Old National Bancorp — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Old National Bancorp is a Midwest community bank holding company. Unless noted otherwise, dollar figures below are in millions. The November 2018 Klein acquisition materially affects year-over-year comparisons.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Net interest income | $153.1 | $130.8 | +17.0% |
| Noninterest income | $54.0 | $46.0 | +17.4% |
| Noninterest expense | $122.6 | $119.4 | +2.7% |
| Provision for loan losses | $1.4 | $0.8 | +$0.7 |
| Net income | $69.8 | $51.3 | +35.9% |
| Diluted earnings per share | $0.41 | $0.34 | +20.6% |
| Tax-equivalent net interest margin | 3.57% | 3.51% | +6 bps |
| Efficiency ratio | 56.44% | 64.71% | Improved |
| Return on average assets | 1.39% | 1.18% | +21 bps |
For the first nine months, net income was $189.0 million versus $143.3 million; diluted EPS was $1.09 versus $0.94. Net interest income was $455.4 million (+16.4%), noninterest income $151.6 million (+10.5%), and noninterest expense $373.7 million (+1.8%). The nine-month effective tax rate rose to 17.7% from 9.3%, primarily due to fewer federal tax credits and higher pretax income.
Financial position, cash flow and credit
- At September 30, total assets were $20.44 billion, loans $12.02 billion, deposits $14.45 billion and shareholders’ equity $2.83 billion. Compared with September 30, 2018, assets increased $2.87 billion, loans $725 million and deposits $1.85 billion; the Klein acquisition was a significant contributor.
- Cash and cash equivalents were $420.3 million, up from $286.8 million a year earlier. The company reported $4.18 billion of available funds at subsidiaries, including cash, unencumbered securities and borrowing capacity.
- Nine-month operating cash flow was $136.7 million, down from $178.2 million. Investing activities used $293.5 million; financing activities provided $259.9 million. Cash flow reflects, among other items, substantial securities purchases and loan-sale activity.
- Borrowed funds totaled $2.83 billion, versus $2.58 billion a year earlier; wholesale funding was 16% of total funding. FHLB advances were $2.00 billion. The bank reported a 9.57% Tier 1 leverage ratio and 13.00% common equity Tier 1 ratio; it met the well-capitalized definition.
- The allowance for loan losses was $56.9 million, or 0.47% of loans. Nonperforming loans were 1.31% of loans, down from 1.47% a year earlier; underperforming assets were $161.0 million, also lower year over year. However, criticized and classified assets together were $521.3 million, up $80.0 million year over year. Nine-month net charge-offs were $2.0 million versus $1.2 million.
Material changes and management commentary
- Year-over-year growth largely reflects Klein, acquired November 1, 2018 for approximately $406.5 million in Old National shares. Management cited acquisition-related growth in earning assets and income, while integration costs and higher operating expenses contributed to expense growth.
- Q3 loans, excluding loans held for sale, declined $28.9 million from June 30, 2019. Commercial loan production was $680 million and the reported pipeline was $2.0 billion. Management described a continued shift toward commercial and commercial real estate lending and runoff in less-profitable indirect consumer loans.
- Management said it was reviewing business functions with a consulting firm to improve efficiency and client service. It described its acquisition approach as active but selective; no numerical earnings guidance was provided.
- The Federal Reserve cut rates twice during Q3, and the yield curve was slightly inverted from one-month bills to ten-year notes. Management warned this could reduce spreads and net interest income, while citing balance-sheet and derivative actions to mitigate exposure. Its model showed a 2.09% decline in projected two-year cumulative net interest income for an immediate 50-basis-point rate decrease, and increases of 1.92% to 2.97% for increases of 100 to 300 basis points.
- The company estimated that CECL adoption would increase the credit-loss allowance by approximately $35–$45 million, including $3–$8 million for off-balance-sheet exposures; most of the expected increase related to acquired loans. The estimate depends on credit quality and economic forecasts. The filing’s MD&A says CECL becomes effective January 1, 2019, while the accounting note describes adoption effective January 1, 2020; investors should verify the intended adoption date.
- Other notable items: available-for-sale securities had net unrealized gains of $82.4 million at quarter-end, versus net unrealized losses of $96.1 million a year earlier; no other-than-temporary impairment was recorded. The company repurchased 5.6 million shares in the first nine months for $95.2 million and paid $0.39 per share in dividends.
Risks, contingencies and unusual items
- Key stated risks include credit quality and economic conditions in the Midwest, interest-rate and liquidity exposure, competition, operational and cybersecurity disruptions, regulatory and legal matters, and accounting or tax changes.
- Loan commitments were $2.89 billion and standby letters of credit $93.3 million at September 30. These off-balance-sheet commitments are not reflected as funded loans on the balance sheet.
- Management said it was not involved in material litigation and did not expect pending matters to materially affect consolidated financial condition, while noting results or cash flows in a particular future period could be affected.
- The company identified $4.8 billion of LIBOR-indexed contract exposure maturing beyond 2021 and noted reliance on third parties and industry guidance in transitioning those contracts.
- Moody’s ratings were A3 for Old National and Aa3 for Old National Bank; the disclosed outlook was negative.
Important facts for investors to verify
- How much of earnings and balance-sheet growth is recurring versus attributable to the Klein acquisition, acquired-loan accretion and other period-specific effects.
- Whether criticized and classified assets, charge-offs and acquired-loan credit performance improve, and whether the allowance remains adequate.
- The actual CECL adoption date and final day-one allowance and capital impact; the filing’s effective-date statements are inconsistent.
- Deposit pricing, wholesale funding needs and net interest margin sensitivity following rate cuts and potential curve changes.
- Execution and cost outcomes from the operational-efficiency review, plus the pace and terms of future share repurchases and acquisitions.