Old National Bancorp — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Old National is a Midwest community and regional bank operating primarily in Indiana, Kentucky, Michigan, Wisconsin, and Minnesota, with 192 banking centers and $20.4 billion in year-end assets.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income | $604.3 million | $537.6 million |
| Noninterest income | $199.3 million | $195.3 million |
| Noninterest expense | $508.5 million | $517.3 million |
| Provision for loan losses | $4.7 million | $7.0 million |
| Net income | $238.2 million | $190.8 million |
| Diluted earnings per share | $1.38 | $1.22 |
| Net interest margin, taxable-equivalent basis | 3.55% | 3.54% |
| Efficiency ratio | 60.35% | 67.74% |
| Return on average assets | 1.19% | 1.07% |
- Fourth quarter: Net income was $49.2 million, or $0.29 diluted per share, versus $47.5 million, or $0.28, in fourth-quarter 2018. Net interest income was $148.9 million versus $146.2 million. Compared with third-quarter 2019, net income fell from $69.8 million and the efficiency ratio increased from 56.44% to 65.57%.
- Revenue drivers: Annual net interest income rose 12%, largely as average earning assets expanded by $1.884 billion, reflecting the full-year contribution of Klein and organic growth. Acquired-loan accretion income was $43.6 million, versus $41.1 million. Mortgage banking revenue rose 50.8% to $26.6 million; capital markets income rose to $13.3 million from $4.9 million.
- Cash flows: Operating activities provided $233.8 million; investing activities used $525.4 million; financing activities provided $250.8 million. Cash and cash equivalents declined $40.8 million to $276.3 million.
- Year-end balance sheet: Assets were $20.412 billion, up 3%; loans were $12.118 billion, down from $12.244 billion; deposits were $14.553 billion, up from $14.350 billion. Borrowings totaled $2.745 billion, up from $2.494 billion. Shareholders’ equity was $2.852 billion, or 14% of assets.
- Asset quality: Nonperforming loans were 1.19% of loans, versus 1.43% a year earlier. Underperforming assets were $147.5 million, down from $179.4 million. Net charge-offs increased to $5.6 million from $1.9 million, or 0.05% of average loans; the allowance was $54.6 million, equal to 0.45% of loans.
- Capital and liquidity: Old National Bank was well capitalized. Its year-end CET1 ratio was 13.01%, total capital ratio 13.50%, and leverage ratio 9.62%. Subsidiaries reported $4.16 billion in available funds, including cash, unencumbered securities, and borrowing capacity; this is not the same as cash on hand.
- Shareholder returns: The company repurchased 6.0 million shares during 2019 and paid $0.52 per share in dividends. In January 2020, the board raised the quarterly dividend to $0.14 per share and authorized a new repurchase plan for up to 7.0 million shares.
Material changes and unusual items
- Net income rose 24.8%, supported by higher net interest income and lower noninterest expense. The lower expense included a sharp decline in tax-credit investment amortization and charitable contributions; professional fees increased, including $10.3 million of ONB Way consulting fees.
- The 2018 comparison included a $14.0 million gain from the sale of ten Wisconsin branches; 2019 had no branch-divestiture gain. The 2019 effective tax rate rose to 18.0% from 8.6%, primarily due to fewer federal tax credits and higher pretax income.
- In the fourth quarter, the company inadvertently sold six held-to-maturity municipal securities and then reclassified its remaining $382.0 million held-to-maturity portfolio to available-for-sale. The reclassification increased capital by $19.4 million; management said it did not expect to use held-to-maturity classification for at least two years.
- Old National adopted lease accounting in 2019, recognizing $95.5 million in operating lease right-of-use assets and $99.5 million in operating lease liabilities at year-end.
- The company had no acquisitions in 2019; the comparison reflects a full year of Klein, acquired November 1, 2018. It repurchased shares at a cost of approximately $99.1 million under its repurchase plan.
Outlook, commentary, and risks
- Management described the 2020 U.S. economic outlook as approximately 2% GDP growth. It cited high loan production and pipeline levels, prioritized organic loan growth and positive operating leverage, and remained selective about acquisitions. These are expectations, not formal earnings guidance; the filing does not provide a clear quantified earnings or revenue forecast.
- The ONB Way strategic plan, launched in January 2020, reorganizes client-facing teams, integrates commercial, community banking, and wealth functions, and targets improved operations, technology, and client experience. Management planned to consolidate 31 banking centers in April 2020, with estimated costs of $25 million, plus approximately $8 million for later non-branch closures.
- CECL adoption on January 1, 2020 was expected to increase the allowance for credit losses by approximately $35–$45 million, including $3–$8 million for off-balance-sheet exposures. Management cautioned that the estimate could change with credit quality, loan mix, and economic forecasts.
- Key risks include economic weakness in the company’s concentrated Midwest markets, commercial real estate and other credit exposure, interest-rate and funding pressure, competition and technology change, cybersecurity and vendor disruptions, regulatory costs, and execution of its strategic plan. The filing also identifies LIBOR transition exposure: $4.8 billion of LIBOR-indexed instruments mature beyond 2021.
- Old National Bank, as successor to KleinBank, assumed ongoing obligations under a 2018 DOJ settlement agreement concerning alleged fair-lending violations in the Minneapolis market. The company reported no material litigation and said pending matters were not expected to materially affect consolidated financial condition, though a particular period’s results or cash flows could be affected.
- The company reported effective internal control over financial reporting, and the auditor gave unqualified opinions on the financial statements and internal controls. The allowance for loan losses was identified as a critical audit matter.
Important facts for investors to verify
- Track whether loan growth, deposit pricing, and interest margins support earnings as rates and the yield curve change; annual margin improvement was slight, and fourth-quarter margin fell to 3.46%.
- Assess CECL’s actual opening allowance and capital impact against the estimated $35–$45 million increase.
- Monitor credit losses, criticized and classified assets, commercial real estate exposure, and the allowance relative to loan growth.
- Verify the timing, realized savings, customer effects, and actual costs of the 31 branch closures and broader ONB Way plan.
- Review the consequences of the securities reclassification and whether capital, liquidity, or securities gains are affected by subsequent portfolio actions.
- Check how repurchases, the higher dividend, and the bank subsidiary’s capacity to upstream dividends affect parent-company liquidity and capital allocation.