Old National Bancorp — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; the filing was signed February 12, 2019. Old National is a Midwest community banking and financial holding company operating primarily in Indiana, Kentucky, Michigan, Wisconsin, and Minnesota. It reported 191 banking centers and $19.7 billion in year-end assets.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $537.6 million | $437.2 million |
| Noninterest income | $195.3 million | $183.4 million |
| Net income | $190.8 million | $95.7 million |
| Diluted earnings per share | $1.22 | $0.69 |
| Net interest margin, taxable-equivalent basis | 3.54% | 3.48% |
| Efficiency ratio | 67.74% | 68.87% |
| Return on average assets | 1.07% | 0.63% |
Net interest income plus noninterest income was $732.9 million. Provision for loan losses was $7.0 million, versus $3.1 million in 2017. Net charge-offs were $1.9 million, or 0.02% of average loans. The effective tax rate was 8.6%, compared with 43.3% in 2017.
Fourth-quarter 2018 net income was $47.5 million, or $0.28 diluted per share, compared with a $18.5 million net loss in fourth-quarter 2017. Fourth-quarter 2017 included a $39.3 million tax charge related to revaluation of deferred tax assets. Fourth-quarter 2018 net interest margin was 3.64% and the efficiency ratio was 70.33%.
At December 31, 2018, total assets were $19.73 billion, loans were $12.24 billion, deposits were $14.35 billion, borrowings were $2.49 billion, and shareholders’ equity was $2.69 billion. Cash and cash equivalents were $317.2 million. The company reported $234.4 million of operating cash flow, $271.4 million of net cash used in investing activities, and $63.7 million of net cash from financing activities; cash and cash equivalents increased $26.7 million.
Regulatory capital remained above stated requirements: the company reported a 11.36% Common Equity Tier 1 ratio and 12.27% total capital ratio; Old National Bank reported 11.98% and 12.47%, respectively. Management said the bank was well capitalized. Subsidiaries reported $3.58 billion of available funds, including liquid assets and borrowing capacity.
Material changes versus 2017
- Net income nearly doubled, reflecting higher net interest income, lower income tax expense, and contributions from acquisitions. Results benefited from the federal corporate tax rate reduction to 21%; 2017 earnings included the $39.3 million deferred-tax revaluation charge.
- Net interest income rose 23%, primarily as average earning assets increased by $2.26 billion. The increase reflected the Anchor acquisition, completed in November 2017, the Klein acquisition, completed in November 2018, and organic growth. Taxable-equivalent net interest margin improved 6 basis points.
- Noninterest expense rose 15% to $517.3 million, principally from acquisition and integration costs, higher salaries and benefits, and increased tax-credit investment amortization. Noninterest income included a $14.0 million pre-tax gain on the sale of ten Wisconsin branches.
- Assets grew 13%, loans 10%, and deposits 14%. The Klein transaction added $2.16 billion of assets, including $1.05 billion of loans and $1.71 billion of deposits, and was funded with 22.8 million newly issued shares valued at $406.5 million.
- Underperforming assets increased to $179.4 million from $154.2 million; nonaccrual loans rose to $157.5 million from $124.9 million. The allowance remained 0.45% of loans, while criticized and classified assets rose to $576.4 million from $419.2 million.
Outlook, commentary, risks, and unusual items
Management expected continued, though less robust, U.S. economic growth in 2019 and prioritized organic loan growth, fee-based income, expense management, technology, and operating efficiency. It described loan production and the pipeline as strong and stated its intention to maintain disciplined underwriting. Management highlighted continued monitoring of commercial real estate subsectors, including senior housing, retail, and multifamily, and anticipated further branch consolidation. It remained a selective, disciplined potential acquirer, not a compelled buyer. The filing does not provide numeric earnings or revenue guidance.
- Acquisition and integration: Klein integration and cost savings remained in progress. Klein’s acquisition accounting was preliminary, including certain loan, intangible-asset, premises, and tax measurements. Goodwill increased to $1.04 billion; goodwill from Klein is not tax deductible.
- Credit and concentration: Commercial real estate loans were 198% of the bank’s risk-based capital, below the cited 300% regulatory guideline. Klein-acquired loans included $46.3 million classified as criticized and $56.6 million as classified at year-end. The filing notes exposure to local economic conditions and commercial real estate values.
- Interest rates and funding: Management’s model estimated two-year cumulative net interest income sensitivity of -0.81% for an immediate 50-basis-point decrease and +0.82% for a 100-basis-point increase. These are model scenarios, not forecasts. Deposit costs rose during the year, and management cautioned that wholesale funding availability and cost may be affected by market conditions.
- Legal and regulatory: Old National Bank, as KleinBank’s successor, assumed ongoing obligations under a May 2018 DOJ settlement concerning alleged Fair Housing Act and Equal Credit Opportunity Act violations in the Minneapolis market. The company said it was not currently involved in material litigation, while noting that legal matters could affect future-period results or cash flows.
- Other items: Old National sold its remaining student loan portfolio for $64.9 million, recording a $2.2 million gain. The company recorded no securities other-than-temporary impairment in 2018. It expected CECL adoption to increase the allowance, but said the amount could not yet be reasonably estimated; it planned to identify a range in its September 2019 Form 10-Q. The 2019 CEO transition was also announced.
Most important facts for investors to verify
- Whether Klein integration delivers expected savings and whether final acquisition valuations materially change goodwill, loan values, or taxes.
- Whether nonaccrual, criticized, and classified loans continue to rise, particularly among acquired credits and commercial real estate, and whether the allowance remains adequate.
- The eventual CECL allowance increase and its effects on earnings and regulatory capital.
- Whether deposit pricing, funding costs, and rate sensitivity develop in line with management’s assumptions.
- How much 2018 earnings depended on tax effects and one-time gains, and whether core operating performance supports continued growth.
- The ongoing costs and compliance obligations associated with the KleinBank settlement, branch changes, and acquisition integration.