Old National Bancorp — Q3 2012 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2012. Old National is a regional bank operating primarily in Indiana, Illinois and Kentucky. On September 15, it acquired Indiana Community Bancorp (IBT) in an all-stock transaction valued at approximately $88.5 million, adding 17 banking centers. Comparisons with 2011 are affected by the July 2011 Integra Bank acquisition.
Key financial metrics
- Q3 earnings: Net income was $19.7 million, or $0.20 per diluted share, versus $16.8 million, or $0.18, a year earlier. For the first nine months, net income was $68.7 million, or $0.72 per diluted share, versus $50.2 million, or $0.53.
- Net interest income and margin: Net interest income was $74.2 million in Q3 and $224.4 million year to date, up 2.1% and 14.3%, respectively. Fully taxable-equivalent net interest margin was 4.09% for Q3 (3.96% in 2011) and 4.18% year to date (3.75% in 2011). Integra purchase-accounting accretion added 48 basis points to Q3 margin and 52 basis points year to date.
- Other income and expenses: Noninterest income was $40.9 million in Q3, down 13.6%, largely reflecting a $4.9 million negative adjustment to the FDIC indemnification asset; year-to-date income was $138.5 million, up 3.6%. Noninterest expense was $89.0 million in Q3, down 6.5%, but $266.3 million year to date, up 4.5%, including elevated OREO and acquisition-related costs. Q3 and nine-month provision for loan losses was $0.4 million and $2.8 million, respectively.
- Credit and asset quality: Net charge-offs were $0.4 million in Q3 and $6.1 million year to date, down from $4.6 million and $13.2 million in 2011. The allowance was $54.8 million, or 1.04% of loans excluding loans held for sale, versus $65.5 million and 1.35% a year earlier. Underperforming assets were $339.4 million, down from $367.0 million a year earlier; however, noncovered nonperforming loans rose to 3.59% of loans from 3.01%.
- Balance sheet and liquidity: Total assets were $9.38 billion, up 5.0% year over year; loans were $5.24 billion and deposits $7.22 billion. Cash and cash equivalents were $217.5 million. Short-term borrowings were $452.1 million and other borrowings $288.5 million. Shareholders’ equity was $1.19 billion. Operating cash flow for the first nine months was $58.0 million, down from $112.2 million; cash and cash equivalents decreased $5.3 million during the period.
- Capital: Consolidated Tier 1 leverage and total risk-based capital ratios were 8.78% and 14.06%. Old National Bank’s respective ratios were 7.79% and 12.59%; the bank exceeded well-capitalized thresholds. Q3 return on average common equity was 7.17%, and the efficiency ratio was 75.26%.
Material changes versus comparable periods
- Profitability improved, supported by higher net interest income, lower loan-loss provision year to date, and lower quarterly expense. Management attributed much of the earnings and margin benefit to Integra and related purchase-accounting accretion, which it expects to decline over time.
- Loan growth and higher deposits partly reflect the IBT acquisition. Year-end-to-date deposits increased 9.2%; noninterest-bearing demand and savings deposits grew, while time deposits declined. Wholesale funding was 9.3% of total funding, down from 10.3% a year earlier.
- Credit metrics improved in several respects, including lower net charge-offs and total underperforming assets. But criticized loans increased, troubled debt restructurings rose to $28.8 million from $13.0 million at year-end, and the allowance-to-loans ratio declined.
- The company recorded $86.7 million of goodwill in the IBT acquisition. Its preliminary purchase-price allocation included $496.2 million of loans and $784.6 million of deposits. Q3 included $4.9 million of acquisition and integration costs.
Outlook, risks, contingencies and unusual items
- Management expected another $1.0–$1.5 million of IBT acquisition and integration costs in Q4 2012. Branch consolidations were planned for Q4, with pending deposit/branch sales expected to close in Q1 2013; management anticipated $2.0–$2.5 million of related lease-termination and deconversion costs in Q4. It also cited continuing BSA/AML compliance costs.
- The bank is subject to an OCC consent order concerning its Bank Secrecy Act/Anti-Money Laundering program. Management expected to address the requirements, but failure to comply could result in restrictions or penalties and could affect merger and acquisition approvals.
- IBT’s assumed Pentegra pension plan is subject to a planned withdrawal effective December 31, 2012; the company recorded an estimated $11.7 million termination liability.
- Year-to-date OREO expense included $10.6 million of impairment on properties acquired in the Integra FDIC-assisted transaction; 80% of eligible covered-asset losses are reimbursable under the FDIC loss-sharing agreement. Management did not expect covered losses to exceed the agreement’s initial $275 million threshold.
- The available-for-sale portfolio included pooled trust preferred securities with $9.1 million fair value and $16.2 million unrealized losses. Management reported $1.1 million of year-to-date credit impairment charges on securities and said it did not intend, nor expect to be required, to sell securities in unrealized-loss positions.
- A class action concerning overdraft-fee practices was ongoing; class certification had been requested, and management said it could not estimate the probability or amount of loss. The filing also describes other ordinary-course litigation and notes that outcomes could affect results or cash flows in a particular period.
- Interest-rate modeling showed potential one-year net interest income declines of 2.82% and 5.80% under immediate rate increases of 200 and 300 basis points, respectively. Management cautioned that model outputs are not guarantees. No formal earnings guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether IBT integration costs, branch actions and expected savings track management’s stated timing and amounts.
- How quickly Integra purchase-accounting accretion declines and what that means for net interest margin and earnings.
- Trends in noncovered criticized, nonperforming and restructured loans, and whether the lower allowance ratio remains adequate.
- Progress on OCC consent-order requirements, associated compliance expenses and any impact on future acquisitions.
- Developments in the IBT pension withdrawal liability, FDIC loss-share recoveries, and overdraft-fee litigation.