Old National Bancorp — Q1 2013 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012 and March 31, 2012. Old National is a regional banking company operating primarily in Indiana, Illinois and Kentucky. The quarter reflects the September 2012 Indiana Community Bancorp acquisition and the first-quarter sale of nine former Integra branches.
Financial performance and condition
- Earnings: Net income was $23.9 million, up 10.2% from $21.7 million; diluted EPS was $0.24 versus $0.23. Return on average common equity was 8.00%, compared with 8.34%.
- Income and margins: Net interest income rose 6.4% to $79.1 million. Fully taxable-equivalent net interest income was $83.0 million versus $77.3 million, while the corresponding margin narrowed to 4.04% from 4.20%. Noninterest income fell 5.7% to $46.3 million; noninterest expense declined 1.2% to $90.2 million. The reported efficiency ratio improved to 68.34% from 70.88%.
- Credit costs and quality: Loan-loss provision was $0.8 million versus $2.1 million. Net charge-offs were $2.1 million, or 0.17% of average loans, versus $4.2 million and 0.36%. Nonperforming loans including covered loans were 4.30% of total loans, down from 5.85% a year earlier. Excluding covered loans, the ratio was 3.23%, up from 2.77%. Total underperforming assets were $256.8 million, down from $305.0 million at March 2012. The allowance for loan losses was $53.5 million, or 1.05% of loans excluding loans held for sale.
- Balance sheet and funding: Assets were $9.674 billion, up 12.7% year over year and 1.4% from year-end. Total loans were $5.112 billion; deposits were $7.066 billion. Total liabilities were $8.474 billion and shareholders’ equity was $1.200 billion. Short-term borrowings were $644.0 million and other borrowings $536.8 million; wholesale funding growth partly financed securities purchases ahead of the proposed branch acquisition.
- Cash flow and liquidity: Operating activities provided $29.7 million; investing activities used $419.8 million and financing activities provided $280.0 million. Cash and equivalents declined $110.2 million to $153.9 million. The filing reported $3.565 billion of available funds at subsidiaries, including available liquidity and borrowing capacity.
- Capital: Old National Bancorp’s Tier 1 leverage ratio was 8.71%; Old National Bank’s was 8.00%, with a 13.96% total risk-based capital ratio. The bank exceeded regulatory well-capitalized thresholds.
Material changes and unusual items
- Net interest income benefited from the Indiana Community Bancorp acquisition, growth in residential mortgages and lower-cost funding. Purchased-loan accretion contributed $5.1 million, or 25 basis points, to net interest margin; management expected this accretion to decline over time.
- Noninterest income included a $2.2 million deposit-premium gain from the sale of nine branches. A $2.3 million negative change in the FDIC indemnification asset compared with $4.8 million of income in Q1 2012, contributing to lower noninterest income.
- Other real estate owned expense fell to $1.0 million from $9.8 million. Salaries and benefits rose to $51.0 million from $46.0 million, while professional fees increased, partly due to regulatory compliance work. A $0.7 million loss was recorded on termination of a $25 million FHLB advance.
- Other comprehensive income was negative $9.0 million, mainly reflecting a decline in unrealized gains on available-for-sale securities; accumulated other comprehensive income fell to $20.8 million from $29.8 million at year-end.
Outlook, commentary and risks
- Management cited an aspirational efficiency-ratio target of 65% and continued focus on revenue growth and operating efficiency; the filing provides no formal earnings guidance.
- Old National agreed to acquire 24 Bank of America branches in northern Indiana and southwest Michigan. At March 2013, associated deposits and loans were about $745.2 million and $8.1 million; closing was expected in Q3 2013, subject to regulatory approval. The company said it expected to remain below $10 billion in assets.
- Interest-rate modeling indicated that an immediate 1% rate increase could reduce one-year net interest income by 2.13%; a 3% increase could reduce it by 12.42%. Management said modeled exposures remained within risk tolerances but were being monitored closely.
- The bank remained subject to a June 2012 BSA/AML consent order, with required remediation and increased professional fees. A class action concerning overdraft-fee transaction sequencing was certified in March 2013; Old National sought an interlocutory appeal, and proceedings were stayed pending review.
- Investment risks include pooled trust preferred securities with $8.6 million fair value and $14.6 million in unrealized losses. No Q1 2013 impairment charge was recorded, and management said it did not intend to sell securities in unrealized-loss positions. Results also remain exposed to economic and credit conditions, interest rates, acquisition integration, FDIC loss-share estimates and litigation outcomes.
Important facts for investors to verify
- Whether the proposed branch acquisition closed as expected, its final deposit and loan balances, and its effect on funding, assets and capital.
- Whether purchased-loan accretion and other acquisition benefits persist as expected, and how they affect margin and earnings.
- Trends in nonperforming loans and criticized/classified assets, particularly excluding covered loans, and the adequacy of loan-loss reserves.
- Progress and costs under the BSA/AML consent order, and subsequent developments in the overdraft-fee litigation.
- Changes in securities valuations and impairment assumptions, FDIC indemnification recoveries, and sensitivity to higher interest rates.