Old National Bancorp — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; balance-sheet comparisons are to December 31, 2014. Old National is an Indiana-based financial holding company operating mainly in Indiana, Kentucky and Michigan, with banking and insurance businesses. Figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial results and position
| Metric | FY2015 / year-end | FY2014 / prior year-end |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $596.7 | $531.5 |
| Net interest income | $366.1 | $366.4 |
| Net interest margin, taxable-equivalent basis | 3.72% | 4.22% |
| Noninterest income | $230.6 | $165.1 |
| Provision for loan losses | $2.9 | $3.1 |
| Noninterest expense | $430.9 | $386.4 |
| Net income / diluted EPS | $116.7 / $1.00 | $103.7 / $0.95 |
| Return on average assets / return on average common equity | 0.98% / 7.88% | 0.99% / 7.91% |
| Efficiency ratio | 68.65% | 70.03% |
| Total assets | $11,991.5 | $11,646.1 |
| Total loans / deposits | $6,948.4 / $8,400.9 | $6,318.2 / $8,490.7 |
| Short-term and other borrowings | $1,920.2 | $1,469.9 |
| Shareholders’ equity | $1,491.2 | $1,465.8 |
- Cash flows: Operating activities provided $125.0 million; investing activities used $502.1 million; financing activities provided $357.0 million. Cash and cash equivalents ended the year at $219.8 million, down from $240.0 million.
- Liquidity: The bank subsidiary reported $2.612 billion of available funds, including liquid assets and borrowing capacity; the parent reported $54.8 million. Wholesale funding was 19% of total funding at year-end, versus 15% a year earlier.
- Capital: Old National Bancorp’s CET1 ratio was 12.11%, Tier 1 risk-based ratio 12.55%, total capital ratio 13.28%, and Tier 1 leverage ratio 8.54%. Old National Bank’s corresponding ratios were 13.38%, 13.38%, 14.11%, and 9.11%; the bank was reported well capitalized.
- Credit quality: Net recoveries were $1.5 million; net charge-offs were -0.02% of average loans. Underperforming assets were $160.1 million, down from $170.5 million; nonperforming loans were 2.11% of loans versus 2.43%. The allowance for loan losses was $52.2 million, or 0.75% of loans.
- Q4 snapshot: Net income was $32.0 million and diluted EPS was $0.27, compared with $29.3 million and $0.25 in Q4 2014.
Material changes versus the prior comparable period
- Revenue rose 12% and net income rose about 13%; diluted EPS increased from $0.95 to $1.00. Net interest income was nearly flat, while the taxable-equivalent net interest margin declined 50 basis points.
- Average earning assets increased 14%, with average loans up $1.171 billion, reflecting recent acquisitions and organic growth. Lower acquired-loan accretion and a lower yield on earning assets pressured margin.
- Noninterest income increased 40%, partly reflecting a smaller negative FDIC indemnification-asset adjustment, the branch-sale gain, and recognition of deferred sale-leaseback gains. Noninterest expense rose 12%, including acquisition operating costs, branch-related costs and restructuring expenses.
- Year-end loans rose about 10%, while deposits declined about 1%. Borrowings increased about 31%, primarily due to higher Federal Home Loan Bank advances after the branch divestitures.
- Asset quality improved on several reported measures, including underperforming assets and nonperforming-loan ratios; commercial nonaccrual loans increased.
Outlook, risks and unusual items
- Management identified a slowing Chinese economy and uncertainty over the Federal Reserve’s rate path as potential headwinds to 2016 revenue growth. Priorities include core revenue growth, operating leverage, expense management and prudent capital use. No numerical earnings or revenue guidance was provided.
- On January 12, 2016, the company announced a proposed acquisition of Anchor BanCorp Wisconsin, valued at approximately $461 million based on the specified share-price reference. Anchor reported $2.2 billion in assets and $1.8 billion in deposits at September 30, 2015. Closing was expected in Q2 2016, subject to regulatory and shareholder approval.
- In August 2015, Old National sold 17 branches, transferring $193.6 million of loans and $555.8 million of deposits, and recorded a $15.6 million pretax gain. It also consolidated 23 branches. In Q4, it purchased 14 previously leased properties and recognized $10.8 million of deferred gains.
- Other notable 2015 items included a $5.6 million severance charge, $9.5 million of branch divestiture/closure/consolidation costs, and a $4.8 million accrual for an overdraft-fee class action settlement. The proposed $4.75 million settlement remained subject to court approval.
- Key risks include net-interest-margin sensitivity to rates and funding costs; credit deterioration, particularly in commercial and commercial real estate lending; reliance on wholesale funding; regulatory and compliance costs; acquisition integration and execution; and cybersecurity, operational and legal risks. Management said it expected acquired-loan accretion to decline over time.
- Auditors issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also concluded internal controls were effective as of year-end.
Important facts for investors to verify
- How much of reported revenue and earnings growth came from ongoing operations versus acquisitions, the branch-sale gain, sale-leaseback gains and FDIC accounting adjustments.
- Whether loan growth can continue without higher provisions, and how commercial nonaccruals, criticized/classified assets, TDRs and acquired-loan marks develop.
- Whether margin pressure persists as acquired-loan accretion declines, rates change and the company uses more wholesale funding.
- Anchor acquisition terms, regulatory and shareholder approvals, financing, integration costs, expected savings and effects on capital and credit ratings.
- Final court approval and payment of the overdraft-fee settlement, plus any material developments in other legal proceedings.
- Capital and liquidity headroom, deposit trends, funding maturities and dividend capacity; the bank’s dividend payments to the parent are subject to regulatory limits.