Business Context and Reporting Period
Company: Old National Bancorp
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Overview: Old National Bancorp is a financial holding company operating primarily in Indiana, Illinois, and Kentucky. The quarter was marked by the completion of the acquisition of the Indiana retail branch banking network of Citizens Financial Group on March 20, 2009, adding 65 branches. The company also repurchased all $100 million of preferred stock issued to the U.S. Treasury under the Capital Purchase Program (CPP) on March 31, 2009.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 | Dec 31, 2008 |
|---|---|---|---|
| Net Income | $9.4 million | $19.3 million | $6.6 million |
| Net Income Available to Common | $5.5 million | $19.3 million | N/A |
| Earnings Per Share (Basic) | $0.08 | $0.29 | N/A |
| Total Assets | $8.36 billion | $7.72 billion | $7.87 billion |
| Total Loans | $4.62 billion | $4.68 billion | $4.76 billion |
| Total Deposits | $5.85 billion | $5.35 billion | $5.42 billion |
| Net Interest Income | $59.2 million | $59.8 million | N/A |
| Net Interest Margin | 3.63% | 3.68% | 3.96% (Q4 2008) |
| Provision for Loan Losses | $17.3 million | $21.9 million | N/A |
| Allowance for Loan Losses | $71.8 million | $72.3 million | $67.1 million |
| Shareholders' Equity | $631.8 million | $675.4 million | $730.9 million |
| Cash and Cash Equivalents | $174.1 million | $301.6 million | $193.0 million |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 51.4% year-over-year to $9.4 million. This was driven by a $3.0 million charge for direct acquisition costs, a $2.4 million other-than-temporary impairment (OTTI) charge on securities, and lower noninterest income, partially offset by net securities gains of $5.6 million.
- Asset Growth: Total assets increased 8.2% year-over-year to $8.36 billion, primarily due to the $424.7 million asset increase from the Citizens Financial acquisition.
- Loan Portfolio Contraction: Total loans decreased slightly year-over-year due to weak loan demand and conservative underwriting, particularly in commercial real estate. However, the portfolio grew slightly quarter-over-quarter due to the acquisition.
- Deposit Growth: Total deposits increased 9.5% year-over-year, driven by the acquisition of $427.6 million in deposits from Citizens Financial.
- Capital Structure: Shareholders' equity decreased from December 2008 levels primarily due to the repurchase of the $100 million TARP preferred stock and the payment of common dividends.
- Credit Quality: Nonaccrual loans increased to $77.4 million (1.67% of total loans) from $64.0 million at year-end 2008. Net charge-offs were $12.6 million, an increase from $6.1 million in Q1 2008.
Guidance, Outlook, and Risks
- Dividend Reduction: On April 23, 2009, the company announced a reduction of the second-quarter dividend to $0.07 per share to conserve capital amidst the challenging economic environment.
- Acquisition Integration: Management plans to close eight overlapping banking centers from the Citizens Financial acquisition, which could result in $8.0 to $10.0 million in additional costs in 2009.
- Capital Strategy: The company intends to repurchase the warrant issued to the Treasury Department (covering up to 813,008 shares) in the second quarter of 2009, completing its exit from the Capital Purchase Program.
- Key Risks:
- Credit Risk: Continued deterioration in the economy and real estate markets could lead to higher loan losses. The company remains cautious regarding consumer, construction, and commercial real estate sectors.
- Market Risk: Interest rate sensitivity remains a focus; the company is asset-sensitive, meaning rising rates could benefit net interest income, but falling rates could compress margins.
- Securities Portfolio: Significant unrealized losses exist in the investment portfolio ($111.8 million in available-for-sale securities), primarily due to interest rate changes and market illiquidity. A $2.4 million OTTI charge was recognized in Q1 2009.
Investor Verification Checklist
- Acquisition Costs: Verify the timeline and total impact of the $8.0–$10.0 million in expected integration costs from the Citizens Financial acquisition.
- Allowance Adequacy: Assess the sufficiency of the $71.8 million allowance for loan losses given the rise in nonaccrual loans to $77.4 million and the $12.6 million in net charge-offs.
- Securities Impairment: Monitor the $111.8 million in unrealized losses on available-for-sale securities and the potential for further OTTI charges, particularly in the $209.2 million non-agency mortgage-backed securities portfolio.
- Capital Ratios: Confirm that the repurchase of TARP preferred stock and the dividend reduction have maintained the bank subsidiary's "well-capitalized" status under regulatory guidelines.
- Loan Officer Misconduct: Review the status of the $6.8 million in nonaccrual loans associated with the former loan officer misconduct in the Indianapolis market.