Old National Bancorp — 2012 Form 10-K
Business context and reporting period. Old National Bancorp is an Indiana-based financial holding company providing community banking and related wealth management, insurance and investment services, principally in Indiana, Illinois and Kentucky. This annual report covers the fiscal year ended December 31, 2012; the filing also reports fourth-quarter results.
Financial performance and position
Unless noted otherwise, dollar amounts are in millions. Comparisons are with 2011.
| Metric | 2012 | 2011 |
|---|---|---|
| Net interest income | $308.8 | $272.9 |
| Noninterest income | $189.8 | $182.9 |
| Provision for loan losses | $5.0 | $7.5 |
| Noninterest expense | $365.8 | $348.5 |
| Net income | $91.7 | $72.5 |
| Diluted earnings per share | $0.95 | $0.76 |
| Return on average assets | 1.04% | 0.86% |
| Return on average common equity | 8.34% | 7.24% |
| Net interest margin, taxable-equivalent basis | 4.23% | 3.87% |
| Efficiency ratio | 71.83% | 73.80% |
| Net charge-offs / average loans | 0.17% | 0.49% |
- Fourth quarter: Net income was $23.0 million and diluted EPS was $0.23, versus $22.2 million and $0.23 in Q4 2011.
- Balance sheet at year-end: Assets were $9.54 billion, loans $5.20 billion, deposits $7.28 billion and shareholders’ equity $1.19 billion. Assets increased 10.8% and deposits 10.1%, primarily reflecting the Indiana Community Bancorp acquisition.
- Credit: The allowance for loan losses was $54.8 million, or 1.05% of loans, compared with $58.1 million, or 1.22%, a year earlier. Underperforming assets were $301.9 million, down from $340.5 million; excluding FDIC-covered assets, the underperforming-assets-to-loans-and-foreclosed-property ratio increased to 3.55% from 3.01%.
- Cash flow: Operating activities provided $114.3 million, compared with $143.1 million. Investing activities used $11.7 million; financing activities used $61.4 million. Cash and cash equivalents rose $41.2 million to $264.1 million.
- Debt and liquidity: Short-term borrowings were $589.8 million and other borrowings $237.5 million at year-end. The filing reports $3.54 billion of available subsidiary funds, including unencumbered securities and borrowing capacity, as distinct from cash. The Bank’s Tier 1 leverage ratio was 7.57%; its total risk-based capital ratio was 13.14%, above the stated 10% well-capitalized threshold.
- Shareholder returns: The 2012 dividend was $0.36 per share. In January 2013, the Board raised the quarterly dividend from $0.09 to $0.10 per share and authorized a new repurchase program of up to 2.0 million shares.
Material changes versus the prior year
- Net income rose $19.2 million, or about 26%, and diluted EPS increased $0.19. Management attributed the improvement mainly to acquired-loan accretion, lower-cost funding, modest organic loan growth and improved credit.
- Net interest income increased 13.2%; the taxable-equivalent margin rose 36 basis points. Purchased-loan accretion contributed 75 basis points to margin, versus 50 basis points in 2011; management expected this benefit to decline over time.
- Provision expense fell as charge-offs and assessed loss factors declined. Net charge-offs decreased to $8.3 million from $21.7 million.
- Noninterest expense increased 4.9%, including acquisition and integration costs, higher incentive compensation and a sharp increase in other-real-estate-owned expense to $17.1 million from $2.0 million. The latter largely reflected valuation reductions on covered property; eligible covered-asset costs and losses are subject to FDIC reimbursement.
- Indiana Community Bancorp was acquired on September 15, 2012 in an all-stock transaction valued at approximately $88.5 million. The acquisition added 17 banking centers and approximately $784.6 million of deposits at fair value.
Outlook, risks and unusual items
- Management said the interest-rate environment would continue to challenge 2013 revenue growth. Its stated priorities were to increase revenue, reduce expenses, pursue risk-conscious loan growth and consider strategic partnerships. No specific numerical earnings or revenue guidance was provided.
- After year-end, Old National announced an agreement to acquire 24 Bank of America branches in northern Indiana and southwest Michigan. The transaction was expected to close in the third quarter of 2013, subject to regulatory approval.
- Old National Bank remained subject to an OCC consent order concerning its Bank Secrecy Act/anti-money-laundering program. The filing states the order required ongoing controls, testing, training and customer/transaction monitoring; noncompliance could bring penalties or operating and expansion restrictions and could affect acquisition approvals. The OCC had not identified systemic undetected criminal activity or money laundering, and the order did not call for a civil monetary penalty.
- FDIC loss sharing on Integra-acquired covered assets reimburses 80% of losses up to $275 million, with a zero-reimbursement tranche above that level through $467.2 million and 80% reimbursement above that. Management did not expect losses to exceed $275 million at year-end 2012.
- Investment risks included $9.4 million fair value of pooled trust preferred securities with $15.5 million of unrealized losses, and non-agency mortgage-backed securities with below-investment-grade ratings. The company recorded $1.4 million of securities impairment charges in 2012.
- The company recorded an estimated $13.4 million liability after giving notice to withdraw from the acquired Pentegra defined-benefit plan. A checking-account overdraft-fee class action remained unresolved; management could not estimate the likelihood or amount of loss. A separate trust-beneficiary lawsuit was settled in 2012 for the previously accrued $2.0 million.
- Interest-rate simulations indicated a 7.0% one-year net-interest-income decline under an immediate 300-basis-point rate increase; results are model-based, not forecasts. The filing also cites economic, credit, funding, regulatory, acquisition-integration and operational risks.
Key facts investors should verify
- Whether improved credit trends persist, particularly given the lower allowance ratio and the increase in noncovered underperforming-asset ratios.
- How much of 2012 earnings and net interest margin depended on purchased-loan accretion, and how quickly that contribution is expected to run off.
- Progress on the OCC consent order, including any regulatory restrictions, added compliance costs or effect on acquisition plans.
- Realized FDIC reimbursements, covered-asset losses and the assumptions supporting the $115.7 million indemnification asset.
- Integration costs, expected benefits and purchase-accounting assumptions for Indiana Community Bancorp, and execution and regulatory status of the proposed branch acquisition.
- Liquidity and funding composition, including short-term borrowings, deposit behavior and the availability of pledged-collateral borrowing capacity.
- Potential additional losses or valuation changes in impaired securities, other real estate owned, pension obligations and pending litigation.
The independent auditor issued an unqualified opinion on the consolidated financial statements and concluded that internal control over financial reporting was effective as of December 31, 2012.