Old National Bancorp — 2020 Form 10-K
Business and period. Old National Bancorp is a Midwest financial holding company providing commercial and consumer banking, deposits, lending, wealth management, and related services, primarily in Indiana, Kentucky, Michigan, Minnesota, and Wisconsin. This filing covers the fiscal year ended December 31, 2020; fourth-quarter results are also summarized below.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $596.1 million | $604.3 million |
| Noninterest income | $239.3 million | $199.3 million |
| Net income | $226.4 million | $238.2 million |
| Diluted EPS | $1.36 | $1.38 |
| Net interest margin, taxable-equivalent | 3.18% | 3.55% |
| Efficiency ratio | 62.91% | 60.35% |
| Return on average assets | 1.04% | 1.19% |
Noninterest income rose 20%, led by mortgage banking revenue ($62.8 million, up 136%), capital markets income ($22.5 million, up 69%), and securities gains ($10.8 million). Lower deposit service charges partly offset the growth. Net income declined about 5% as lower net interest income, higher credit-loss provision, and strategic-plan costs outweighed stronger fee income and lower taxes. The effective tax rate fell to 11.4% from 18.0%, primarily reflecting increased federal tax credits.
Fourth quarter: net income was $74.1 million, or $0.44 diluted EPS, versus $49.2 million, or $0.29, in fourth-quarter 2019. Net interest income was $161.1 million; the provision for loan losses was a $1.1 million reversal, compared with a $1.3 million provision in the prior-year quarter.
Balance sheet and liquidity: At year-end, assets were $23.0 billion, loans $13.8 billion, deposits $17.0 billion, and shareholders’ equity $3.0 billion. Deposits increased $2.5 billion year over year, while borrowings were $2.7 billion, down $68 million. Cash and cash equivalents totaled $589.7 million. The bank reported $4.9 billion of available subsidiary liquidity, including cash, unencumbered securities, and borrowing availability. Regulatory capital ratios included 11.75% CET1 at the holding company and 12.23% at the bank; the bank remained “well capitalized.”
Operating cash flow was $219.8 million; investing activities used $2.14 billion, largely reflecting securities purchases and net loan growth, while financing activities provided $2.24 billion, primarily from deposit growth. The company paid $0.56 per share in dividends during 2020.
Material changes and notable items
- Loans grew 14% year over year, with commercial and commercial real estate loans up 23%; remaining PPP loans were $943 million at year-end. Total deposits grew 17%.
- CECL adoption on January 1, 2020 increased the loan allowance by $41.3 million and the unfunded-commitment allowance by $4.5 million, and reduced retained earnings by $31.2 million. The year-end loan allowance was $131.4 million, versus $54.6 million under the prior-year methodology; the accounting bases differ.
- Provision expense rose to $38.4 million from $4.7 million, driven largely by CECL and COVID-related economic forecasts. Net charge-offs remained low at $3.0 million, or 0.02% of average loans.
- Nonperforming loans were 1.20% of loans, versus 1.19% a year earlier; underperforming assets were $166.6 million. COVID-related loan deferrals outstanding fell to $63.9 million at year-end from $1.30 billion at June 30.
- ONB Way strategic-plan charges were $42.6 million, versus $11.4 million in 2019. The company consolidated 31 banking centers in April 2020 and recorded $27.1 million of related lease-termination and long-lived-asset charges. Year-end banking centers totaled 162, down from 192.
- The board suspended the 2020 repurchase program in March amid uncertainty. The company reported repurchases of 4.9 million shares under the plan during 2020; in January 2021 the board authorized a new program of up to $100 million through January 2022 and declared a $0.14 quarterly dividend.
Outlook, risks, and contingencies
Management reported signs of economic recovery and promising vaccine progress, but emphasized continued uncertainty. It warned that fiscal stimulus and relief programs may have delayed pandemic-related credit stress; management expects credit metrics to worsen and loan losses to emerge as support programs expire. Organic loan growth, disciplined underwriting, ONB Way revenue initiatives, and positive operating leverage are priorities. Revenue initiatives were underway in technology, commercial banking, wealth, and treasury management; community initiatives were scheduled to begin during 2021. No specific company earnings or revenue guidance was provided.
Key risks include the duration and economic effects of COVID-19, borrower defaults and adequacy of credit-loss reserves, commercial real estate exposure, historically low interest rates and margin pressure, funding access, LIBOR transition, cyber and third-party technology risks, regulatory requirements, and PPP compliance or litigation exposure. PPP participation exceeded 9,700 loans and $1.5 billion originated in 2020; the loans are SBA-guaranteed subject to program requirements. The company reported no material litigation currently, while noting ordinary-course claims whose outcomes cannot be predicted.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter because of the modeling, forecast, and judgment involved. Goodwill of $1.04 billion was not impaired in the 2020 annual test.
Most important facts for investors to verify
- Whether pandemic-related credit deterioration and losses materialize as stimulus and borrower relief programs wind down, and how the CECL allowance responds to updated forecasts.
- Whether net interest margin stabilizes after declining 37 basis points year over year, and the effect of further rate changes and PPP loan forgiveness.
- How much of 2020 fee-income growth—especially mortgage banking and securities gains—is sustainable.
- Whether ONB Way savings and planned revenue initiatives deliver improved efficiency and positive operating leverage, net of implementation costs.
- Current PPP forgiveness, remaining balances, and any related compliance, guaranty, or litigation developments.
- Capital, liquidity, dividend capacity, and execution of the new share-repurchase authorization.