Old National Bancorp — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are primarily against December 31, 2018 and the prior-year quarter. Old National is a Midwest community banking company operating through one reportable segment. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance
| Metric | Q1 2019 | Comparison |
|---|---|---|
| Net interest income | $147.0 million | Up 14.4% from $128.6 million in Q1 2018 |
| Net interest margin, taxable-equivalent basis | 3.51% | Up from 3.45% in Q1 2018 |
| Noninterest income | $46.4 million | Up 10.8% from $41.9 million |
| Noninterest expense | $123.0 million | Up 5.0% from $117.2 million |
| Provision for loan losses | $1.0 million | Up from $0.4 million |
| Net income | $56.3 million | Up from $48.0 million |
| Diluted EPS | $0.32 | Up from $0.31; dividend was $0.13 per share in both periods |
| Operating cash flow | $43.9 million | Down from $51.4 million |
Net interest income growth reflected higher average earning assets and loan yields, including the Klein acquisition; higher funding costs partly offset the benefit. Interest expense rose to $31.9 million from $19.1 million. The efficiency ratio improved to 60.26% from 65.84%, while return on average assets was 1.14% versus 1.10%. The effective tax rate increased to 18.9% from 9.4%, primarily because fewer federal tax credits were available.
Financial position, funding and capital
- Assets were $20.08 billion, up $356.0 million from year-end and $2.59 billion year over year; the Klein acquisition was a major contributor to the annual increase.
- Loans were $12.07 billion, down $174.9 million from year-end but up from $11.24 billion a year earlier. Management attributed the quarterly decline chiefly to seasonal factors, lower commercial line utilization and elevated prepayments. Deposits were $14.43 billion, up $79.3 million from year-end.
- Cash and cash equivalents were $323.1 million. Management reported $4.06 billion of available funds at subsidiaries, including unencumbered securities and borrowing capacity. Wholesale borrowings totaled $2.64 billion; total deposits and borrowed funding were $17.07 billion.
- Shareholders’ equity was $2.75 billion. Old National reported consolidated capital ratios of 8.80% for leverage, 11.77% for common equity Tier 1 and 12.70% for total risk-based capital; the bank subsidiary met the well-capitalized definition.
- Cash flow was affected by $206.3 million of investing outflows, including substantial purchases of available-for-sale securities, partly offset by $168.3 million of financing inflows. Ending cash increased $6.0 million from year-end.
Material changes and notable items
- Klein acquisition: Completed November 1, 2018 for $406.5 million in Old National shares. The acquired company contributed to growth in assets, deposits, loans, fee income and operating costs. Acquisition and integration costs of $15.5 million had been expensed through March 31, 2019; purchase accounting valuations remained preliminary.
- Asset quality: The allowance for loan losses was $55.6 million, or 0.46% of loans. Nonperforming loans were 1.41% of loans, versus 1.28% a year earlier. Underperforming assets were $173.8 million; criticized and classified assets totaled $635.7 million, up from $423.6 million a year earlier. Management noted that acquired Klein loans included $47.8 million classified as criticized and $59.8 million classified, of which $16.3 million were nonaccrual.
- Shareholder returns: The company repurchased 1.5 million shares under its 2019 repurchase plan and paid $0.13 per share in dividends.
- Accounting and equity: Adoption of the new lease standard on January 1, 2019 resulted in recognition of $109.9 million in operating lease right-of-use assets and $114.0 million in operating lease liabilities at quarter-end; opening retained earnings increased $6.3 million. A substantial securities-market recovery also lifted other comprehensive income and AOCI during the quarter.
Outlook, risks and contingencies
Management identified loan growth, fee-based income and expense management as strategic priorities, and said it aims to sustain positive operating leverage. It described itself as an active but selective potential acquirer. No quantified earnings or revenue guidance was provided. Management warned that a flatter yield curve could pressure interest income; its rate model showed projected two-year net interest income modestly lower under a 50-basis-point rate decline and generally within policy limits for tested scenarios. The company expects acquired-loan accretion income to decline over time, though future acquisitions could offset that effect.
Key uncertainties include credit quality and economic conditions in its Midwest markets, acquisition integration and potential customer or deposit attrition, interest-rate and liquidity risk, and changes in funding costs. The company had $3.74 billion of loan commitments and $100.2 million of standby letters of credit off 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 outcomes could affect a particular period’s results or cash flows. CECL implementation was in progress; the eventual allowance increase and financial-statement impact could not yet be reasonably estimated, with a range expected to be identified in the September 2019 quarterly report.
Important facts for investors to verify
- Whether loan growth resumes and whether the recent commercial-loan decline reflects temporary seasonality, prepayments and lower utilization or a more persistent trend.
- How acquired Klein criticized, classified and nonaccrual loans perform, and whether credit costs or the allowance need to rise.
- Whether deposit pricing and wholesale funding costs continue to outpace asset-yield improvement and pressure net interest margin.
- Realized Klein integration savings, remaining costs, customer retention and final purchase-accounting valuations.
- The eventual CECL adoption impact, management’s allowance assumptions, and the implications of securities values and interest-rate sensitivity.