Old National Bancorp — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; financial statements are unaudited. Old National is a Midwest community bank. Comparisons are affected by its May 1, 2016 acquisition of Anchor BanCorp and the May 2016 sale of ONB Insurance Group.
Financial performance
Amounts below are in millions, except per-share data and ratios.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $107.8 | $97.1 | $292.8 | $280.2 |
| Noninterest income | $47.2 | $59.7 | $190.1 | $170.0 |
| Net interest income plus noninterest income | $155.0 | $156.8 | $482.9 | $450.2 |
| Provision for loan losses | $1.3 | $0.2 | $2.7 | $2.4 |
| Noninterest expense | $108.1 | $102.6 | $327.9 | $328.5 |
| Income before taxes | $45.7 | $54.1 | $152.3 | $119.3 |
| Net income | $34.7 | $37.7 | $100.8 | $84.7 |
| Diluted earnings per share | $0.25 | $0.33 | $0.80 | $0.73 |
| Tax-equivalent net interest margin | 3.60% | 3.94% | 3.56% | 3.80% |
| Efficiency ratio | 66.05% | 61.97% | 64.50% | 69.38% |
The efficiency ratio is a company-defined non-GAAP measure. Q3 2016 included $5.5 million in Anchor acquisition and integration costs; Q3 2015 included a $15.4 million pre-tax gain from branch divestitures. Nine-month 2016 noninterest income included a $41.9 million pre-tax gain on the insurance sale, while the related nondeductible goodwill generated $8.3 million of additional tax expense. The insurance sale’s after-tax gain was $17.6 million.
- Net interest income rose 11% in Q3 and 4.5% year to date, primarily reflecting higher average earning assets after Anchor. The margin declined year over year, driven by lower acquired-loan accretion, lower asset yields, higher funding costs, and balance-sheet mix.
- Mortgage banking revenue increased 52% year over year for the first nine months, supported by secondary-market sales and Wisconsin production. Debit card fees fell year to date after the Durbin Amendment took effect for the company in July 2015; deposit service charges also faced pressure.
- Operating cash flow was $71.3 million for the first nine months, versus $67.4 million a year earlier. Investing activities used $470.1 million and financing activities provided $440.0 million; cash and equivalents increased $41.2 million to $261.0 million.
Financial position, funding and capital
- Total assets were $14.70 billion at September 30, 2016, up from $11.99 billion at December 31, 2015, largely reflecting Anchor, which added approximately $2.17 billion of assets at acquisition.
- Total loans were $8.90 billion, compared with $6.95 billion at year-end 2015. Q3 loan balances, excluding loans held for sale, grew $74.8 million sequentially; management attributed quarterly growth to organic lending, particularly in Wisconsin and Louisville.
- Deposits were $10.65 billion; short-term borrowings were $422.9 million and other borrowings were $1.60 billion. Total liabilities were $12.87 billion and shareholders’ equity was $1.83 billion.
- Cash and equivalents totaled $261.0 million. The filing reported $3.04 billion of available subsidiary funds, including unencumbered securities and borrowing capacity; availability depends in part on collateral.
- Consolidated capital ratios included an 8.42% Tier 1 leverage ratio, 11.77% common equity Tier 1 ratio, and 12.49% total capital ratio. Management said the bank exceeded minimum requirements and met the well-capitalized definition.
Material changes, outlook and risks
- Anchor’s $459.8 million acquisition was completed May 1, 2016, adding 46 banking centers and substantially increasing loans, deposits and shares outstanding. The filing reports $14.1 million of transaction and integration costs through September 30; further costs were expected as incurred.
- The company sold ONB Insurance Group on May 31 for approximately $91.8 million cash and recorded a $41.9 million pre-tax gain. It also terminated FDIC loss-share agreements in June, receiving a final payment and recognizing a $0.2 million pre-tax gain. Future covered-asset gains and losses are now borne entirely by Old National.
- Credit indicators merit attention: nonaccrual loans were $151.5 million versus $132.4 million at year-end; underperforming assets were $189.5 million versus $160.1 million. The allowance was $51.5 million, or 0.58% of loans, with the ratio reduced in part by acquired Anchor loans. Anchor-related nonaccrual loans were $35.0 million.
- Management described gradual economic improvement in its markets and continued focus on loan growth, fee income and expense management. It provided no specific earnings or margin guidance. It cautioned that loan growth, higher charge-offs or credit deterioration could increase provision expense, and that low rates and a flattening yield curve pressure margins.
- After quarter-end, Old National contributed approximately $7.4 million toward terminating its frozen retirement plan and expected a $9.6 million pre-tax settlement charge in Q4. It also decided to close or consolidate 15 banking centers in early 2017, with expected pre-tax costs just under $6 million. A post-quarter agreement to buy four leased bank properties for approximately $18.6 million was expected to close in Q4.
- Other risks include integration and cost-savings execution, deposit or customer attrition, regional economic and credit conditions, interest-rate sensitivity, liquidity and competition. The filing says there was no material litigation and management did not expect pending matters to materially affect consolidated financial condition, though a particular period’s results or cash flows could be affected.
Important facts for investors to verify
- Separate acquisition-driven balance-sheet and earnings growth from organic growth; review Anchor integration progress and remaining costs.
- Assess recurring earnings apart from the insurance-sale gain, 2015 branch-sale gain, acquisition expenses and acquired-loan accretion.
- Track net interest margin, deposit funding costs, loan growth and the effect of future interest-rate movements.
- Review nonaccrual and criticized loans, acquired-credit exposures, allowance adequacy and the effect of ending FDIC loss sharing.
- Confirm expected pension settlement and branch-consolidation charges, property purchases, and the realization of projected efficiencies.