Old National Bancorp — Q3 2015 Form 10-Q
Business context and period: Regional bank holding company with banking and insurance operations, reporting for the three and nine months ended September 30, 2015. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Financial results and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $97.1 | $108.4 | $280.2 | $276.3 |
| Noninterest income | $59.7 | $34.4 | $170.0 | $114.6 |
| Noninterest expense | $102.6 | $100.0 | $328.5 | $286.3 |
| Net income | $37.7 | $29.1 | $84.7 | $74.4 |
| Diluted EPS | $0.33 | $0.26 | $0.73 | $0.70 |
| Net interest margin, fully taxable equivalent | 3.94% | 4.78% | 3.80% | 4.37% |
| Efficiency ratio | 61.97% | 67.41% | 69.38% | 70.21% |
- Q3 net income rose 29% year over year; nine-month net income increased 14%. Q3 noninterest income included a $15.4 million pretax gain on branch sales. Lower FDIC indemnification-asset charges also lifted reported noninterest income versus 2014.
- Net interest margin contracted as acquired-loan accretion declined, asset yields fell, and funding mix changed. Management said purchased-loan accretion is expected to decline gradually over time.
- At September 30, total assets were $11.915 billion; loans were $6.848 billion, up 8% from December 31, 2014, driven primarily by organic growth. Deposits were $8.621 billion. Shareholders’ equity was $1.476 billion.
- Allowance for loan losses was $51.2 million, or 0.75% of loans excluding loans held for sale. Q3 provision was $0.2 million; net recoveries were $0.9 million. Underperforming assets were $169.1 million (2.46% of loans and OREO), down from $182.8 million a year earlier. Nonaccrual loans were $140.7 million; troubled debt restructurings were $52.7 million.
- Nine-month operating cash flow was $67.4 million, versus $134.9 million in 2014; investing cash outflow was $401.9 million versus $49.6 million, including $333.1 million of branch-divestiture-related payments. Financing provided $267.9 million. Cash and cash equivalents fell $66.6 million to $173.4 million.
- Total liabilities were $10.439 billion. Short-term borrowings were $474.9 million and other borrowings were $1.120 billion, including $849.4 million of FHLB advances and $175 million of 4.125% senior notes due 2024. Wholesale funding was 16% of total funding.
- Capital ratios remained above stated regulatory thresholds: consolidated leverage ratio 8.39%, common equity Tier 1 12.08%, Tier 1 risk-based capital 12.52%, and total risk-based capital 13.24%. The bank subsidiary met the regulatory definition of well-capitalized.
Material changes and notable items
- On August 14, 2015, the company sold 17 branches—12 in southern Illinois, four in eastern Indiana, and one in Ohio—along with $555.8 million of deposits and $193.6 million of loans. The sale generated a $15.4 million pretax gain. The company had consolidated 19 other branches during 2015 and planned four additional consolidations in Q4.
- Founders Financial was acquired effective January 1, 2015; its preliminary purchase price was $91.7 million. The company also completed smaller insurance acquisitions. Recent acquisitions, including LSB and Founders, contributed to balance-sheet and expense growth.
- Q3 interest expense rose to $8.6 million from $6.3 million, including higher expense on other borrowings. Nine-month operating costs included $29.9 million associated with acquisitions and $8.1 million related to branch sales, closures, and consolidations. Nine-month salaries and benefits included $4.8 million of severance expense.
- The Durbin Amendment’s interchange-fee limits became effective for the company July 1, 2015. Management estimated a pretax reduction of approximately $5.5 million in debit-card and ATM fees in the second half of 2015. Deposit service charges and overdraft fees also remained pressured.
- Subsequent to quarter-end, the company agreed to purchase 14 bank properties for approximately $66.2 million. Closing was expected in Q4 2015; lease terminations were expected to produce approximately $12 million of pretax deferred-gain recognition.
Outlook, risks, and contingencies
- Management cited strong loan demand and continued focus on loan growth, fee income, and expense management. No formal earnings or full-year financial guidance is provided in the supplied filing text.
- Management reported interest-rate sensitivity within policy limits. Its two-year model estimated net interest income changes from base of -2.70% for an immediate 50-basis-point rate decrease, +1.63% for +100 basis points, +2.72% for +200 basis points, and +3.40% for +300 basis points. These are model estimates, not forecasts or guarantees.
- Risks include credit quality and loan growth, interest-rate and funding-cost changes, liquidity, securities valuation, acquisition integration and expected cost savings, and FDIC loss-share estimates. Management noted that continued loan growth, lower recoveries, or credit deterioration could increase provision expense.
- A class action concerning the bank’s historical debit-card transaction sequencing remained pending on one claim—breach of the duty of good faith and fair dealing. Trial was scheduled for May 2016; management said it could not estimate the probability or amount of loss. The company stated that other pending legal matters were not expected to materially affect consolidated financial condition, although an individual period’s results or cash flows could be affected.
- Three pooled trust-preferred securities had a fair value of $6.6 million and unrealized losses of $10.8 million. No impairment was recorded in the first nine months of 2015; management said it did not intend, and did not expect to be required, to sell securities in unrealized-loss positions.
Most important facts for investors to verify
- How much reported earnings growth depended on the branch-sale gain and lower FDIC indemnification-asset charges, and the sustainable level of fee income thereafter.
- Whether organic loan growth continues while credit indicators remain controlled, particularly nonaccrual commercial loans, TDRs, and acquired-loan performance.
- How quickly purchased-loan accretion declines and how margin responds to deposit pricing, wholesale funding costs, and interest-rate changes.
- The realized impact of Durbin-related fee reductions and whether expense savings offset acquisition, severance, and branch-consolidation costs.
- Completion economics of the property purchases and expected deferred-gain recognition, plus the outcome and potential exposure from the remaining overdraft-fee litigation claim.