Old National Bancorp — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Dollar amounts are in millions unless otherwise noted. Comparisons are with Q1 2011 for results and March 31, 2011 or December 31, 2011 for balance-sheet measures, as indicated.
Business context
Old National is a regional bank holding company operating primarily in Indiana, Illinois and Kentucky. Results reflect the July 2011 FDIC-assisted acquisition of Integra Bank; therefore, year-over-year comparisons include a larger business and are not fully like-for-like.
Financial performance and condition
- Earnings: Net income was $21.7 million, up from $16.4 million; diluted EPS was $0.23 versus $0.17. Return on average common equity was 8.34%.
- Revenue and margin: Net interest income increased 21.0% to $74.3 million. Noninterest income rose 14.7% to $49.1 million. Together, these totaled $123.4 million, compared with $104.2 million. Fully taxable-equivalent net interest margin was 4.20%, up from 3.62%.
- Expense and efficiency: Noninterest expense increased 14.2% to $91.3 million. The efficiency ratio improved to 70.88% from 73.58%. Income before taxes was $30.1 million, up from $21.0 million; the effective tax rate rose to 27.7% from 21.6%.
- Credit costs: Provision for loan losses declined to $2.1 million from $3.3 million, while net charge-offs increased to $4.2 million from $2.9 million; annualized net charge-offs were 0.36% of average loans versus 0.27%. The allowance was $55.9 million, or 1.20% of loans excluding loans held for sale, compared with $72.7 million and 1.74% a year earlier.
- Assets, loans and deposits: Total assets were $8.58 billion, up 6.1% year over year and down 0.3% from year-end. Total loans were $4.66 billion, down from $4.77 billion at year-end; deposits were $6.67 billion, up 10.0% year over year. Cash and cash equivalents were $160.4 million.
- Debt and capital: Short-term borrowings were $352.8 million and other borrowings were $289.5 million. Consolidated Tier 1 leverage and total risk-based capital ratios were 8.78% and 15.41%; management stated the bank met the well-capitalized regulatory definition. Shareholders’ equity was $1.05 billion.
- Cash flow: Operating cash flow was $13.5 million versus $57.0 million. Investing activities used $50.9 million, while financing activities used $25.1 million. Cash and cash equivalents decreased $62.4 million during the quarter.
Material changes and unusual items
- Management attributed earnings growth primarily to Integra and related purchase-accounting benefits. Integra-related loan-mark accretion benefited Q1 2012 net interest margin by 52 basis points; management expects this benefit to decline over time.
- Noninterest income included a $4.8 million adjustment to the FDIC indemnification asset. Management linked the adjustment mainly to increased reimbursement claims following lower valuations of covered other real estate owned (OREO).
- Noninterest expense included $9.8 million of OREO expense, compared with $0.3 million a year earlier. The filing cites approximately $10.2 million of covered OREO write-downs; FDIC loss sharing mitigates eligible losses, but not all expenses qualify for reimbursement.
- Nonaccrual loans were $271.5 million, versus $121.4 million a year earlier, largely reflecting Integra’s acquired covered loans. Underperforming assets were $305.0 million versus $136.3 million a year earlier, but below $340.5 million at year-end. Excluding covered assets, nonperforming loans were 2.77% of loans, compared with 2.90% a year earlier.
- Q1 included $0.1 million of credit impairment on non-agency mortgage-backed securities. Pooled trust preferred securities had a fair value of $7.8 million and unrealized losses of $17.7 million; no impairment was recognized on these securities in the quarter.
Outlook, risks and contingencies
- Management said a prolonged, slow economic recovery could constrain revenue growth and that weak local loan demand remained a headwind. It cited initiatives to grow core revenue, improve processes and reduce costs.
- Interest-rate sensitivity modeling indicated that an immediate 1% rate increase would raise one-year net interest income by 0.54%, while increases of 2% and 3% would reduce it by 2.16% and 4.83%, respectively. Management cautioned that model outputs are not guarantees of actual results.
- The planned all-stock acquisition of Indiana Community Bancorp, valued at approximately $79.2 million, was expected to close in Q3 2012, subject to regulatory approvals.
- The filing identifies credit, interest-rate, liquidity, securities valuation and acquisition-integration risks. It also reports a checking-account-practices class action for which management could not estimate the likelihood or amount of loss; a separate trust-administration case was settled in Q1 using a previously accrued $2 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much future earnings depend on Integra purchase-accounting accretion and the FDIC indemnification asset, and how quickly those benefits may diminish.
- Whether covered and non-covered credit quality, OREO valuations, charge-offs and FDIC reimbursements continue to improve; review the loss-sharing thresholds and reimbursement eligibility.
- Whether core revenue growth and expense control can offset weak loan demand and elevated OREO costs.
- Progress and final terms of the Indiana Community Bancorp transaction, including regulatory approval and integration costs.
- Potential outcomes of the pending class action and the company’s exposure to investment securities with significant unrealized losses.