Old National Bancorp — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports a fourth-quarter net loss. Old National is a Midwest community bank holding company operating primarily in Indiana, Kentucky, Michigan, Wisconsin and Minnesota; it reported one community-banking segment and $17.5 billion in year-end assets.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Net interest income | $437.2 million | $402.7 million |
| Noninterest income | $183.4 million | $252.8 million |
| Noninterest expense | $448.8 million | $454.1 million |
| Provision for loan losses | $3.1 million | $1.0 million |
| Net income | $95.7 million | $134.3 million |
| Diluted earnings per share | $0.69 | $1.05 |
| Net interest margin, taxable-equivalent basis | 3.48% | 3.58% |
| Return on average assets | 0.63% | 0.98% |
- Quarterly result: Fourth-quarter 2017 net loss was $18.5 million, or $0.13 diluted per share, versus net income of $33.5 million, or $0.25 per share, in fourth-quarter 2016. The 2017 quarter included a $39.3 million tax expense for the estimated revaluation of deferred tax assets after the federal corporate tax rate was reduced to 21%.
- Balance sheet: Year-end loans were $11.1 billion, up from $9.0 billion; deposits were $12.6 billion, up from $10.7 billion. Total assets increased 18% to $17.5 billion. Shareholders’ equity was $2.15 billion.
- Credit quality: Net charge-offs were $2.5 million, or 0.03% of average loans, compared with $3.4 million and 0.04% in 2016. Nonperforming loans were 1.30% of ending loans versus 1.62%. The allowance was $50.4 million, or 0.45% of loans, down from 0.55%; the filing attributes the ratio decline partly to acquired loans recorded at fair value.
- Cash flow and liquidity: Operating cash flow was $290.7 million; investing cash flow was negative $577.0 million; financing cash flow was $321.2 million. Cash and cash equivalents ended at $290.4 million. Deposits were the main funding source; borrowings totaled $2.58 billion. Subsidiaries reported $3.24 billion of available funds, including liquid securities and borrowing capacity.
- Capital and distributions: Old National Bank’s common equity Tier 1 ratio was 11.21%, total capital ratio 11.73%, and Tier 1 leverage ratio 8.93%; it met the regulatory definition of well capitalized. The annual dividend remained $0.52 per share; the board declared a further quarterly dividend of $0.13 in January 2018.
Material changes versus 2016
- Net interest income rose 9%, primarily from higher average earning assets, acquisitions and organic lending growth. Taxable-equivalent net interest margin declined 10 basis points to 3.48%; acquired-loan accretion income fell to $40.8 million from $58.1 million.
- Noninterest income fell 27.5%, mainly because 2016 included a $41.9 million gain on the sale of Old National’s insurance business, ONI, and higher insurance-related revenue. Wealth-management, investment-product and capital-markets income increased in 2017.
- Noninterest expense declined 1.2%. Lower personnel and occupancy costs were partly offset by $12.3 million of Anchor (MN) acquisition and integration costs and $11.7 million of tax-credit investment amortization.
- On November 1, 2017, Old National acquired Anchor (MN) for $332.8 million in cash and stock, issuing 16.5 million shares. The acquisition added $2.22 billion in assets at closing and expanded the franchise into Minnesota. Acquisition valuation remained preliminary at year-end.
- Loans grew 23% year over year, with management reporting almost 5% organic loan growth and 10% organic commercial and commercial-real-estate growth. Deposits rose 17%. The acquisition contributed materially to reported growth.
Outlook, risks and unusual items
- Management identified loan growth, fee-based income and expense management as 2018 priorities, and reaffirmed its focus on positive operating leverage. It expected additional rate increases to benefit earnings because assets were expected to reprice faster than liabilities, while noting the unusually flat yield curve. No quantified earnings or revenue guidance was provided.
- Management expected tax reform to support client investment and loan demand and reduce future corporate taxes. The $39.3 million deferred-tax revaluation charge was estimated and subject to refinement during 2018.
- Old National planned to continue evaluating branch consolidation; it closed 29 centers in 2017 and expected further reductions in 2018. It described its acquisition approach as active but selective and disciplined.
- Key risks include credit deterioration—particularly in commercial real estate and acquired Anchor (MN) loans—interest-rate and funding-cost changes, deposit retention, acquisition integration and expected cost savings, regulatory and capital requirements, cybersecurity and third-party vendor exposures, and competition. Criticized and classified assets increased to $419.2 million from $323.0 million, including acquired problem loans.
- Legal matters arose in the ordinary course of business; the company said it was not involved in material litigation and did not expect pending matters to materially affect consolidated financial condition, though results or cash flows in a particular period could be affected.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The Anchor (MN) operations, representing about 9.8% of year-end assets, were excluded from the internal-control assessment.
Important facts for investors to verify
- How much of 2017 loan, deposit and asset growth was organic versus acquisition-driven, and whether Anchor (MN) integration savings and customer retention meet expectations.
- Whether credit trends in the acquired portfolio worsen, especially given the increase in criticized and classified assets and the lower allowance-to-loan ratio after acquisition accounting.
- Underlying earnings excluding the one-time $39.3 million tax revaluation charge, and the eventual refinement of the tax accounting and deferred-tax asset valuation.
- Whether net interest margin stabilizes as rates and deposit costs rise, accretion income runs off and the yield curve remains flat.
- Funding mix and liquidity resilience, including the scale and cost of wholesale borrowings and the ability to sustain dividends within regulatory limits.