Old National Bancorp(ONB) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Consolidated financial statements reflect significant balance sheet expansion and operational shifts due to the First Midwest merger, with total assets nearly doubling Consolidated Balance Sheets Total assets grew to $46.2 billion (89% increase) due to the First Midwest merger, with significant increases in net loans and deposits, offset by AOCI losses Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $46,215,526 | $24,453,564 | +89.0% | | Net Loans | $30,226,679 | $13,494,505 | +124.0% | | Goodwill | $2,002,599 | $1,036,994 | +93.1% | | Total Liabilities | $41,272,143 | $21,441,546 | +92.5% | | Total Deposits | $36,053,663 | $18,569,195 | +94.2% | | Total Shareholders' Equity | $4,943,383 | $3,012,018 | +64.1% | | Accumulated Other Comprehensive Loss | ($808,450) | ($2,375) | N/M | Consolidated Statements of Income Net income for Q3 2022 significantly increased due to the First Midwest merger and rising rates, while nine-month net income slightly decreased due to credit loss provisions Q3 2022 vs Q3 2021 Performance (in thousands) | Metric | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $376,589 | $151,572 | +148.5% | | Provision for Credit Losses | $11,287 | ($4,613) | N/M | | Noninterest Income | $80,385 | $54,515 | +47.5% | | Noninterest Expense | $266,647 | $121,274 | +119.9% | | Net Income to Common Shareholders | $136,119 | $71,746 | +89.7% | | Diluted EPS | $0.47 | $0.43 | +9.3% | Nine Months 2022 vs 2021 Performance (in thousands) | Metric | Nine Months 2022 | Nine Months 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $936,846 | $449,619 | +108.4% | | Provision for Credit Losses | $118,101 | ($26,898) | N/M | | Noninterest Income | $234,742 | $162,735 | +44.2% | | Noninterest Expense | $770,798 | $368,632 | +109.1% | | Net Income to Common Shareholders | $217,468 | $221,350 | -1.8% | | Diluted EPS | $0.80 | $1.33 | -39.8% | Notes to Consolidated Financial Statements The notes detail the significant impact of the First Midwest merger, covering accounting, acquired assets, goodwill, loan portfolio increase, and the large negative AOCI balance Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q3 2022 results to robust loan growth and net interest margin expansion from the First Midwest merger and rising rates, emphasizing strong capital and risk management Executive Summary Old National reported strong Q3 2022 results with net income of $136.1 million, driven by robust loan growth and net interest margin expansion from the First Midwest merger, and an agreement to sell the HSA business - Q3 2022 net income was $136.1 million, or $0.47 per diluted share, up from $111.0 million, or $0.38 per share, in Q2 2022[225] - Loan balances grew by $1.0 billion (13% annualized) from Q2 2022, driven by strong commercial and consumer production[227] - Net interest income increased by $39.1 million from Q2 2022, benefiting from higher interest rates and loan growth[228] - An agreement was made to sell the Health Savings Account (HSA) business to UMB Bank, expecting a premium of approximately $95 million[224] Results of Operations Results were significantly shaped by the First Midwest merger, with Q3 net interest income surging 148.5% to $376.6 million, noninterest income growing, and noninterest expense rising, including merger costs - Net interest income for Q3 2022 increased 148.5% YoY, primarily due to the merger, loan growth, higher rates, and accretion income Accretion income was $25.4 million in Q3 2022 vs $3.0 million in Q3 2021[247] - The net interest margin (tax-equivalent) expanded to 3.71% in Q3 2022 from 2.92% in Q3 2021, driven by higher asset yields[213][248] - Provision for credit losses was an expense of $11.3 million in Q3 2022, compared to a recapture of $4.6 million in Q3 2021 For the nine-month period, the provision was $118.1 million, including $96.3 million to establish an allowance for acquired non-PCD loans[253] - Q3 2022 noninterest income increased 47.5% YoY, despite a 50.7% decline in mortgage banking revenue due to the higher rate environment[254] - Q3 2022 noninterest expense increased 119.9% YoY, reflecting additional operating costs from the merger and $22.7 million in merger-related expenses[255] Financial Condition Old National's financial condition was substantially larger and reshaped by the First Midwest merger, with total assets at $46.2 billion, earning assets at $41.2 billion, and a $10.3 billion investment portfolio carrying $860.3 million in unrealized losses - Total assets increased by $21.8 billion to $46.2 billion at Sept 30, 2022, from Dec 31, 2021, primarily due to the First Midwest merger[259] - Commercial and commercial real estate loans grew by $11.8 billion to $21.5 billion since year-end 2021, driven by the merger and strong organic production[266] - The investment securities portfolio had net unrealized losses of $860.3 million at Sept 30, 2022, compared to $6.0 million at year-end 2021, due to rising interest rates[264] - Total deposits increased by $17.5 billion to $36.1 billion, and total wholesale borrowings increased by $1.7 billion to $4.3 billion since year-end 2021[275] - Shareholders' equity increased to $4.9 billion, reflecting $2.4 billion in stock issued for the merger, but was reduced by a $651.4 million decrease from unrealized losses on AFS securities[277][279] Risk Management The company manages credit, market, and liquidity risks, with asset quality metrics reflecting the First Midwest merger, and an asset-sensitive balance sheet positioned to benefit from rising interest rates, supported by strong liquidity and credit ratings - Under-performing assets were $260.1 million (0.85% of total loans and OREO) at Sept 30, 2022, an increase in dollar amount but a decrease in ratio compared to Dec 31, 2021 ($127.1 million, 0.93%) The change was driven by the First Midwest merger[301][302][303] - The allowance for credit losses for loans increased to $302.3 million from $107.3 million at year-end 2021, primarily due to an $89.1 million allowance on acquired PCD loans and a $96.3 million provision for acquired non-PCD loans from the merger[320] - Net interest income sensitivity analysis shows a projected 4.01% increase in NII over two years with a +100 basis point rate shock, indicating an asset-sensitive position[327] - The company maintains strong credit ratings, with Moody's affirming a long-term deposit rating of 'Aa3' and a short-term rating of 'P-1' for Old National Bank[333][335] Quantitative and Qualitative Disclosures About Market Risk This section refers readers to the 'Market Risk' and 'Liquidity Risk' sections within Item 2, Management's Discussion and Analysis, for detailed disclosures - The report directs readers to the MD&A section for detailed information on market and liquidity risk[345] Controls and Procedures Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that disclosure controls and procedures are effective at a reasonable assurance level as of the end of the reporting period[346] - No material changes to the company's internal control over financial reporting were identified during the quarter[349] PART II. OTHER INFORMATION Risk Factors The company states no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021 - There have been no material changes to the risk factors disclosed in the 2021 Form 10-K[351] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2022, Old National acquired 34,195 shares from employee tax withholdings, with no repurchases under the $200 million stock repurchase program, which has $136.1 million remaining authorization - No shares were repurchased during Q3 2022 under the publicly announced stock repurchase program[353] - The company acquired 34,195 shares during the quarter, which were surrendered by employees to cover tax obligations on vested restricted stock[352] - The stock repurchase program, authorizing up to $200 million in repurchases, remains in effect through January 31, 2023[353] Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, Sarbanes-Oxley certifications, and financial statements in inline XBRL format - Exhibits filed include corporate governance documents, Sarbanes-Oxley certifications by the CEO and CFO, and financial data in inline XBRL format[356]