Old National Bancorp — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016, with quarterly results also provided. Old National is a Midwest community banking company operating primarily in Indiana, Kentucky, Michigan, and Wisconsin. It reported one community banking segment and operated 203 banking centers at year-end.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Net interest income | $402.7 million | $366.1 million |
| Noninterest income | $252.8 million | $230.6 million |
| Net income | $134.3 million | $116.7 million |
| Diluted earnings per share | $1.05 | $1.00 |
| Net interest margin, taxable-equivalent basis | 3.58% | 3.72% |
| Efficiency ratio | 65.82% | 68.65% |
| Net charge-offs / average loans | 0.04% | (0.02%) |
| Cash provided by operating activities | $82.1 million | $123.8 million |
- Total revenue on the filing’s reported basis was $655.5 million, up 10%; noninterest expense rose 5% to $454.1 million. Return on average assets was 0.98%, and return on average common equity was 7.84%.
- Year-end assets were $14.86 billion, loans $9.01 billion, deposits $10.74 billion, borrowings $2.15 billion, and shareholders’ equity $1.81 billion. These balance-sheet increases largely reflect the Anchor acquisition.
- The allowance for loan losses was $49.8 million, or 0.55% of loans, versus $52.2 million, or 0.75%, in 2015. Underperforming assets were $164.7 million; nonaccrual loans were $131.4 million.
- Old National Bank’s year-end capital ratios included CET1 of 11.82%, total capital of 12.35%, and Tier 1 leverage of 8.55%. The bank was reported as well capitalized.
- Subsidiaries reported $2.82 billion in available funds, including cash, unencumbered securities, and borrowing capacity. Total deposits grew 28% year over year; wholesale borrowings were 17% of total funding, down from 19%.
Fourth-quarter detail
For Q4 2016, net income was $33.5 million and diluted EPS was $0.25, versus $32.0 million and $0.27 in Q4 2015. Q4 2016 net interest income was $109.9 million; the provision for loan losses was a $1.8 million benefit. Noninterest income was $62.8 million and noninterest expense was $126.3 million.
Material changes versus the prior comparable period
- On May 1, 2016, Old National acquired Anchor for a total purchase price of $459.8 million, including $273.6 million in stock and $186.2 million in cash. Anchor added 46 banking centers and approximately $1.85 billion of deposits at acquisition.
- Loans increased 30% to $9.01 billion, while deposits increased 28% to $10.74 billion. The company reported organic loan growth of more than 7%, including loans held for sale.
- Net interest income rose 10%, principally from higher average earning assets, while the taxable-equivalent margin declined 14 basis points. Excluding acquired-loan accretion, the margin was 3.09% versus 3.11% in 2015.
- Noninterest income included a $41.9 million pretax gain from selling ONB Insurance Group in May; the after-tax gain was $17.6 million. Insurance premiums and commissions fell following the sale. In 2015, a $15.6 million gain arose from branch divestitures.
- Expenses included a $9.8 million pension settlement loss following termination of the frozen retirement plan, as well as Anchor integration costs. The company said the pension termination should eliminate future annual expense associated with that plan.
- The FDIC loss-share agreements were terminated in June 2016. The FDIC paid $8.7 million as consideration; after related adjustments, Old National recorded a $0.2 million pretax gain. Future gains and losses on the formerly covered assets are now borne fully by Old National.
Outlook, commentary, risks, and contingencies
- Management cited a potentially improving commercial loan pipeline and said additional rate increases could benefit net interest income because assets were expected to reprice faster and with more margin than liabilities. These are expectations, not formal earnings guidance.
- Management’s 2017 priorities were core revenue growth, operating leverage, expense management, and prudent capital use. It planned to slow indirect consumer loan originations, which it described as the least profitable consumer lending activity.
- Key risks include interest-rate and margin sensitivity, credit deterioration, commercial real estate exposure, acquisition integration and dilution, deposit and wholesale-funding pressures, regulatory costs, cybersecurity and vendor risks, competition, and weakness in the company’s Midwest markets.
- Available-for-sale securities had net unrealized losses of $61.5 million at year-end, compared with $5.8 million a year earlier, mainly reflecting higher long-term rates. Management said it did not intend, and did not expect to be required, to sell securities in unrealized-loss positions. Pooled trust preferred securities had a fair value of $8.1 million and an unrealized loss of $8.9 million.
- Anchor integration costs of $15.9 million had been expensed through year-end, with additional costs expected in future periods. The filing also identifies estimates in acquired-loan valuations, loan-loss reserves, goodwill, and deferred tax assets as areas where actual outcomes may differ from assumptions.
- The company reported no material litigation and believed pending matters would not materially affect consolidated financial condition, while noting that outcomes could affect results or cash flows in a particular future period. It reported effective internal control over financial reporting; the independent auditor issued an unqualified opinion.
Important facts for investors to verify
- How much of 2016 earnings growth reflects the ONB Insurance sale gain and Anchor, rather than recurring organic operations.
- Whether Anchor integration produces expected cost savings, loan and deposit retention, and organic growth, and how the related share issuance affects per-share returns.
- Whether net interest margin stabilizes or improves as rates and deposit costs reprice; monitor acquired-loan accretion, which management expects to decline over time.
- Whether credit quality and reserve coverage remain adequate as loans grow and the allowance-to-loans ratio is lower, particularly for acquired Anchor loans and commercial real estate.
- Whether funding costs, liquidity, capital ratios, and the $895 million of time deposits maturing in 2017 remain manageable.
- How securities unrealized losses, the termination of FDIC loss protection, and the 2017 branch consolidations affect capital, earnings, and operating costs.