and classified assets | $1,650,489 | $1,406,289 | - The allowance for credit losses on loans was $304.0 million at September 30, 2023, and on unfunded loan commitments was $33.0 million[275][276] Projected Net Interest Income Sensitivity (2-Year Cumulative Horizon, in thousands) | Interest Rate Change | Sep 30, 2023 % Change from Base | Sep 30, 2022 % Change from Base | | :--- | :--- | :--- | | -300 Basis Points | (8.47)% | N/A | | -200 Basis Points | (5.56)% | N/A | | -100 Basis Points | (3.34)% | N/A | | -50 Basis Points | N/A | (3.41)% | | +100 Basis Points | 2.49% | 4.01% | | +200 Basis Points | 4.60% | 7.82% | | +300 Basis Points | 6.88% | 11.61% | - Old National Bank maintains significant available liquid funds and borrowings, including $9.5 billion available from FHLB, Federal Reserve discount window, and Term Funding Program at the subsidiary level[293] Critical Accounting Estimates This section confirms no material changes to critical accounting estimates since year-end - No material changes in the company's application of critical accounting estimates since December 31, 2022[296] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item refers readers to the "Market Risk" and "Liquidity Risk" sections within the MD&A - Disclosures about market risk are provided in the "Market Risk" and "Liquidity Risk" sections of Management's Discussion and Analysis of Financial Condition and Results of Operations[297] Item 4. Controls and Procedures The principal officers concluded that disclosure controls and procedures were effective - Old National's disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2023[298] - No material changes in Old National's internal control over financial reporting occurred during the period covered by this report[301] Part II. Other Information This part contains other required information, including risk factors and exhibits Item 1A. Risk Factors This item states there have been no material changes to previously disclosed risk factors - There have been no material changes from the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022[303] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item reports on the company's issuer purchases of equity securities Issuer Purchases of Equity Securities (Q3 2023) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) | | :--- | :--- | :--- | :--- | | 07/01/23 - 07/31/23 | 27,973 | $14.01 | $170,476,849 | | 08/01/23 - 08/31/23 | 303 | $16.76 | $170,476,849 | | 09/01/23 - 09/30/23 | 3,479 | $15.79 | $170,476,849 | | Total | 31,755 | $14.24 | $170,476,849 | - The Board of Directors approved a stock repurchase program on February 22, 2023, authorizing the repurchase of up to $200 million of common stock through February 29, 2024[305] Item 5. Other Information This item confirms no other material information to report - No material changes in the procedure by which security holders recommend nominees to the Company's board of directors[307] - No director or Section 16 officer adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the three months ended September 30, 2023[307] Item 6. Exhibits This item lists all exhibits filed as part of the Form 10-Q - Exhibits include Fifth Amended and Restated Articles of Incorporation, Amended and Restated By-Laws, Certifications of Principal Executive and Financial Officers, and XBRL formatted financial statements[308] Signature The report is duly signed by the Chief Financial Officer - The report is signed by Brendon B. Falconer, Senior Executive Vice President and Chief Financial Officer, on November 1, 2023[311]