Old National Bancorp — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also provides unaudited fourth-quarter results. Old National is an Indiana-based financial holding company with banking and insurance operations, principally in Indiana, southeastern Illinois, western Kentucky and southwestern Michigan.
Financial performance and condition
- Profit: Net income was $103.7 million, up from $100.9 million in 2013. Diluted EPS fell to $0.95 from $1.00, reflecting an increase in weighted-average diluted shares to 108.4 million from 101.2 million, including shares issued for acquisitions. Fourth-quarter net income was $29.3 million versus $24.5 million a year earlier; diluted EPS was $0.25 in both quarters.
- Revenue and margins: Net interest income rose 15.4% to $366.4 million; noninterest income fell 10.6% to $165.1 million. Their sum was $531.5 million, compared with $502.2 million in 2013. Tax-equivalent net interest margin increased to 4.22% from 4.02%; excluding purchased-loan accretion, it was 3.27% versus 3.31%.
- Key income-statement items: Noninterest expense increased 6.8% to $386.4 million, including $15.6 million of acquisition and integration costs. The loan-loss provision was $3.1 million, compared with a $2.3 million credit in 2013. The $43.2 million negative adjustment to the FDIC indemnification asset was substantially larger than the $9.3 million adjustment in 2013.
- Credit quality: Net charge-offs were $2.4 million, or 0.04% of average loans, versus $5.3 million and 0.10% in 2013. Underperforming assets were $170.5 million, up from $165.7 million, while their ratio to loans and foreclosed property improved to 2.69% from 3.25%. Nonaccrual loans increased to $140.9 million from $128.4 million. The allowance was $47.8 million, or 0.76% of loans, down from 0.93%.
- Balance sheet and funding: Assets grew 21.6% to $11.65 billion, largely following acquisitions. Loans were $6.32 billion, deposits $8.49 billion, and shareholders’ equity $1.47 billion at year-end. Short-term borrowings were $551.3 million and other borrowings $920.1 million; other borrowings included $175 million of 4.125% senior notes due 2024.
- Cash flow and liquidity: Operating cash flow was $199.7 million; investing activities used $162.5 million and financing activities used $3.9 million. Cash and cash equivalents increased $33.2 million to $240.0 million. The company reported $2.47 billion of available funds at subsidiaries, including unencumbered securities and borrowing capacity; this is not equivalent to cash on hand.
- Capital and returns: Old National Bank met the regulatory definition of well-capitalized. Its total risk-based capital ratio was 13.02% and Tier 1 leverage ratio 8.41%; the parent company’s Tier 1 leverage ratio was 8.79%. The annual dividend rose to $0.44 per share from $0.40; the board declared a $0.12 quarterly dividend in January 2015.
Material changes versus 2013
- Completed acquisitions of Tower, United and LSB in 2014, adding branches and loans in Indiana and Michigan; the Founders acquisition closed January 1, 2015. These transactions materially increased assets, deposits, loans, goodwill and shares outstanding.
- Net interest income growth reflected larger balances and higher purchased-loan accretion, including payoffs of several large acquired credit-impaired loans. Management expects lower accretion in future periods.
- Noninterest income declined, principally because of the larger FDIC indemnification-asset adjustment and the absence of 2013 branch-sale gains. Wealth management, insurance and securities gains partly offset the declines.
- Borrowings increased, including issuance of $175 million in senior unsecured notes. Equity increased substantially, in part from acquisition-related stock issuance and improved unrealized securities values.
Outlook, risks and unusual items
- Management said the interest-rate environment would challenge 2015 revenue growth, while clients appeared more optimistic about the economy. Its stated priorities were core revenue growth, improved operating leverage and prudent capital use; the filing does not provide a numerical earnings or revenue forecast.
- Management planned to sell, consolidate or close 36 branches, with about $620 million of deposits and $197.9 million of loans associated with announced branch sales. It also expected an early-retirement program and other actions to reduce the workforce by 10%. Management expected the branch transactions to be completed before September 30, 2015.
- The Durbin Amendment was expected to apply beginning July 1, 2015; management estimated a $4–$6 million negative effect on 2015 debit-card and ATM fees.
- The Integra FDIC loss-sharing asset fell to $20.6 million from $88.5 million. Management did not expect covered losses to exceed the $275 million threshold, but future estimates and amortization depend on credit performance and cash-flow assumptions.
- Key risks include loan and commercial real-estate credit deterioration, interest-rate and funding sensitivity, acquisition integration and cost savings, regulatory changes, cybersecurity and fraud, and competition. The company had a certified class action concerning overdraft-fee transaction sequencing; an appeal was pending, and management could not estimate the probability or amount of loss.
- The company’s consolidated assets exceeded $10 billion in 2014, bringing it under CFPB supervision and making it subject to company-run stress-test reporting in 2016. New capital and liquidity requirements could affect costs, distributions and earnings.
Important facts for investors to verify
- How much future earnings depend on acquired-loan accretion, and whether core net interest margin can improve as accretion fades.
- Whether acquisition integration, branch sales and workforce reductions deliver expected savings without materially harming deposits, customer relationships or revenue.
- Credit trends in acquired portfolios: nonaccrual and criticized/classified loans rose, and the allowance ratio declined partly because acquired loans were initially recorded at fair value without an allowance.
- The realized impact of Durbin fee limits, regulatory compliance and stress-testing requirements on 2015 expenses and revenue.
- Funding mix, upcoming maturities and capacity to sustain dividends and repurchases; review the overdraft-fee litigation status and any subsequent resolution.