Old National Bancorp — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Old National is a Midwest community bank. Financial statements are unaudited; amounts below are in U.S. dollars. Comparisons are year over year unless otherwise noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $108.5m | $107.8m | $318.6m | $292.8m |
| Noninterest income | $46.4m | $47.2m | $138.6m | $190.1m |
| Net income | $39.4m | $34.7m | $114.2m | $100.8m |
| Diluted earnings per share | $0.29 | $0.25 | $0.84 | $0.80 |
| Noninterest expense | $103.7m | $108.1m | $308.4m | $327.9m |
| Provision for loan losses | $0.3m | $1.3m | $2.0m | $2.7m |
- Q3 net income increased about 13%; nine-month net income increased about 13%. Nine-month net interest income rose 8.8%, supported by higher average earning assets and loan growth.
- Tax-equivalent net interest margin was 3.52% in Q3 and 3.48% for the first nine months, down from 3.60% and 3.56%, respectively. Management cited lower acquired-loan accretion, higher funding costs and changes in asset and liability mix. Acquired-loan accretion was $11.1m in Q3 and $33.4m year to date.
- Nine-month noninterest income fell 27.1%, principally because 2016 included a $41.9m pretax gain on the sale of ONB Insurance Group and insurance revenue that was absent after the divestiture. Q3 noninterest income was down 1.9%, including lower mortgage banking revenue, partly offset by capital markets income and securities gains.
- Nine-month noninterest expense fell 5.9%, reflecting the insurance divestiture and lower acquisition/integration costs. Q3 expense included $1.9m of client-experience initiative costs; management said the initiative was expected to improve service and reduce costs in 2018.
- Return on average assets was 1.05% in Q3; return on average common equity was 8.31%. The reported efficiency ratio was 64.17%, versus 66.05% in Q3 2016.
Balance sheet, cash flow and capital
- At September 30, 2017, assets were $15.07bn, loans $9.40bn, deposits $10.61bn and shareholders’ equity $1.91bn. Loans rose 5.5% from September 2016; commercial and commercial real estate loans grew 10% over that period. Deposits were down $39.9m year over year and $136.5m from December 2016.
- Cash and cash equivalents were $252.4m. For the first nine months, operating cash flow was $221.7m, investing cash flow was negative $295.5m and financing cash flow was positive $70.6m; cash declined $3.2m from year-end 2016.
- Borrowed funds totaled $2.41bn, up 19% year over year, while wholesale funding rose to 19% of total funding from 16%. Federal Home Loan Bank advances were $1.59bn; $752.8m was contractually due in the remainder of 2017. Management reported $2.97bn of available subsidiary liquidity and borrowing capacity, in addition to $114.1m of parent-company cash.
- Consolidated regulatory capital ratios included a 8.79% leverage ratio, 11.66% common equity Tier 1 ratio and 12.46% total capital ratio. The bank subsidiary exceeded well-capitalized thresholds. The quarterly dividend was $0.13 per share; $0.39 per share was paid year to date.
Credit quality and material changes
- Nonperforming loans were 1.46% of loans, down from 1.86% a year earlier. Underperforming assets were $148.3m, versus $189.5m a year earlier. The allowance for loan losses was $50.2m, or 0.53% of loans; nine-month net charge-offs were $1.7m, compared with $3.4m.
- Some measures warrant attention: criticized and classified assets were $347.2m, down year over year but up $24.3m from December 2016. Troubled debt restructurings increased to $62.0m from $40.7m at year-end; $43.7m were included in nonaccrual loans.
- The $459.8m Anchor (Wisconsin) acquisition closed in May 2016 and contributed to year-over-year balance-sheet and average-asset growth. Old National agreed in August 2017 to acquire Anchor (Minnesota) for an estimated $334.2m; the filing reports that the transaction closed November 1, 2017, after the quarter-end.
- Old National had consolidated 134 branches since 2011, with 14 more planned for Q4 2017, and was evaluating additional consolidation opportunities in 2018.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management described steady commercial loan demand and a focus on organic growth, fee income, low-cost core deposits and efficiency. It expected Q4 2017 tax-credit investment amortization of approximately $12.7m–$22.2m, depending on when investments were placed in service; the estimate included about $5.0m related to the Anchor (Minnesota) partnership.
- Management warned that loan growth, reduced recoveries or higher charge-offs could increase provision expense. Other stated sensitivities include economic and credit conditions, interest rates, deposit behavior, competition, acquisition integration and execution of cost savings. Moody’s affirmed ratings in August 2017 but assigned a negative outlook.
- Three pooled trust preferred securities had fair value of $8.3m and unrealized losses of $8.4m; all three had experienced credit defaults. No other-than-temporary impairment was recorded in the first nine months, and management said it did not intend or expect to be required to sell securities in unrealized-loss positions.
- Loan commitments were $2.43bn and standby letters of credit were $50.2m. The company reported no material litigation currently; it noted that legal matters could nevertheless affect results or cash flows in a particular future period.
- Expected adoption of lease accounting was estimated to increase assets and liabilities by $80m–$100m, without a material income-statement impact. The eventual effect of the new expected-credit-loss standard could not yet be determined; management anticipated a one-time allowance adjustment upon adoption.
Important facts for investors to verify
- Whether loan growth can continue without deterioration in criticized loans, TDRs, nonaccruals or charge-offs, and whether the allowance remains adequate.
- How deposit trends and increased FHLB and other wholesale funding affect funding costs, liquidity and net interest margin.
- Whether recurring fee growth and expense savings offset the loss of insurance-related revenue and the effects of lower mortgage production.
- The realized integration costs, synergies and capital impact of the Anchor (Minnesota) acquisition, which closed after quarter-end.
- The timing and actual Q4 tax-credit amortization expense, and the assumptions underlying management’s projected 2018 cost reductions.