Old National Bancorp — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports quarterly results, including the three months ended December 31, 2013. Old National is an Indiana-based financial holding company operating banking, insurance and wealth-management businesses, primarily in Indiana, southeast Illinois, western Kentucky and southwest Michigan.
Financial performance and position
- Earnings: Net income was $100.9 million, up 10.1% from $91.7 million in 2012; diluted EPS was $1.00 versus $0.95. Fourth-quarter net income was $24.5 million versus $23.0 million a year earlier; diluted EPS was $0.25 versus $0.23.
- Revenue and margins: Net interest income was $317.4 million, up 2.8%; noninterest income was $184.8 million, down 2.7%. Net interest margin on a fully taxable-equivalent basis declined to 4.02% from 4.23%. The efficiency ratio improved to 68.61% from 71.83%. Return on average assets was 1.05% and return on average common equity was 8.54%.
- Credit costs and asset quality: The provision for loan losses was a $2.3 million credit, compared with $5.0 million of expense in 2012. Net charge-offs fell to $5.3 million (0.10% of average loans) from $8.3 million (0.17%). Underperforming assets declined to $165.7 million from $302.6 million. The allowance was $47.1 million, or 0.93% of loans, versus $54.8 million, or 1.05%.
- Balance sheet: Total assets were $9.58 billion, loans $5.08 billion, deposits $7.21 billion, and shareholders’ equity $1.16 billion at year-end. Total assets were nearly flat year over year; loans declined from $5.20 billion and deposits from $7.28 billion. Short-term and other borrowings totaled about $1.02 billion, up from $827.3 million.
- Cash flow: Operating activities provided $165.4 million; investing activities provided $101.0 million; financing activities used $323.7 million. Cash and cash equivalents ended the year at $206.7 million, down from $264.1 million.
- Capital and liquidity: Old National Bank was reported well-capitalized. Its total risk-based capital ratio was 12.67%, Tier 1 risk-based ratio 11.80%, and Tier 1 leverage ratio 7.35%. Subsidiaries reported $3.31 billion of available funds, including cash, unencumbered securities and borrowing capacity; this is not equivalent to cash on hand.
Material changes versus 2012
- Higher net income reflected improved credit quality and lower funding costs, alongside growth in net interest income. Acquired-loan accretion supported results: IBT-related accretion benefited 2013 net interest margin by 28 basis points, and management expected that benefit to decline over time.
- Noninterest income fell, principally because net securities gains declined to $3.3 million from $13.6 million and FDIC indemnification-asset adjustments were less favorable. Service charges also decreased; wealth-management and investment-product fees increased.
- Noninterest expense decreased 1.0% to $362.0 million. Lower other-real-estate and occupancy costs partly offset higher salaries and acquisition- and branch-consolidation costs.
- Available-for-sale securities had net unrealized losses of $34.1 million, versus net unrealized gains of $64.0 million in 2012. Net other comprehensive income was a loss of $74.3 million, and year-end accumulated other comprehensive income was a loss of $44.5 million. A $357.8 million municipal-securities transfer to held-to-maturity was intended, in part, to limit tangible-equity volatility as rates rose.
- The company acquired 24 Bank of America branches in July 2013, entered southwest Michigan, and consolidated or sold branches. Year-end branches/financial centers numbered 169, compared with 180 in 2012.
Outlook, risks and notable items
- Management said the interest-rate environment would continue to challenge 2014 revenue growth. Priorities were revenue and loan growth, expense reduction, efficiency improvements, and selective acquisition and partnership opportunities. No quantified earnings guidance was provided.
- Pending acquisitions of Tower Financial and United Bancorp could take assets above $10 billion, bringing enhanced regulatory oversight and potentially higher capital and liquidity standards. Both transactions remained subject to approvals and closing conditions; United was then expected to close in the second quarter of 2014.
- Interest-rate exposure is material: modeling showed a 100-basis-point immediate rate increase would reduce one-year net interest income by 2.11%; a 300-basis-point increase would reduce it by 11.63%. A 300-basis-point increase reduced modeled economic value of equity by 21.48%. These are model scenarios, not forecasts.
- Key risks include regional economic weakness, commercial-real-estate and borrower credit risk, acquisition integration and dilution, deposit and wholesale-funding pressures, interest-rate sensitivity, regulatory changes, cybersecurity, and uncertain fair-value and credit-loss estimates. Management noted that higher rates and liquidity requirements could adversely affect earnings.
- A certified Indiana class action challenges the bank’s debit-card and ATM transaction sequencing for overdraft fees. Mediation had not resolved the dispute; management said it could not estimate the likelihood or amount of loss. The company also recorded a $0.5 million BSA/AML penalty and a $1.0 million impairment charge on a pooled trust-preferred security.
- The quarterly common dividend was $0.10 per share during 2013; in January 2014 the board raised it to $0.11. The board also authorized a new repurchase of up to 2.0 million shares through January 2015.
Important facts for investors to verify
- Whether loan growth, net interest margin and the decline in purchased-loan accretion develop as management anticipated.
- Whether credit-quality improvement persists, and how the allowance compares with nonaccrual, criticized and restructured loans.
- The impact of unrealized securities losses, rising-rate sensitivity and the held-to-maturity reclassification on capital and earnings.
- Final regulatory and shareholder approvals, integration costs, expected benefits and capital implications of the Tower and United acquisitions.
- The outcome and potential financial exposure of the overdraft-fee class action, for which the filing provides no clear loss estimate.
- Future funding mix, borrowing costs, dividend capacity and the consequences of crossing the $10 billion asset threshold.