Old National Bancorp — Q2 2013 Form 10-Q
Business context and period. Unaudited results for the quarter and six months ended June 30, 2013; balance-sheet comparisons are primarily with December 31, 2012 and June 30, 2012. Old National is a regional banking company operating principally in Indiana, Illinois, and Kentucky. The September 2012 Indiana Community Bancorp (IBT) acquisition affects year-over-year comparisons.
Financial performance and condition
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $79.2m | $76.0m | $158.2m | $150.2m |
| Noninterest income | $46.2m | $48.5m | $92.6m | $97.7m |
| Noninterest expense | $86.9m | $86.0m | $177.1m | $177.3m |
| Net income | $28.5m | $27.2m | $52.4m | $48.9m |
| Diluted earnings per share | $0.28 | $0.29 | $0.52 | $0.52 |
- Margins and efficiency: Fully taxable-equivalent net interest margin was 3.97% in Q2 and 4.01% for the first half, down from 4.26% and 4.23%, respectively. Management attributed the decline mainly to asset yields falling faster than funding costs. The reported efficiency ratio improved to 66.52% from 69.20% in Q2 and to 67.44% from 70.06% for the first half.
- Credit costs: Provision for loan losses was a $3.7m credit in Q2 and a $2.8m credit for the first half, versus $0.4m and $2.4m of provision expense in the comparable 2012 periods. Q2 net charge-offs to average loans were 0.04%, versus 0.13%; the first-half rate was 0.10%, versus 0.24%. The allowance was $49.3m, or 0.95% of loans excluding loans held for sale.
- Balance sheet and liquidity: Total assets were $9.64bn; total loans were $5.18bn and deposits $6.84bn at June 30. Deposits fell $438.9m from year-end, partly reflecting the first-quarter branch deposit sale. Cash and cash equivalents were $216.8m. Cash from operations was $71.4m for the first half, compared with $123.0m in 2012; investing cash outflow was $391.6m and financing cash inflow was $273.0m. Cash declined $47.2m during the period.
- Borrowings and capital: Short-term borrowings were $530.4m and other borrowings $884.3m, versus $589.8m and $237.5m at year-end. The increase largely funded securities purchases ahead of the Bank of America branch transaction; the company reported that approximately $537m of short-term borrowings and FHLB advances were repaid when the deal closed in July. Old National’s Tier 1 leverage ratio was 8.80%; the bank subsidiary’s was 7.91%, above the 5.00% well-capitalized guideline.
Material changes versus comparable periods
- Net income increased, but Q2 diluted EPS declined because shares issued for the IBT acquisition increased the weighted-average share count. First-half EPS was unchanged at $0.52.
- Higher net interest income reflected IBT and balance-sheet growth, while lower noninterest income reflected FDIC indemnification adjustments, lower deposit service charges, and smaller securities gains. Q2 securities gains were $1.8m versus $7.0m in Q2 2012.
- Credit indicators improved overall: nonperforming loans to total loans, including covered loans, fell to 3.84% from 5.13% a year earlier. However, criticized loans increased, and nonperforming loans excluding covered loans were 2.83%, up from 2.38% a year earlier.
- Higher market interest rates caused available-for-sale securities to move from net unrealized gains of $64.0m at year-end 2012 to net unrealized losses of $26.2m at June 30, 2013. First-half other comprehensive loss was $54.8m; the company remained profitable but reported a comprehensive loss of $2.4m for the first half.
Outlook, risks, contingencies, and unusual items
- No specific earnings or financial guidance was provided. Management described loan demand as soft and cautioned that a steeper yield curve could slow refinancing activity and weaken loan growth. IBT purchased-loan accretion benefited Q2 margin by $6.1m, or 29 basis points, and management expects this income to decline over time.
- Management planned to consolidate 18 additional banking centers in Q3 2013. The acquisition of 24 Bank of America branches closed July 12, 2013, bringing approximately $575m of deposits and $5m of loans; the company paid a 2.94% deposit premium. Management expected assets to remain below $10bn after the transaction.
- Interest-rate simulations showed that an immediate 1% rate increase would reduce modeled net interest income by 2.89% over one year; a 3% increase would reduce it by 14.04%. Management said the temporary pre-acquisition borrowings contributed to sensitivity and expected the July repayment to improve the position. These are model estimates, not forecasts of actual results.
- Key risks include credit deterioration, interest-rate and securities-market volatility, deposit and loan growth, acquisition integration, and uncertainty in FDIC loss-sharing recoveries. The FDIC covered-asset agreements reimburse 80% of specified losses up to $275m; management did not expect covered losses to exceed that threshold.
- The company reported a BSA/AML consent order requiring further risk assessment, customer due diligence, transaction monitoring, independent testing, and staffing and training improvements; related professional fees increased. An Indiana class action concerning overdraft transaction sequencing had been certified, and a summary-judgment motion was pending. Management said it could not estimate the probability or amount of a material loss. Routine litigation remained subject to uncertainty.
- Other notable items: a $1.0m loss on extinguishing FHLB debt, a $14m contribution to complete withdrawal from the acquired Pentegra pension plan (treated in purchase accounting, with no earnings impact), and $11.6m of finance leases transferred to held-for-sale status, with a $0.2m loss recognized.
Important facts for investors to verify
- Whether the post-quarter branch acquisition, deposit inflows, and repayment of temporary borrowings developed as management expected.
- Whether margin pressure and the expected decline in purchased-loan accretion are offset by core loan growth and lower funding costs.
- Whether credit quality continues to improve, particularly criticized/classified loans, uncovered nonperforming loans, and IBT acquired credits.
- How rising rates affect securities values, accumulated other comprehensive income, and realized earnings; review the substantial unrealized losses in pooled trust preferred securities.
- Progress and costs under the BSA/AML consent order, and developments in the overdraft-fee class action.
- Interim results are unaudited and may not represent full-year results; management estimates for loan losses, acquired-loan cash flows, and FDIC indemnification assets are subject to change.