Old National Bancorp — Q1 2016 Form 10-Q
Business context and reporting period. Old National Bancorp is a regional banking and financial services company operating primarily in Indiana, Kentucky and Michigan. This unaudited filing covers the three months ended March 31, 2016; balance-sheet comparisons are to March 31, 2015 and December 31, 2015. Unless noted, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q1 2016 | Comparable period / change |
|---|---|---|
| Net interest income | $85.6 | $91.0 in Q1 2015, down 5.9% |
| Noninterest income | $49.5 | $55.3 in Q1 2015, down 10.6% |
| Total revenue (net interest and noninterest income) | $135.1 | $146.3 in Q1 2015 |
| Noninterest expense | $98.4 | $116.2 in Q1 2015, down 15.3% |
| Provision for loan losses | $0.1 | $0.001 in Q1 2015 |
| Income before taxes | $36.6 | $30.1 in Q1 2015 |
| Net income / diluted EPS | $27.0 / $0.24 | $20.9 / $0.18 in Q1 2015 |
| Net interest margin | 3.32%; 3.52% taxable-equivalent | 3.52%; 3.70% taxable-equivalent in Q1 2015 |
| Efficiency ratio | 68.76% | 76.27% in Q1 2015 |
| Operating cash flow | $15.8 | $3.1 in Q1 2015 |
Management attributed the lower net interest income mainly to a $3.3 million decline in acquired-loan accretion income. Excluding that accretion, taxable-equivalent net interest income was $79.6 million versus $81.1 million, and taxable-equivalent margin was 3.08% versus 3.14%.
At March 31, 2016, total assets were $11.93 billion, total loans were $7.01 billion, deposits were $8.59 billion, and shareholders’ equity was $1.51 billion. Loans increased $58.7 million from year-end 2015; deposits increased $188.0 million. Cash and cash equivalents were $175.6 million, down from $219.8 million at year-end.
Short-term borrowings were $494.4 million and other borrowings were $1.17 billion, for total wholesale borrowings of $1.66 billion. The company reported $2.71 billion of available funds at its subsidiaries, including cash, unencumbered securities and borrowing capacity. Consolidated capital ratios included an 8.63% Tier 1 leverage ratio, 12.04% common equity Tier 1 ratio and 13.22% total capital ratio; management stated the company and bank exceeded regulatory minimums and the bank was well-capitalized.
Net charge-offs were $1.6 million, compared with net recoveries of $1.0 million in Q1 2015. The allowance for loan losses was $50.7 million, or 0.72% of loans excluding loans held for sale. Nonaccrual loans were $117.9 million, and total under-performing assets were $145.9 million.
Material changes versus prior periods
- Net income increased 29% year over year, despite weaker net interest and noninterest income; substantially lower expenses and a lower effective tax rate contributed to the improvement. The effective tax rate was 26.4%, versus 30.6%.
- Noninterest expense fell $17.8 million year over year, reflecting lower salaries and benefits, fewer branches and employees, and lower prior-year restructuring costs. Q1 2015 included $4.4 million of severance and $2.6 million of branch divestiture, closure and consolidation costs.
- Noninterest income declined $5.8 million, primarily from lower debit card and ATM fees, deposit service charges, and securities gains. The Durbin Amendment reduced debit card and ATM fees by approximately $2.7 million pre-tax in Q1 2016; branch divestitures also reduced deposit fee income.
- Compared with year-end 2015, total assets declined $59.2 million and wholesale borrowings fell $258.1 million. Total loans grew 1% over the quarter; investment securities and cash declined.
- Credit measures improved year over year: nonaccrual loans fell from $155.9 million and under-performing assets from $184.1 million. Troubled debt restructurings, however, rose to $49.7 million from $44.3 million at year-end 2015.
Outlook, management commentary, risks and unusual items
- Management said it was encouraged by Q1 loan demand and focused on loan growth, fee income and expense management. It expects acquired-loan accretion income to decline over time, though future acquisitions may offset the decline. No specific earnings or margin guidance is provided.
- Management said wealth-management fees may improve if fixed-income and equity markets improve, while deposit service charges remain challenged. It intends to continue reviewing its branch and service-delivery network.
- In March 2016, the company notified participants of its intent to terminate its frozen retirement plan. Distribution of the plan assets is expected in Q4 2016 and is projected to produce an $11–$14 million pre-tax charge, while ending future plan obligations and expense.
- On April 30, 2016, the company agreed to sell ONB Insurance Group for approximately $93 million in cash. It estimated an after-tax gain of $16–$18 million; the sale was expected to close in Q2, subject to customary conditions. Approximately $47.7 million of goodwill and intangible assets were expected to be eliminated.
- Anchor BanCorp’s merger closed May 1, 2016, after the reporting date. The transaction was valued at approximately $460 million; Anchor reported $2.231 billion of assets and $1.816 billion of deposits at March 31. Purchase accounting remained preliminary.
- After quarter-end, Old National entered into a $75 million, 364-day revolving credit facility priced at one-month LIBOR plus 200 basis points; $50 million was outstanding at the time described in the filing.
- The company agreed on April 5 to settle an Indiana overdraft-fee class action for $4.75 million. The amount had been accrued at year-end 2015; preliminary court approval was obtained, with final approval pending at the filing date.
- Key risks include interest-rate and liquidity changes, credit deterioration, competition, integration and acquisition execution, FDIC-assisted asset losses, and economic conditions in the company’s markets. The company had applied to terminate its FDIC loss-sharing agreements; if approved, it would lose future FDIC sharing of gains and losses on covered assets. Management reported no other-than-temporary impairment in its securities portfolio during the quarter, but pooled trust preferred securities had a fair value of $8.0 million and unrealized losses of $9.2 million.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue pressure—especially lower net interest margin, debit-card fees and deposit service charges—continues, and how acquired-loan accretion trends.
- Whether loan growth is sustained without deterioration in criticized loans, nonaccrual loans, restructurings or charge-offs, and whether the allowance remains adequate.
- The final closing proceeds, gain and accounting treatment for the insurance sale, and the integration and financial effects of the Anchor acquisition.
- The timing and ultimate $11–$14 million cost of the retirement-plan termination, and final approval and payment of the overdraft-fee settlement.
- Liquidity and funding costs after the decline in cash, the use of wholesale funding and the post-quarter revolver draw; also monitor the status of the FDIC loss-sharing termination request.
- Capital ratios and interest-rate exposure following the Anchor transaction and insurance divestiture; reported sensitivity modeling estimates are not guarantees of actual results.