Old National Bancorp — Q1 2015 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2015, with balance-sheet comparisons to December 31, 2014 and March 31, 2014. Old National is a regional banking and insurance company operating primarily in Indiana, southeastern Illinois, western Kentucky and southwestern Michigan. Recent acquisitions of Tower, United, LSB and Founders materially expanded the business; Founders was acquired January 1, 2015.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net interest income | $91.0 million | $83.5 million |
| Noninterest income | $55.3 million | $40.6 million |
| Noninterest expense | $116.2 million | $88.3 million |
| Provision for loan losses | $1 thousand | $37 thousand |
| Income before taxes | $30.1 million | $35.8 million |
| Net income | $20.9 million | $26.5 million |
| Diluted earnings per share | $0.18 | $0.26 |
| Net interest margin, fully taxable-equivalent | 3.70% | 4.22% |
| Efficiency ratio | 76.27% | 67.77% |
Net interest income rose 9.0%, while noninterest income increased 36.3%. Revenue growth reflected acquisitions, higher wealth-management and mortgage-banking fees, securities gains, and a less negative FDIC indemnification-asset adjustment. These gains were outweighed by a 31.6% increase in noninterest expense, including acquisition-related operating costs and restructuring charges. The effective tax rate was 30.6%, versus 25.9%.
Average earning assets grew 25.0% year over year to $10.35 billion, primarily from acquisitions. However, fully taxable-equivalent net interest margin fell 52 basis points. Management attributed the decline mainly to lower acquired-loan accretion and fewer nonaccrual-loan payoffs; it expects acquired-loan accretion income to decline over time.
Operating cash flow was $3.1 million, compared with $55.5 million in Q1 2014; investing cash flow was $151.9 million and financing cash flow was negative $179.7 million. Cash and cash equivalents ended the quarter at $215.3 million, down $24.7 million from year-end.
Financial position and changes versus comparable periods
- Total assets were $11.95 billion, up 25.2% year over year and 2.6% from December 31, 2014. Total loans were $6.65 billion, up from $5.07 billion a year earlier; deposits were $8.93 billion, up 23.0% year over year.
- At March 31, total short-term and other borrowings were $1.33 billion. Other borrowings included $175 million of 4.125% senior unsecured notes due 2024 and $599.9 million of FHLB advances. Wholesale funding was 13.0% of total funding, versus 11.2% a year earlier.
- Shareholders’ equity was $1.48 billion. The consolidated Tier 1 leverage ratio was 8.30%; common equity Tier 1 was 11.63%, Tier 1 risk-based capital 12.22%, and total risk-based capital 12.85%. The bank subsidiary exceeded well-capitalized regulatory thresholds.
- Nonaccrual loans were $155.9 million, up from $112.1 million a year earlier and $140.9 million at year-end. Total under-performing assets were $184.1 million, compared with $153.2 million a year earlier. Management noted that acquired troubled loans contributed to elevated nonaccrual balances.
- The allowance for loan losses was $48.9 million, or 0.73% of loans excluding loans held for sale. Net recoveries were $1.0 million for the quarter. Management cautioned that further loan growth or credit deterioration could require additional provision expense.
Outlook, management commentary and risks
- The company announced plans to sell, consolidate or close 36 branches and reduce its workforce by about 10%, including through an early-retirement program. Management expects these actions to be completed by the end of Q3 2015. Q1 results included $4.4 million of severance expense, $2.6 million of branch-related costs and $4.0 million of acquisition and integration charges.
- Branch sales cover 17 locations in southern Illinois, eastern Indiana and Ohio. Approximately $186.2 million of loans and $620.2 million of deposits were associated with the planned transactions; completion was expected before September 30, 2015.
- Management expected the Durbin Amendment, effective for Old National July 1, 2015, to reduce debit-card and ATM fee income by approximately $4 million to $6 million in 2015. It also modeled net interest income increasing approximately 0.58% over the next 12 months under its interest-rate assumptions; this is a model estimate, not formal earnings guidance.
- Management described credit quality and capital as strong, while acknowledging elevated nonaccrual loans and risks from acquisition integration, economic conditions, loan and deposit growth, interest rates, liquidity, competition and FDIC-assisted assets. Expected acquisition cost savings may not be fully realized or may take longer than anticipated.
- At March 31, the company reported $2.96 billion of available funds at subsidiaries, including cash, unencumbered securities and borrowing availability, based on pledged collateral. Loan commitments were $1.70 billion and standby letters of credit were $60.0 million.
- An Indiana class action concerning overdraft-fee transaction sequencing remained unresolved. On April 23, 2015, after quarter-end, the Court of Appeals affirmed in part and reversed in part the denial of summary judgment, removing claims that could support treble damages but remanding a contractual good-faith claim. Management said it could not estimate the likelihood or amount of loss.
- Three pooled trust preferred securities had a fair value of $6.6 million and unrealized losses of $11.2 million; no Q1 2015 impairment charge was recorded. Management stated it did not intend to sell securities in unrealized-loss positions and did not expect to be required to sell them. A separate limited partnership subject to the Volcker Rule was required to be divested by July 2015.
Most important facts for investors to verify
- Whether branch divestitures and closures were completed on schedule, and whether the stated workforce reductions and cost savings were achieved.
- Whether acquired-loan accretion, FDIC indemnification adjustments and margin trends continue to weigh on recurring earnings.
- Whether the rise in nonaccrual loans and under-performing assets persists, and whether allowance coverage remains adequate as acquired credit marks run off.
- The actual 2015 revenue impact of the Durbin Amendment compared with management’s $4 million to $6 million estimate.
- Progress and any financial effect of the overdraft-fee litigation, and the required divestiture of the Volcker Rule-related investment.
- How much of asset and deposit growth reflects acquisitions versus organic growth, and how repurchases and dividends affect capital and liquidity.