Old National Bancorp — 2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010; filed February 25, 2011. This is an annual report, not a standalone 2010 fourth-quarter filing. Old National is an Indiana-based financial holding company serving primarily Indiana, Illinois and Kentucky through community banking, treasury and related financial businesses.
Financial performance and condition
| Metric | 2010 | 2009 |
|---|---|---|
| Net income available to common shareholders | $38.2 million | $9.8 million |
| Diluted earnings per share | $0.44 | $0.14 |
| Net interest income | $218.4 million | $231.4 million |
| Net interest margin, tax-equivalent | 3.40% | 3.50% |
| Provision for loan losses | $30.8 million | $63.3 million |
| Noninterest income | $170.2 million | $163.5 million |
| Noninterest expense | $314.3 million | $339.0 million |
| Efficiency ratio | 78.18% | 81.54% |
| Return on average assets | 0.50% | 0.17% |
| Net charge-offs / average loans | 0.75% | 1.40% |
- Balance sheet at year-end: Assets were $7.264 billion, down 9.3%; loans were $3.743 billion, down from $3.835 billion; deposits were $5.463 billion, down from $5.903 billion. Shareholders’ equity was $878.8 million, or 12.1% of assets.
- Credit reserves and problem assets: Allowance for loan losses was $72.3 million, or 1.93% of loans, versus $69.5 million and 1.81% a year earlier. Nonperforming loans were 1.90% of loans, compared with 1.75%; underperforming assets totaled $77.1 million, broadly stable year over year.
- Funding and debt: Short-term borrowings were $298.2 million and other borrowings $421.9 million, versus $331.1 million and $699.1 million, respectively, in 2009. The company prepaid $75 million of FHLB advances and $49 million of long-term repurchase agreements, and redeemed $100 million of 8% trust preferred securities. A $150 million subordinated bank note was due in 2011.
- Liquidity and cash flow: Cash and cash equivalents were $251.6 million at year-end, versus $497.3 million. Operating cash flow was $96.5 million; investing activities provided $436.6 million and financing activities used $778.8 million. Old National Bank reported $712 million of potential Federal Reserve discount-window borrowing capacity.
- Capital: Old National Bancorp’s Tier 1 leverage ratio was 9.01%; Old National Bank’s was 7.37%. The bank exceeded regulatory minimums and met the regulatory definition of well-capitalized.
Changes versus 2009
- Profit improved substantially, primarily as the provision for loan losses fell by $32.5 million and noninterest expense declined by $24.7 million. Management also reduced full-time-equivalent staffing by 11.4%.
- Net interest income fell 5.6% and the tax-equivalent net interest margin declined 10 basis points. Lower loan balances and asset yields outweighed reductions in funding costs; average earning assets fell 5.4%.
- Noninterest income rose 4.1%, including securities gains, while deposit service-charge income and mortgage banking revenue declined. Securities impairment charges recognized in earnings fell to $3.9 million from $24.8 million.
- Net charge-offs declined to $28.0 million from $60.8 million. However, nonaccrual loans increased to $70.9 million from $67.0 million, and classified loans rose to $174.3 million from $157.1 million.
- Deposits and wholesale funding both contracted as the company reduced higher-cost time deposits and borrowings. Noninterest-bearing demand deposits increased year over year.
Outlook, risks and notable items
- Management expected slow economic improvement in 2011 and did not anticipate better loan demand until unemployment declined and confidence in the recovery became sustained. It planned continued expense control and process improvement; the filing gives no numerical earnings or revenue guidance.
- Management expected Dodd-Frank provisions permitting interest on demand deposits to increase deposit costs; the law’s overall financial effects remained uncertain. The company also disclosed potential future capital implications from changes to trust-preferred capital treatment.
- Interest-rate exposure is material: management described the balance sheet as historically asset-sensitive, with margin potentially benefiting from sustained rate increases and weakening in sustained rate declines. The company reported that rate-risk models were within applicable green-zone policy limits for the scenarios discussed.
- Key risks include weak regional economic conditions, commercial real estate and borrower credit quality, interest-rate changes, securities impairment, competition, regulatory changes, and operational, fraud and cybersecurity risks. The portfolio included $126.8 million of non-agency mortgage-backed securities and $8.4 million of pooled trust preferred securities at fair value, both with significant unrealized losses.
- After year-end, Old National completed its all-stock acquisition of Monroe Bancorp on January 1, 2011, issuing approximately 7.6 million shares valued at $90.1 million. Monroe reported $808.1 million of assets and $711.5 million of deposits; purchase-accounting valuations were incomplete at filing.
- Two significant legal matters remained unresolved: a trust-administration lawsuit, for which potential loss could not be estimated and no liability was recorded, and a November 2010 class action challenging checking-account practices, for which loss probability and amount could not yet be determined.
- Old National declared $0.28 per common share in dividends for 2010, down from $0.44 in 2009. Subsequent to year-end, the board authorized repurchase of up to 2.25 million shares through January 31, 2012.
Most important facts for investors to verify
- Whether credit quality continues to improve: track nonaccrual and classified loans, commercial real estate performance, charge-offs and reserve adequacy.
- Whether earnings recovery is sustainable without relying chiefly on lower credit provisions, cost reductions and securities-related gains.
- How loan demand, asset yields, deposit pricing and interest-rate movements affect net interest income and margin.
- The final purchase accounting, integration results, dilution and expected contribution from the Monroe Bancorp acquisition.
- Any material developments or estimated exposure in the pending trust and checking-account litigation.
- The effect of regulatory changes on deposit costs, fee income, capital requirements and dividend capacity.
Assurance: Crowe Horwath LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also concluded controls were effective as of December 31, 2010.