Business Context and Reporting Period
Company: Old National Bancorp
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Overview: Old National Bancorp is a financial holding company operating primarily in Indiana, Illinois, and Kentucky. The reporting period covers the third quarter of 2009, a time marked by a deep recession and significant capital market volatility. During the quarter, the company completed a public offering of common stock to strengthen its capital position and acquired the Indiana retail branch banking network of Citizens Financial Group in March 2009.
Key Financial Metrics
| Metric | Q3 2009 (Three Months) | Q3 2008 (Three Months) | YTD 2009 (Nine Months) | YTD 2008 (Nine Months) |
|---|---|---|---|---|
| Net Interest Income | $56.4 million | $59.6 million | $176.4 million | $180.7 million |
| Provision for Loan Losses | $12.2 million | $6.8 million | $41.5 million | $34.4 million |
| Noninterest Income | $39.0 million | $39.0 million | $126.8 million | $129.4 million |
| Noninterest Expense | $84.0 million | $72.5 million | $248.2 million | $218.2 million |
| Net Income | $4.0 million | $17.0 million | $23.1 million | $55.8 million |
| Diluted EPS | $0.06 | $0.26 | $0.29 | $0.85 |
| Total Assets | $7.97 billion | $7.57 billion | N/A | |
| Total Deposits | $5.69 billion | $5.35 billion | ||
| Shareholders' Equity | $865.4 million | $635.4 million | N/A | |
| Net Interest Margin | 3.53% | 3.79% |
Material Changes vs. Prior Period
- Profitability Decline: Net income for the third quarter dropped 76% year-over-year to $4.0 million, driven by a 78% increase in the provision for loan losses and a compression in net interest margin.
- Capital Strengthening: Shareholders' equity increased significantly to $865.4 million, primarily due to a public offering of 20.7 million shares of common stock in late September 2009, raising approximately $196.4 million. This improved Tier 1 and total risk-based capital ratios to 14.1% and 16.5%, respectively.
- Asset Quality Deterioration: Nonperforming loans rose to 1.80% of total loans ($73.7 million), up from 1.46% a year ago. Net charge-offs for the nine months ended September 30, 2009, totaled $39.0 million, compared to $27.4 million in the prior year period.
- Expense Growth: Noninterest expenses increased 15.9% year-over-year in the quarter, largely due to integration costs from the Citizens Financial acquisition and a significant rise in FDIC assessment expenses.
- Investment Portfolio: The investment securities portfolio grew to $2.96 billion, an increase of 43% year-over-year, as the company shifted assets from loans to securities due to weak loan demand. This included $15.3 million in other-than-temporary impairment (OTTI) charges on pooled trust preferred and non-agency mortgage-backed securities.
Guidance, Outlook, and Risks
- Management Commentary: Management believes the economy is in a "very deep and long lasting recession" and expects the challenging credit environment to persist. While loan demand remains soft, the company intends to focus on streamlining processes and efficiency improvements.
- Strategic Actions: The company sold a $258 million municipal lease portfolio in the third quarter, resulting in a $1.4 million loss after fees. It also repurchased its TARP preferred stock and warrants earlier in the year.
- Risks and Contingencies:
- Credit Risk: Significant exposure to non-agency mortgage-backed securities ($183.5 million) and pooled trust preferred securities ($16.0 million), both of which have experienced downgrades and OTTI charges.
- Legal: Ongoing litigation regarding the administration of trusts from 1997; while the company believes it has meritorious defenses, an adverse resolution could be material.
- Regulatory: Potential for additional FDIC special assessments or requirements to prepay future assessments.
- Unusual Items: The quarter included a $5.1 million OTTI charge on securities and a $1.4 million loss on the sale of finance leases. Conversely, net securities gains were $5.1 million.
Investor Verification Checklist
- Allowance Adequacy: Verify if the $69.6 million allowance for loan losses (1.72% of loans) is sufficient given the rising nonperforming loan ratio and the depth of the recession.
- Securities Portfolio Quality: Review the specific credit ratings and cash flow projections for the $183.5 million non-agency mortgage-backed securities and $16.0 million pooled trust preferred securities to assess future impairment risks.
- Capital Ratios: Confirm the sustainability of the improved capital ratios (Tier 1: 14.1%) post-stock offering and monitor for any dilution from future equity issuances.
- FDIC Assessments: Monitor for announcements regarding additional FDIC special assessments that could impact future earnings.
- Loan Growth: Assess the company's ability to generate loan growth in a soft demand environment to offset the yield drag from the expanded investment portfolio.