Business Context and Reporting Period
Company: Old National Bancorp
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Overview: Old National Bancorp is a financial holding company headquartered in Evansville, Indiana, operating primarily through its community banking segment. The reporting period covers the second quarter of 2009, a time marked by the integration of 65 branches acquired from Citizens Financial Group in March 2009 and the repurchase of $100 million in preferred stock and warrants from the U.S. Treasury Department under the Capital Purchase Program (TARP).
Key Financial Metrics
| Metric | Q2 2009 (3 Months) | Q2 2008 (3 Months) | YTD 2009 (6 Months) | YTD 2008 (6 Months) |
|---|---|---|---|---|
| Net Interest Income | $60.8 million | $61.3 million | $120.0 million | $121.1 million |
| Provision for Loan Losses | $12.0 million | $5.7 million | $29.3 million | $27.6 million |
| Noninterest Income | $45.6 million | $43.5 million | $87.8 million | $90.4 million |
| Noninterest Expense | $86.8 million | $74.8 million | $164.2 million | $145.8 million |
| Net Income | $9.6 million | $19.5 million | $19.0 million | $38.8 million |
| Diluted EPS | $0.15 | $0.30 | $0.23 | $0.59 |
| Total Assets | $8.01 billion | $7.60 billion | $8.01 billion | $7.60 billion |
| Total Deposits | $5.80 billion | $5.37 billion | $5.80 billion | $5.37 billion |
| Shareholders' Equity | $634.6 million | $649.0 million | $634.6 million | $649.0 million |
| Net Interest Margin | 3.59% | 3.85% | 3.61% | 3.76% |
| Allowance for Loan Losses | $70.1 million | $62.1 million | $70.1 million | $62.1 million |
Material Changes vs. Prior Period
- Profitability Decline: Net income for Q2 2009 dropped 50.7% year-over-year to $9.6 million, driven by a 110% increase in the provision for loan losses and a 15.9% rise in noninterest expenses.
- Acquisition Impact: The March 2009 acquisition of Citizens Financial Group's Indiana retail network added approximately $427 million in deposits and $5.6 million in loans. This contributed to higher service charges and ATM fees but also increased occupancy and personnel expenses.
- Capital Structure Changes: The company repurchased $100 million of TARP preferred stock and $1.2 million of warrants in the first half of 2009, reducing shareholders' equity compared to the prior year-end balance which included these instruments.
- Asset Quality Deterioration: Nonperforming loans increased to $77.7 million (1.71% of total loans) from $68.1 million (1.43%) in the prior year. Net charge-offs for the six months ended June 30, 2009, totaled $26.3 million compared to $22.0 million in 2008.
- Impairment Charges: The company recorded a $10.3 million other-than-temporary impairment (OTTI) charge on six pooled trust preferred securities during the first six months of 2009.
Guidance, Outlook, and Risks
- Management Commentary: Management is focused on maintaining strong capital levels to absorb loan growth and pursue acquisition opportunities. They are actively reducing leverage by shrinking the investment portfolio and moving a significant portion of the lease portfolio to "held-for-sale" status, which may lower near-term margins.
- FDIC Assessment: A $4.0 million special assessment by the FDIC in Q2 2009 significantly impacted expenses. Management noted the possibility of further special assessments later in the year.
- Investment Portfolio Risks: The portfolio contains $189.8 million in non-agency mortgage-backed securities with $56.8 million in unrealized losses. Eight of these securities are rated below investment grade. Additionally, pooled trust preferred securities carry significant credit risk due to defaults and deferrals.
- Market Risk: Net interest margin compression is expected to continue due to the shift toward lower-yielding securities and higher average deposit balances. Interest rate risk modeling indicates the company is within policy limits for rising rate scenarios but requires close monitoring.
- Litigation: A pending lawsuit regarding the administration of trusts (filed in 2002) had a summary judgment reversed in July 2009. While management believes it has meritorious defenses, an adverse resolution could materially affect financial results.
Investor Verification Checklist
- Allowance Adequacy: Verify if the $70.1 million allowance for loan losses (1.69% of loans) is sufficient given the rising nonperforming loan ratio and the economic downturn.
- Security Valuation: Review the specific credit quality and cash flow projections for the non-agency mortgage-backed securities and pooled trust preferred securities to assess potential for further OTTI charges.
- FDIC Exposure: Monitor for announcements regarding additional FDIC special assessments that could further impact noninterest expenses.
- Lease Portfolio Sale: Track the progress of the $370.2 million finance lease portfolio held for sale to confirm the anticipated closing in Q3 2009 and the impact on liquidity.
- Capital Ratios: Confirm that the repurchase of TARP preferred stock has not pushed regulatory capital ratios below "well-capitalized" thresholds, despite the reduction in equity.