Old National Bancorp — Q1 2014 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2014, compared with Q1 2013; balance-sheet comparisons are primarily to December 31, 2013. Old National is a regional bank holding company with banking, insurance, and wealth management businesses, operating mainly in Indiana, southeast Illinois, western Kentucky, and southwestern Michigan.
Financial performance and condition
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior date |
|---|---|---|
| Net interest income | $83.5 million | $79.1 million, Q1 2013 |
| Net interest margin | 4.03%; 4.22% fully taxable-equivalent | 3.85%; 4.04% fully taxable-equivalent, Q1 2013 |
| Noninterest income | $40.6 million | $46.3 million, Q1 2013 |
| Noninterest expense | $88.3 million | $90.2 million, Q1 2013 |
| Net income / diluted EPS | $26.5 million / $0.26 | $23.9 million / $0.24, Q1 2013 |
| Operating cash flow | $55.5 million | $23.2 million, Q1 2013 |
| Total assets | $9.545 billion | $9.582 billion, Dec. 31, 2013 |
| Total loans / deposits | $5.072 billion / $7.258 billion | $5.083 billion / $7.211 billion, Dec. 31, 2013 |
| Cash and cash equivalents | $214.5 million | $206.7 million, Dec. 31, 2013 |
| Short-term / other borrowings | $410.1 million / $506.8 million | $462.3 million / $556.4 million, Dec. 31, 2013 |
| Shareholders’ equity | $1.185 billion | $1.163 billion, Dec. 31, 2013 |
Net interest income plus noninterest income, a simple reported revenue measure, was $124.0 million versus $125.4 million in Q1 2013. The efficiency ratio improved to 67.77% from 68.34%. The company reported net cash provided by operating activities of $55.5 million, investing activities of $19.6 million, and financing cash outflow of $67.3 million; cash increased $7.8 million during the quarter.
The bank subsidiary’s capital ratios were 7.87% Tier 1 leverage, 12.46% Tier 1 risk-based, and 13.34% total risk-based capital. The filing states Old National Bank exceeded regulatory minimums and met the well-capitalized definition. Subsidiaries reported $3.30 billion in available liquid funds and borrowing capacity, including pledged-collateral-based facilities; this is not the same as cash on hand.
Changes versus the prior comparable period
- Net income rose about 11%, primarily reflecting lower noninterest expense and higher net interest income. Net interest income increased 5.6%; the fully taxable-equivalent margin rose 18 basis points.
- Noninterest income fell 12.4%, largely from a larger reduction in income associated with the FDIC indemnification asset and the absence of the prior-year branch-sale premium. Insurance income and gains on foreclosed-property sales partly offset the decrease.
- Provision for loan losses declined to $37,000 from $845,000. Net recoveries were $0.4 million, compared with $2.1 million in net charge-offs in Q1 2013.
- Nonaccrual loans fell to $112.1 million from $210.5 million a year earlier and $128.4 million at year-end. Total criticized and classified assets were $362.7 million, down from $501.7 million a year earlier.
- Deposits grew 2.7% year over year, while wholesale borrowings declined 22.3%. Consumer loans grew, but overall loans were broadly flat as acquired covered loans continued to run off.
Outlook, risks, contingencies, and unusual items
- Management identified loan growth as a top priority and said growth in newer, higher-growth markets was encouraging. It expects accretion income from purchased credit-impaired loans to decline over time. The filing provides no specific earnings or revenue guidance.
- Tower Financial’s merger closed April 25, 2014, after quarter-end. The United Bancorp merger remained pending, with closing then expected early in the third quarter, subject to shareholder and regulatory approvals and other conditions.
- Interest-rate simulations showed a 100-basis-point immediate increase could reduce one-year net interest income by 0.14%; a 300-basis-point increase could reduce it by 1.18%. Two-year scenarios showed gains under rate increases. Management cautioned that model results depend on assumptions and are not guarantees.
- The FDIC indemnification asset declined to $65.7 million from $88.5 million at year-end; its first-quarter changes included $7.3 million of noninterest expense. The company said it did not expect covered losses to exceed the $275 million threshold for 80% FDIC reimbursement.
- A $100,000 other-than-temporary impairment was recorded on a limited partnership investment subject to the Volcker Rule; the company stated it would need to divest the investment by July 2015 unless extensions were granted.
- An Indiana class action alleges improper sequencing of debit-card and ATM transactions in assessing overdraft fees. The court denied Old National’s summary judgment motion after quarter-end; the company said the possible loss could not then be reasonably estimated. Management believed pending matters would not materially affect consolidated financial condition, but outcomes could affect results or cash flows in a future period.
- Key risks include credit deterioration, interest-rate and liquidity exposure, acquisition integration and execution, deposit or customer attrition, FDIC-assisted acquisition outcomes, competition, and economic conditions. Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting.
Investor verification points
- Track whether loan growth offsets runoff in covered and purchased credit-impaired loans, and whether accretion income declines as management expects.
- Review credit trends, especially nonaccrual and criticized/classified balances, troubled debt restructurings, and allowance adequacy.
- Assess the sustainability of earnings given lower noninterest income, FDIC indemnification-asset amortization, and acquisition-related costs.
- Confirm integration progress and realized benefits from Tower and United, including the United transaction’s approvals and closing.
- Monitor securities valuation and interest-rate exposure, including pooled trust preferred securities and the investment’s required divestiture.
- Follow developments in the overdraft-fee litigation and any change in the company’s ability to estimate or reserve for potential loss.